SILICON VALLEY BANK COLLAPSE
WHY IN NEWS?
- Silicon Valley Bank, which catered to the tech industry for three decades, collapsed on March 10, 2023.
MORE ABOUT THE NEWS
- After the unfortunate collapse of Silicon Valley Bank, State regulators seized the bank and made the Federal Deposit Insurance Corporation its receiver.
- SVB, as it’s known, is the biggest US lender to fail since the 2008 global financial crisis.
WHAT LED TO THE COLLAPSE OF SILICON VALLEY BANK?
- The story begins during the pandemic, when SVB and many other banks were raking in more deposits than they could lend out to borrowers.
- In 2021, deposits at SVB doubled. But they had to do something with all that money.
- So, what they could not lend out, they invested in ultra-safe US Treasury securities.
- The main problem is the rapid increase in interest rates in 2022 and 2023 caused the value of these securities to plunge.
- As the characteristic of bonds and similar securities is that when yields or interest rates go up, prices go down, and vice versa.
- Thus, bank took a US$1.8 billion hit on the sale of some of those securities and they were unable to raise capital to offset the loss as their stock began dropping.
- That prompted prominent venture capital firms to advise the companies they invest in to pull their business from Silicon Valley Bank.
- This had a snowball effect that led a growing number of SVB depositors to withdraw their money too.
- The investment losses, coupled with the withdrawals, were so large that regulators had no choice but to step in to shut the bank down to protect depositors.
- SVB did not have enough cash to pay depositors so the regulators closed the bank.
CURRENT STATUS OF SILICON VALLEY BANK LIABILITIES
- According to FDIC, “For depositors with $2,50,000 or less in cash at SVB, those customers will have access to all of their money when the bank reopens.
- For those with uninsured deposits at SVB ,basically anything above the FDIC limit of $2,50,000 – they may or may not receive back the rest of their money.
- These depositors will be given a “Receiver’s Certificate” by the FDIC for the uninsured amount of their deposits.
ARE MORE USA BANKS LIKELY TO FALL?
- At the end of 2022, SVB was the 16thlargest bank in the United States with $209 billion in assets.
- There is little risk that SVB’s failure will spill over to other banks.
- But SVB’s collapse does highlight the risk that many banks have in their investment portfolios.
- If interest rates continue to rise, and the Federal Reserve has indicated that they will, the value of the investment portfolios of banks across the US will continue to go down.
- How much the risk will go up will vary from bank to bank.
- The good news is that most banks currently have enough capital to absorb these losses – however large – in part because of efforts taken by the Fed after the 2008 financial crisis to ensure financial firms can weather any storm.
IMPACT OF SILICON VALLEY BANK COLLAPSE IN INDIA
- According to experts, this SVB collapse followed by Signature Bank closure, will hit bond yield, especially in treasuries badly.
- However, this is restricted to US bond market only, for Indian treasuries, which are regulated by Reserve Bank of India, this crisis won’t have much impact.
- For, mutual fund investors, those Indians investing in international and international hybrid funds will be affected by the recent SVB and Signature Bank collapse.
- Likewise, in forex market, those who have position in dollar may have to face the beating as US dollar has retraced from 3-month highs in last three days by a larger extent.
- Experts believe a major impact on Indian banks or the banking system is unlikely.
- The risk of contagion within the banking system looks limited, this is more of a company-specific issue and could impact some of the start-ups.
- The collapse of SVB will not have any effect on the Indian banks as the Indian banking system is more insulated and regulated under the supervision of RBI,
LESSONS INDIAN BANKS CAN LEARN FROM SILICON BANK COLLAPSE
- Indian banks are mostly secured with its diverse deposit sources but the downfall of SVB still has important lessons for them about not concentrating any kind of risk.
- Stress testing should be conducted across all risk siloes.
- Liquidity should not be mistaken for cash.
- Improve scenario analysis capabilities.
- Concentration risk in the deposit book should be better understood.
SOURCE : THE HANS INDIA
Syllabus : MAINS, GS-3, International Economic Developments.