Why Do Companies File for Bankruptcy Now?
End 2022 and the beginning of 2023, we have seen plenty of bankruptcy news. Traditional finance (e.g., Signature Bank) or decentralized finance (e.g., FTX) – either are under great pressure now. What are the reasons for the current trend? How can it affect the US and global markets? The answers can be found in the case of Silicon Valley Bank.
Why now?
Generally, the reasons why a company may file for bankruptcy are varied and can vary depending on the industry and specific circumstances. Several factors could lead a company to file for bankruptcy or declare insolvency in the current climate. These factors include:
The impact of the COVID-19 pandemic: Many companies have been adversely affected by the pandemic, as the economic slowdown and frequent lockdowns have caused a significant decrease in their revenues and a drop in demand for their products and services.
Fierce competition: In some sectors, such as banking and media networks, intense competition can result in reduced profits and a decline in companies’ market share. Both can impact their ability to remain competitive.
Increasing expenses: Companies may face difficulties in managing costs such as employee salaries, rent, raw materials, and services.
Poor management: Ineffective management or poor decision-making can lead to a decline in profits and the worsening of the company’s financial situation, which could ultimately lead to bankruptcy.
Technological advancements: Companies may struggle to adapt to rapid technological progress, such as the switch to digital media and online banking services, and some may find it difficult to keep up with these changes.
Companies must remain vigilant about new challenges and adapt to them swiftly and efficiently, improve their management, and transform their operations to ensure long-term success.
Bankruptcy case study: Silicon Valley Bank
Have you heard about the recent bankruptcy of Silicon Valley Bank?
Silicon Valley Bank is a specialized American bank that serves entrepreneurs and start-up companies in the technology, life sciences, energy, media, and entertainment industries, among others. In 2020, the bank announced significant losses that had accumulated over several years, leading to a declaration of insolvency.
These losses were the result of rising investment and expansion costs in recent years, combined with the failure to achieve expected profits. At the same time, the bank provided unique and high-value-added banking services to a large number of start-up companies and entrepreneurs.
Despite Silicon Valley Bank’s good reputation in the technology and start-up industry, it was unable to achieve sustainable success, and losses accumulated significantly.
The bank’s assets were eventually sold to Cross River Bank, a financial institution with a proven track record of catering to startups and tech companies. The deal, which was valued at $900 million and approved by the relevant regulatory bodies, allowed Cross River Bank to acquire Silicon Valley Bank’s assets.
As part of the agreement, Silicon Valley Bank’s clients were transferred to Cross River Bank, and they continued to receive banking services. This move ensured that Silicon Valley Bank’s clients continued to enjoy their unique banking services while the bank’s financial challenges were resolved.
Can bankruptcy impact the global economy?
The bankruptcy of a large bank or company can have far-reaching economic, financial, and social effects. The following are some potential outcomes of bankruptcy:
Economic slowdown: Bankruptcy can lead to a slowdown in global economic growth. The performance of companies, financial markets, investments, and trade flows may all be affected.
Financial market decline: Bankruptcy can cause a decline in financial markets, resulting in a decrease in the value of financial assets, stocks, bonds, and currencies. This can affect investors, savers, companies, and financial institutions.
Decrease in economic confidence: Bankruptcy can lead to a decrease in economic confidence and uncertainty about the economy, companies, and financial institutions. This can affect investments, monetary policies, and international trade policies.
Impact on customers and employees: Customers and employees of the bankrupt bank can be significantly affected. Customers may lose their money and financial resources, while bankruptcy may lead to job losses and salary cuts for employees.
Government intervention: Governments may intervene to support the bankrupt bank and prevent it from going bankrupt. This can result in significant costs to the government budget and public debt.
Impact on the global banking sector: Bankruptcy of the bank can affect confidence in the global banking sector in general. This can lead to tightened regulatory and supervisory standards to limit bank bankruptcy risks and protect public funds and savings.
Many of these effects came into force after the Silicon Valley Bank’s bankruptcy. This way, the SVB collapse caused the downgrading of the US smaller banks (such as First Republic Bank, US Bancorp, Western Alliance, and Zions Bancorp.)
In general, it’s important to take appropriate measures to mitigate negative effects and maintain financial and economic stability in the event of a large bank’s bankruptcy. Governments and relevant regulatory authorities should work decisively and effectively to identify potential risks and deal with them. They should also enhance the financial and banking system to protect citizens and the global economy.
