When Banks Fail, Companies Suffer: The Intricate Relationship between Bankruptcy Risk and Company Valuation

Silicon Valley Bank was a commercial bank that primarily served the technology, life science, venture capital, and private equity industries. The insolvency of SVB Bank in March 2023 has once again brought up the issue of how the worth of a firm and the bankruptcy risk of financial institutions are related.

"The bankruptcy of banks can have a ripple effect on the value of companies that work with the bank, and it's an aspect of valuation that cannot be ignored." Says Tamir Levy, Ph.D., the founder-CEO of Equitest.

A firm's value and the risk of the financial crisis that banks must deal with can have complicated and diverse relationships. On the one hand, if a firm has substantial exposure to a banking institution that is subject to high levels of bankruptcy risk, that exposure could have a detrimental effect on the company's value. This is because it's possible that the company will struggle to find the loans, credit lines, or other sources of funding necessary for its expansion and development.

On the other hand, a company may be able to retain or even improve its value if it can successfully manage its exposure to banking institutions and avoid taking on too much risk. In order to achieve this, the company may need to diversify its funding sources, build connections with several banks, and uphold strict financial controls and risk management procedures.

Overall, a number of variables, such as the nature of the company's business, its level of exposure to banking institutions, its financial position and risk management procedures, as well as general economic and market conditions, will determine the relationship between the bankruptcy risk of banking institutions and the value of a company.

In the case at hand, high-tech startups and other businesses also owned a significant amount of bank deposits that they had acquired through various capital raisings. The bank's collapse prevented the enterprises from accessing deposits. And as a result, businesses have had liquidity issues that could cause them to go bankrupt if and for as long as they are unable to find other sources of funding.

Companies may encounter serious difficulties in fulfilling their financial commitments and carrying on effective operations if they lack access to essential capital. Many detrimental effects, such as the potential for bankruptcy, a loss of market share, and diminished investor trust, may result from this. So, in order to lessen the effects of prospective bank failures, businesses must diversify their funding sources and forge connections with several banking institutions.

In general, the effects of a banking institution's bankruptcy may be felt for a long time by the companies that depend on it. Businesses must take proactive steps to reduce their exposure to bank failures, such as developing strong financial procedures and risk management techniques, as well as maintaining tight ties with several banking institutions to assure access to finance in the event of a bank failure.