Silicon Valley Bank crisis

Context:

Recently, the California-based Silicon Valley Bank (SVB), a cornerstone of the US technology and startup industries, has failed. This marks the biggest bank failure since the 2008 financial crisis. 

About the crisis:

• The Silicon Valley Bank crisis has resulted in the subsequent seizure of SVB assets by regulators has generated a global wave of risk aversion, particularly among start-ups, including Indian startups.

Reason behind Silicon Valley Bank Crisis: 

• Aggressive raising interest rates: Due to this, the value of existing bonds that were issued at lower interest rates has fallen. Banks, which bought these bonds are sitting on steep unrealised losses.  
• Heavy investment in long-term government bonds: SVB’s invest heavily in US government bonds. A spike in interest rates has led to a sell-off in bonds, leaving banks exposed to potential losses on the securities they hold. 
• A downturn in technology stocks: Silicon Valley Bank was hit hard by the downturn in technology stocks over the past year. 
• “Run on the bank”: The bank failed after depositors began withdrawing their money in panic, creating a “run on the bank”. 
• Soft Regulations: In 2018, regulations were loosened for regional banks like SVB – among other things, it reduced the amount of potential loss reserves mandated for these banks. 

The potential impact of the SVB Crisis on India:

• Indian banks have minimal exposure to US lenders. 
• In its 2022 Financial Stability Report (FSR), the Reserve Bank of India (RBI) said that macro-level stress tests for credit risk showed that domestic banks would be able to comply with minimum capital requirements even under severe-stress scenarios.  
• Improved capital-to-risk-weighted-assets ratio (CRAR)
• Improvement in NPA: Banks have stepped up efforts to clean up asset quality and their profitability has also improved. 

Benefits for the Indian economy from the SVB crisis:

• Boom for emerging markets: A fall in US bond yields typically improves the appeal of higher-yielding fixed-income assets in emerging markets. 
• Bring corporates back to India: Falling US dollar rates coupled with SVB Crisis might bring back big corporates in India, who had shifted to overseas lending due to depreciation in Indian National Rupee (INR) against the US dollar.” 

What should be done to prevent big bank failures? 

• Maintain constant vigil: All the stakeholders, including bank boards, auditors and the regulator have to maintain constant vigil, given the high stakes for safety and stability. 
• Ensure Cooperation and coordination: It will be helpful in bringing transparency and accountability and also help in minimising the spillover effect of bank failure. 
• Ensure proper selection: The selection of the board of directors has to be prudent. The auditors’ selection has to be done with care. 
• Strict actions from central banks: While supervising the banks, the Central bank should not avoid any loopholes in the management and should take strict action against them. 

News Source: Livemint