SVB shock limited, but lessons to learn

The collapse of Silicon Valley Bank (SVB) in California has sent some tremors around the financial world and given rise to apprehensions whether it is the early sign of a bigger crisis. Comparisons with the 2008 crisis have been made, though these are accompanied with the admission that they are exaggerated. The global financial crisis had deeper structural fault lines and the bankruptcy of Lehman Brothers was caused by different reasons. The fears created by the shutdown of SVB are now giving place to a sense of caution. SVB was America’s 16th largest bank, with assets worth about $209 billion. It had mainly clientele from the technology sector and was deeply involved in the start-up economy. Another bank, called Silvergate Capital, had also failed a few days before SVB closed its business. It was followed by the US banking regulators shutting down Signature Bank, based in New York.

One important cause of the failure of SVB was the hawkish policy of the US central bank, the Federal Reserve, which kept increasing the interest rates to fight mounting inflation. The rate was hiked eight times in one year. SVB, which had specialised in financing start-ups, and had much of its deposits from them, found the value of its bonds dipping in the new environment. When it tried to stay afloat by selling shares, it led to a run on the bank, caused partly by panic on social media spread by many in the tech sector itself, and there was no option but to close down. But American authorities have taken proactive measures to contain the damage and there are assurances, including from President Joe Biden, that there is no danger to the banking system. There are promises of compensating the depositors, though it is clear that many of them would lose some money.

Since SVB did not have deep linkages with other banks or the global banking system, its failure may not have much impact on others. But it will cause some pain. Start-ups across the globe which had deposited their money in the bank will find their funds blocked or even lost. Some Indian start-ups also are said to have money stuck in the bank. As from every failure, there are lessons to be learnt from the SVB collapse. The bank had its business concentrated narrowly in a sector and had not cared to spread the risk and to hedge against price fluctuations in the bond market. Policy changes introduced during the Trump administration are also said to have allowed banks like SVB to make risky bets. Moreover, regulators had ignored some warnings about SVB in January. Regulators should ensure that banks follow the best management practices.