March 19, 2023

The collapse of Silicon Valley Bank (SVB), the 16th-largest bank in the United States, has sent shockwaves throughout the global financial markets.

As the provider of banking services to nearly half of tech and life-science ventures, it is (or was) the go-to bank for the venture-backed startup market. 

For Israelis, this begs the question: How might this seismic event influence the wellbeing of our own high-tech startup environment?

There have been any number of explanations for the cause of the failure, with the most popular being a run on the bank by its customers. A “run on a bank” is when a large number of a bank’s customers try to withdraw their money from the institution.

At any given time, a bank doesn’t have all the money deposited with it; rather, the money has been lent out to borrowers.

Not all money on deposit is lent out. Some is held as “reserves” so that the bank has cash for ordinary withdrawals by depositors. However, if too many depositors try to withdraw their money at the same time, the bank will collapse.

Will SVB’s collapse have a substantial ripple effect in Israel, home to “Silicon Wadi,” the tech startup scene that resembles Silicon Valley?

The short answer is: There won’t be a significant impact.

Good shock absorbers

Israel’s economy is strong enough to absorb the shock and move on.

This isn’t meant to sugar-coat the events in the US, as there will be some consequences.

The collapse of the bank means that some of its clients, including Israeli firms, won’t have access to their funds to cover payroll and other obligations. Unless they have access to other funds, that could push them under.

Many, even most, will have access to other funds. If a venture has promise of success, current investors may lend or invest additional funds in the venture to keep it going.

Similarly, other investors may also offer to provide funds to the venture.

The threat of bankruptcy results from the failure of a bank holding its money. A viable business will always be able to find additional funds.

Layoffs vs. positive trends

That said, the timing isn’t ideal. The Israeli high-tech industry, like that of the US, is currently downsizing — an elegant word for laying off workers.

For high-tech workers, this isn’t an auspicious time for another blow to the high-tech industry. The result is that we could see a period of heightened layoffs in the high-tech industry in Israel.

If the layoffs become too significant, this could impact the real-estate industry, which is a major beneficiary of the salaries high-tech workers have been earning.

Why bank crash isn’t cause for panic in the startup nation
Prof. Micheal Humphries of Jerusalem College of Technology. Photo courtesy of JCT

Israel’s economy, however, is strong enough to handle the fall. The number of job vacancies, a measure of the economy’s strength, was 142,730 at the end of January 2023 (the most recent data available), up a pinch from December 2022.

The Central Bureau of Statistics’ Business Tendency Survey, published February 6, 2023, revealed positive economic trends. Foreign tourism has been up 2.9 in the past three months and 4.8% in the prior three-month period.

Recession unlikely

A slowdown in the high-tech sector of the economy will definitely affect the overall economic forecast. However, a recession in Israel due to the banking crises in the U.S. is unlikely.

On top of the strength of the economy, the government’s promise of intervention, if necessary, further reduces the likelihood of a recession.

Would the government have the resources to finance support of the local high-tech industry?

This past January, the Finance Ministry confirmed that the previous 12 months (2022) had seen a budget surplus generated by increased revenues, not by decreased expenditures, as was the case in the past.

In other words, the Israeli economy is performing well enough to the point where tax revenue exceeded government spending.

Accordingly, we can assume that the government will have the necessary funds to stem the tide of a potential recession.

Ultimately, that’s why the collapse of SVB shouldn’t make Israelis panic.

Micheal Humphries teaches marketing and management at the Jerusalem College of Technology – Lev Academic Center and is deputy chairman of the Business Administration Department at Touro College Israel, where he teaches finance.

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