Silicon Valley Bank collapse is America’s biggest banking failure since 2008
what happened at SVB,the problems in the US & will it affect the Indian Banking system?What happens if Silicon Valley Bank fails?
What has happened?
- On Wednesday,Silicon Valley Bank was seeking to raise some funds.
- Within 48 hours, a panic induced by the very venture capital community that SVB had served and nurtured ended the bank’s 40-year-runThere was a Bank run and regulators seized the Bank
- “The precipitous deposit withdrawal has caused the Bank to be incapable of paying its obligations as they come due,” the California financial regulator stated. “The bank is now insolvent.
Why did the Bank become insolvent?
- The crux of the problems started when the US Fed dramatically started to raise Interest rates from 0% to about 5% in a matter of 6 months.
- The most aggressive rate hiking campaign in four decades
- SVB was one of the most prominent lenders in the world of technology start-ups,
- Most of the deposits of 175 Billion came from Start ups!As the interest rates continued to move up.Start-ups found it hard to raise funds from VC.
chilly environment for IPOs and private fundraising caused problems for the start-ups to survive.This meant the start-ups wanted to get back the deposits they had parked with SVB
Had to sell US treasury at a Loss:
In 2020 and 2021 SVB saw a huge influx of deposits.So where could they park the money?
So they invested this money in Mortgage Based Securities (MBS).Which matures typically in 10+ years .They got 1.5%
Bond prices are inversely proportional to Interest rates.When Interest rates move up
Bond prices fall As Fed started a crazy interest rate hike cycle.The bond value of the bonds that SVB held with a duration of 3.6 years started to fall.
At the same time, the start-ups who were starved for cash wanted to withdraw the deposits.So SVB found itself short on capital
So what could it do?
SVB started liquidating its Bond portfolio at a loss.It sold $21B of the portfolio at about $1.8B Loss.As if this was not enough.The Bank said it would require Equity Capital to shore up capital requirements
It proposed $ 1.25 billion of Equity Shares be issued
- Selling the US treasury binds at a loss
- Raising Capital in a hurry
This meant that there was a panic from the depositors and there was a run on the Bank.
This forced the California Authorities to take action.
Thanks to the bank run that ended in SVB’s seizure, those who remained with SVB face an uncertain timeline for retrieving money
Insured deposits will be available by Monday
Lion’s share of deposits held by SVB were uninsured, it’s unclear when they will be freed up.
Did the Bank insiders know about the problems?
Silicon Valley Bank CEO, CFO and CMO sold +$4.4MM in stock over the last 2 weeks. This even as the bank released a mid-quarter update that things were fine.
So will this lead to a contagion?
As Uday Kotak puts it aptly
The US Banking system,analysts, & US Fed underestimated the financial stability risks that come along with the rise in Interest rates sharply.
As these risks become clearer,the regulators will take notice!
How is the Indian Banking system Shaping up?
- The Indian Banking system is as strong as ever-
We are in a credit up-cycle - NPA are low
- Provisioning is less
- Credit growth is strong
- Banks have absorbed the losses that come from interest hikes without much problem
The RBI has learnt from the recent Yes Bank and DHFL failures to strengthen monitoring systems for all Banks.
Most Banks were faced to raise capital during Covid-19 and face no challenges on the capital side of it.
The Banking system is as resilient as ever!
so in conclusion it can be presume that SVB, failure where the system failed to estimate the risks associated with High-interest rates
As Interest rates continue to be high in the US more such accidents can happen India on the other hand has had its own share of banking failures since 2018
The RBI has learnt its lessons from the Bank failures and has put measures in place that have made sure financial stability is not at risk for the Indian Banking system.