The aftermath of the Silicon Valley Bank (SVB) collapse, March 16th largest bank in the US, followed by Signature Bank, and a sharp drop in Credit Suisse share price is seen globally. The SVB collapsed due to poor financial management. The bank’s shareholders have lost all value as SVB’s equity has been wiped out. The ongoing banking crisis has shaken investor confidence. Three major indexes in the US stock market fell 1-2 percent on Friday in response to news of the collapse of the SVB. India alone lost Rs 4.04 lakh crore in investor wealth on Monday.
Market capitalization of the National Stock Exchange fell to Rs 256.56 lakhcrore on Friday from 260.60 lakhcrore. The Indian stock market opened marginally lower on Monday and is now trading lower. The leading indices Sensex and Nifty closed down 1.52 percent and 1.49 percent respectively on Monday. The price was the lowest in seven months. The broader decline in indices suggests that investors are uneasy about the US banking crisis and are trimming positions.
This has created a panic effect in bank stocks. Bank indices are under selling pressure. Foreign investors were net sellers of Rs 5905.17 millions the first three days of the week. Fear of cash flight may result in Indian rupee devaluation and RBI may further tighten our monetary policy.
Is SVB the next Lehman?
Californian lender Silicon Valley Bank specializes in financing tech companies and startups. The bank was shut down due to large depositor withdrawals. According to the Federal Deposit Insurance Corporation (FDIC), it was one of the 20 largest banks in the United States with total assets of $209 billion. The main cause of failure was an asset-liability mismatch and slower loan growth than deposit growth.
According to an article in LiveMint, SVB had average three-month deposits of $55 billion at the end of December 2019, which increased by 169 percent, reaching $147.9 billion at the end of December 2021 and $173.1 billion at the end of December 2022, on the other hand three-month average lending, which was $29.9 billion at the end of December 2019, increased by 82 percent, reaching $54.5 billion at the end of December 2021 and $74.3 billion at the end of December 2022 Pace of loan growth compared to deposit growth.
The bank did not follow the principles of the trade-off between liquidity and profitability. The lender used short-term deposits from startups and venture capital firms to tie up money for long-term US Treasury bonds. You haven’t applied the basics of portfolio management – don’t put all your eggs in one basket. It held more than 75 percent of its investment in securities held to maturity. The bank had invested aggressively during the Covid-19 era when bond yields were quite low. The US Federal Reserve hiked interest rates by a whopping 450 basis points to curb rising inflation, causing asset prices to fall. The price fall was the reason that drove the SVB to collapse.
Losses in its investment portfolio, followed by deposit withdrawals by investors, forced the bank to liquidate its investment portfolio at a loss of $1.8 billion to offset borrowing losses. The bank announced a $2.3 billion share sale. The scenario worsened as depositors lost confidence. In this light, the debacle appears to be the result of unsystematic risk at a particular bank that set off the sentiment of a bank run.
The US is clearly in an uncertain time with the upheaval in the banking system. However, SVB’s problem is not the same as it was with Lehman Brothers in 2008. The challenges facing the US economy today are fundamentally different from those facing it in 2008. Neither is SVB Lehman Brothers nor 2023 is 2008. SVB is the second largest bank to close in the US since 2008 while Lehman was the fourth largest bankth largest bank in the US at the time of its collapse.
According to the New York Times, in 2008 the US economy struggled with collapsing banks and a slump in demand, while today the big challenge seems to be inflation, driven by higher demand relative to available supply. The cause of default of both banks is different. Subprime mortgages were the main cause of the 2008 problem, but SVB’s problem is held-to-maturity securities mismanaged by the bank.
Lehman had total assets of $639 billion and liabilities of $613 billion. Given the size of SVB and Signature Bank, it does not appear that the collapse of these banks will have any impact on the US financial sector and the financial world. The US authorities have already announced that they will solve the SVB problem in a way that protects the entire nation’s deposits and does not subject them to the FDIC’s $0.25 million limit.
However, according to HDFC Bank, it could be a Lehman moment for the tech startups as SVB has been a key partner of the startup industry.
Lesson for India
The SVB debacle has the financial world worried. Because by the time the US banking crisis sets in, there could be pressure to sell bank stocks worldwide – the current example of this is the decline in the Credit Suisse share price. India is no exception. The country will also have to face up to this problem. Indian startups have had direct relationships with SVB and any adverse event can impact the Indian stock market. Foreign institutional investors will withdraw their money from India. Due to the global contagion, there could be a lesser impact in the short term.
However, the SVB debacle and subsequent collapse of Signature Bank will not have a major long-term impact on the Indian banking sector. India’s banking system is regulated and the country’s economy is solid compared to the world’s major developed economies. Apart from that, Indian banks have no direct exposure to SVB and Signature Bank. Accordingly Kranthi Bathni of Wealth Mills, the Indian banking system is more isolated and regulated under the supervision of the RBI. However, India has taken the failure of the SVB seriously and has not dismissed it as irrelevant.
Indian regulators, including the RBI, have successfully addressed similar issues that have emerged off India in the past. We have already seen how the regulator and the government work together successfully processed the failure of Global Trust Bank (GTB) in 2004, Punjab & Maharashtra Cooperative (PMC) Bank in 2018, YES Bank (YB) in 2020 and Lakshmi Vilas Bank (LVB) in 2020. In the case of the YES Bank, the regulator had suspended YES Bank’s board of directors and hired a former SBI CFO as bank administrator. According to the Mint, private and public banks were brought together to buy shares and bail out the bank. RBI managed to win over the local branch of foreign lender DBS Bank for a merger of Lakshmi Vilas Bank.
India also faces the challenge of rising inflation and, like the US government, the RBI has raised the repo rate by 250 basis points to 6.50 per cent in a bid to stem inflation, which was at 6.44 per cent and still above RBI target of 2.0 percent. 6 percent, late February 2023. Another hike of 25 basis points is expected at the monetary policy review meeting in April. The rising yields on securities are having a negative impact on the trading result as the prices of existing securities in the market have fallen. However, according to RBI, Indian banks’ interest and non-interest income could partially offset Treasury losses in a rising interest rate environment.
Therefore, the collapse of SVB could not adversely affect Indian banking due to better asset-liability management and low exposure to SVB. Apart from that, Indian banks mostly do not finance start-ups, so the impact on start-ups can be largely managed. RBI’s Financial Stability Report rules out the possibility of an SVB-like situation in the Indian banking system.
dr Vinay K. Srivastava teaches at ITS Ghaziabad.
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