Sudden Downfall

When India’s political scene and stock market were in a tizzy over the Hindenburg report on the Adani Group, we came across the sudden collapse of an American bank, on which there was no report from any research body or rating agency.

From start-up saviour to sudden collapse in just 48 hours. That’s the story and history of the Silicon Valley Bank (SVB), the 16th largest bank in the US. It was started in 1983, and achieved a phenomenal growth in no time. But its parent company’s stock plummeted by over 60% on 9th March 2023 and fell further on the next day.

The SVB was known as the bank of start-ups, where many tech companies, including those run by Indians, had invested heavily. It was also a trusted financial partner to the venture capitalists, who had funded these start-ups.

The reasons of downfall could be a record inflation, shady balance sheets and rising rates. The sudden increase in the interest rates made less valuable the mortgage securities in the banks’ possession. Low interest bonds caused huge losses in value amid the Federal Reserve’s rapid rate hikes.

And when there is a sudden demand for withdrawal of money, the banks face a cash crunch and are unable to honour their promises. So they are forced to sell those assets and realise losses, resulting in the collapse.

What facilitated the collapse further was the Donald Trump’s Law, enacted in May 2018, that exempted banks with assets of less than $250 billion (earlier the threshold was $50 billion) from following the severe operational risk measures, e.g. Basel norms of capital risk, market risk and operational risk.

Such banks (including SVB) no longer had to undergo periodic stress tests to ensure that they were properly insulated from the risk of collapse. As a result, they enjoyed the laissez faire situation and registered an exceptional growth both in assets and deposits.

The collapse of two other American Banks- Signature Bank and Silvergate Capital Corp highlights the danger of depending solely on market forces to run financial institutions.

In sharp contrast to US, the banking rules and regulations (including risk parameters and measures), in India, are the same for a mega bank like State Bank of India or a small bank like IndusInd Bank. The customers of both types of banks enjoy the same protection for their deposits, as regulated by the Reserve Bank of India.

The Basel norms stipulated a capital adequacy ratio (CAR) of 8%, but RBI is more stringent. It has stipulated that banks in India would maintain a CAR of 9%, apart from the usual cash reserve ratio (CRR) of 4.5% and statutory liquidity ratio (SLR) of 18%.

The fear is that the collapse of these banks may have a cascading effect on the entire banking sector in the US, and other countries like India may not remain unaffected. Some tech start-ups and IT firms have already started feeling the effects of the contagion effect. Our stock market has also seen a lot of volatility after the collapse of SVB

It’s better to be slow and steady than to be fast and furious.

–Kaushal Kishore

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