Silicon Valley Bank crisis

In news

• Silicon Valley Bank has recently been shut down by its regulators.

More about the news

• SVB’s collapse:
  • SVB, which was founded in 1983, dealt with high-growth, high-risk businesses such as technology startups. 
    • Silicon Valley Bank provided banking services to nearly half of venture capital-backed technology and life-science companies, according to its website, and over 2,500 venture capital firms.
  • SVB became the second-biggest collapse in the history of the US.
• Role in India:
  • The bank offered an easy way for startups in India, especially those in the Software as a Service (SaaS) sector who have a number of US clients, to park their cash — as they could set up accounts without a US Social Security Number or Income Tax Identification Number.
• Issues & Outcomes:
  • Global financial stocks:
    • SVB is known to be fueling numerous VC-backed tech start-ups. After the crisis, global financial stocks are believed to have lost $465 billion in market value in just two days.
  • Tech companies:
    • With its unprecedented crisis, the spotlight is now on all the tech companies that have been impacted by the bank’s free fall.
  • Start ups:
    • As the startup ecosystem tries to make sense of Silicon Valley Bank’s implosion, some entrepreneurs whose funds are frozen at the bank are turning to loans to make payroll. 

Impacts of failure of a large bank like the Silicon Valley Bank

• Damage to the financial system & domestic economy:
  • The failure of a large bank anywhere can have a contagion effect across the world. 
  • The impairment or failure of a bank will more likely damage the domestic economy if its activities constitute a significantly large share of domestic banking activities. 
  • Therefore, there is a greater chance that impairment or failure of a larger bank would cause greater damage to the financial system and domestic real economy. 
• Damage of confidence:
  • The impairment or failure of a bank with large size is also more likely to damage confidence in the banking system as a whole. 
• Possibility of failure of other banks:
  • Impairment or failure of one bank may have the potential to increase the probability of impairment or failure of other banks if there is a high degree of interconnectedness (contractual obligations) with other banks. 
  • This chain effect operates on both sides of the balance sheet. 
• Affecting services:
  • The greater the role of a bank as a service provider in underlying market infrastructure like payment systems, the larger the disruption it is likely to cause in terms of availability and range of services and infrastructure liquidity following its failure. 
• Costs borne by the bank customers:
  • The costs to be borne by the customers of a failed bank to seek the same service at another bank would be much higher if the failed bank had a greater market share in providing that particular service.

Impact on India

• Different structures & no impact:
  • The reasons for SVB’s failure are unlikely to play out in India as domestic banks have a different kind of balance sheet structure, according to bankers. 
• No bulk withdrawals:
  • In India, we don’t have a system where deposits are withdrawn in such a bulk quantity.
  • unlike in the US, where a large portion of bank deposits are from corporates, household savings constitute a major part of bank deposits in India. 
    • Today, a large part of deposits is with public sector banks and the remaining deposits are with very strong private sector lenders like HDFC Bank, ICICI Bank and Axis Bank. 
• Protection of depositors’ money:
  • In India, the approach of the regulator has generally been that the depositors’ money should be protected at any cost. 
  • Whenever banks have faced any issue, the government has come to their aid. The finest example is the rescue of Yes Bank where a lot of liquidity support was provided.
• Affcting stock markets:
  • The SVB issue, however, created nervousness in the stock markets with bank shares taking a hit and investors losing money in the process.

Source: TH