Business Matters | SVB collapse: Will U.S’s bank failures, bailouts affect India?

SVB collapse: Will U.S’s bank failures, bailouts affect India?

In this episode of business matters, we discuss the reasons for SVB collapse and will U.S.’s bank failures, and bailouts affect India.

March 22, 2023 08:30 pm | Updated 08:30 pm IST

We all have heard of or read about Silicon Valley Bank’s collapse. Then came the fall of Signature Bank. First Republic too almost failed but other large financial institutions pitched to shore up deposits. Why did this happen? How did the US authorities react? Is it ok to use taxpayer funds to save banks – private or otherwise?

What led to the SVB collapse? 

First a little bit of history. When the pandemic hit us, financial authorities especially in the West began infusing easy funds into the system – the Federal Reserve infused almost $4.8 trillion into the system between Feb 2020 and April 2022 at almost zero interest cost. When easy money became available, banks such as SVB did not have too many opportunities to invest so they pumped large funds into government securities or bonds. 

When inflation began rearing its head in early 2022, the Federal Reserve began raising rates relentlessly. Between March 2022 and Feb 2023, the Fed had raised the target range from 0.25-0.5% to 4.5-4.75%. More than 4 percentage points in about a year.

This spurred bond rates up. Whenever bond rates go up, the price of the bond declines. This pushed down the value of SVB’s holdings. In fact, as early as in the Sept 2022 quarter, SVB’s unrealised losses from its bond investments were $16 bn, compared with its equity base of $11 bn. After it said on March 12 that it needed to raise further funds, depositors became nervous, taking out $42 bn in one single day.

Moody’s also downgraded its rating for the bank because of the fall in its bond portfolio. The stock crashed 60% sending ripples in the market. 

In the case of Silicon Valley Bank, its primary client base comprises start-ups. As start-ups entered the winter of funding – which we talked about in an earlier episode of Business Matters – that sector has also tended to fall back upon their bank deposits to fund their daily operations. 

What did US govt do to save these banks or their depositors? 

You may have noticed that historically, governments have seldom let banks of significance fail. Why? Because there is always a contagion effect. Banks are interconnected in the financial system. There is also a perception problem. Even if a bank is technically sound, a mere unverified rumour can cause panic among depositors. No bank in the world can give back all the money it has taken from depositors all at once, because it makes money by lending out those funds to borrowers. And it cannot call in those loans at short notice. In India, three large banks are tagged as systemically important – or too big to fail – SBI, ICICI Bank and HDFC Bank. 

In the case of SVB and Signature Bank, the U.S. govt closed those banks but assured depositors that they could take their money out.

Is what the U.S. govt did for SVB and Signature Bank equivalent to a bailout using taxpayer money? How likely is India to face a similar situation?

Script and presentation: K. Bharat Kumar

Production: Shibu Narayan

Videography: Johan Sathyadas

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