Introduction:
US President Joe Biden has assured the American people and businesses that a resolution of the collapse of the Silicon Valley Bank will not put taxpayer’s money at risk, and that they can have confidence that their bank deposits would be there when they need it. Further, the Biden administration has announced that depositors of the failed Silicon Valley Bank will have access to their money starting Monday. A joint statement from the US Treasury, Federal Reserve and Federal Deposit Insurance Corporation on Sunday stated that depositors will have access to all of their money starting Monday. The California-based Silicon Valley Bank – the 16th largest bank in the United States – was closed on Friday by the California Department of Financial Protection and Innovation, which later appointed the FDIC as its receiver. Started in 1983 in Santa Clara, Caifornia, SVB was deeply entrenched in the tech startup ecosystem and the default bank for many high-flying startups… As its name implies, it largely served technology startup companies, venture capital firms, and well-paid technology workers.
Regulators take over the bank.
- The California Department of Financial Protection and Innovation shut down Silicon Valley Bank on Friday, less than two days after the bank tried to persuade clients not to pull their money over concerns it was running low on available cash.
- The regulator appointed the Federal Deposit Insurance Corp. as the receiver.
- The FDIC created a new bank, the National Bank of Santa Clara, to hold the deposits and other assets of the failed one. The agency said in a news release that the new entity would be operating and that checks issued by the old bank would continue to clear.
Impact of Silicon Valley Bank collapse on Indian financial sector
- Indian financial system could get impacted if the exporters who are dependent on US market start seeing slowdown in their businesses and that would impact job growth and ability to repay debt to their banks. A lot of venture capital investment coming into India would also slow down
- As the world gears up for the domino effects of SVB’s downfall, the Indian banking system is unlikely to witness any major impact, according to experts. However, it will have some impact on investor sentiments.
- The collapse of SVB will not have any effect on the Indian banks as the Indian banking system is more insulated and regulated under the supervision of RBI.
Higher interest rates:
- Flush with cash from high-flying startups, Silicon Valley Bank bought huge amounts of bonds more than a year ago.
- Like other banks, Silicon Valley Bank kept a small amount of the deposits on hand and invested the rest with the hope of earning a return.
Raising concerns about other banks.
- Silicon Valley Bank is small by comparison with the nation’s largest banks — its $209 billion in assets pales next to the more than $3 trillion at JPMorgan Chase.
- But bank runs can happen when customers or investors panic and start pulling their deposits. Perhaps the most immediate concern late this week was that the failure of Silicon Valley Bank would scare off customers of other banks.
- Shares of First Republic Bank, based in San Francisco, and Signature Bank in New York were down more than 20%. But shares of some of the nation’s largest banks including JPMorgan, Wells Fargo and Citigroup, nudged higher after a slump
- SVB was large but had a unique existence by servicing nearly exclusively the technology world and VC-backed companies.
- Other banks are far more diversified across multiple industries, customer bases and geographies and could survive a deep recession and a significant rise in unemployment.
- However, if the ‘contagion effects’ from SVB or higher interest rates hit more foreign banks, a flight to safety among global investors could hit capital flows into emerging markets.
- The contagion effect explains the possibility of the spread of economic crisis or boom across countries or regions.
- The fundamental underlying this scenario where price movements in one market are resultant of shocks or volatility in the other market is a perfect information flow.
