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Ray Dalio says SVB failure is ‘canary in the coal mine’; warns of knock-off effects

The billionaire investor warned that these trends could pose a significant risk to the financial system as the failure of one large firm could trigger a domino effect that could spread throughout the entire market.

March 16, 2023 / 06:48 AM IST

Ray Dalio, the founder of Bridgewater Associates, has raised concerns about potential systemic risks following the recent collapse of Silicon Valley Bank (SVB).

In a LinkedIn post, the billionaire investor warned that SVB's failure could be seen as a "canary in the coal mine" for the financial system. His concerns stem from the fact that SVB primarily served start-ups and venture capital firms in the tech industry, which has experienced significant growth and investment in recent years. Many of these firms are not profitable and heavily reliant on financing, making them vulnerable to a sudden downturn in the market.

According to Dalio, SVB's collapse could be a sign of a larger trend as the financial system has become increasingly reliant on private credit and risk-taking in recent years. “Low interest rates have encouraged investors to take on more risk, leading to an increase in leverage and a rise in the number of zombie firms that are only able to survive thanks to cheap credit,” he said.

Dalio warned that these trends could pose a significant risk to the financial system as the failure of one large firm could trigger a domino effect that could spread throughout the entire market.

He urged investors and regulators to take note of SVB's collapse and consider the broader implications for the industry.

The SVB collapse

SVB's failure has raised concerns about the broader tech industry's long-term viability as many firms are not profitable and rely heavily on financing. SVB had become a key player in the industry, providing financing and other services to a wide range of start-ups and venture capital firms. The bank's collapse was triggered by a large loss that was disclosed in late February, which led to a slide in the bank's stock price. Questions were raised about insider stock sales and management practices at the bank after CEO Greg Becker had sold nearly $30 million worth of stock over the past two years. Ro Khanna, a Democrat from California, where the bank was based, has called for Becker to return the money to depositors.

The Securities and Exchange Commission of the US has also raised concerns about insider stock sales and abuse of 10b5-1 plans. The SEC recently implemented new rules that impose more disclosure, transparency and timelines for scheduled sales.

Need for oversight

Dalio's warning highlights the need for increased oversight and regulation of the financial industry, particularly in the tech sector. The growth and investment in the industry have created a significant amount of risk, and the failure of one large firm could have far-reaching implications for the entire market. Investors and regulators must take note of SVB's collapse and work to address the underlying issues that led to its failure to prevent potential systemic risks that could have serious consequences for the financial system and the broader economy.

Shivam Shukla
first published: Mar 15, 2023 04:29 pm