Sansad TV Perspective: Silicon Valley Bank Collapse

In the series Sansad TV Perspective, we bring you an analysis of the discussion featured on the insightful programme ‘Perspective’ on Sansad TV, on various important topics affecting India and also the world. This analysis will help you immensely for the IAS exam, especially the mains exam, where a well-rounded understanding of topics is a prerequisite for writing answers that fetch good marks.

In this article, we feature the discussion on the topic:  Silicon Valley Bank Collapse.

Anchor: Teena Jha

Guests:

1. Alicia García Herrero, Senior Fellow, BRUEGEL 
2. Alexander Slater, Deputy Managing Director, U.S.-India Business Council 
3. Dr. Charan Singh, CEO, EGROW Foundation 
4. AK Bhattacharya, Editorial Director, Business Standard 

Context:  Silicon Valley Bank Collapse in the United States.

Highlights of the discussion:

• Introduction
• Silicon Valley Bank Crisis
• Associated concerns 
• Impact
• Way Ahead

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 taxpayers’ money at risk and that they can have confidence that their bank deposits would be there when they need them. 
• Further, the Biden administration has announced that depositors of the failed Silicon Valley Bank will have access to their money. 
• A joint statement from the US Treasury, Federal Reserve, and Federal Deposit Insurance Corporation stated that depositors will have access to all of their money. 
• The California-based Silicon Valley Bank(SVB) – the 16th largest bank in the United States – was closed by the California Department of Financial Protection and Innovation, which later appointed the FDIC as its receiver. 
• Started in 1983 in Santa Clara, California, SVB was deeply entrenched in the tech startup ecosystem and the default bank for many high-flying startups. 
• The bank largely served technology startup companies, venture capital firms, and well-paid technology workers.

For more details on the issue, read here: Silicon Valley Bank Crisis [UPSC Notes]

Silicon Valley Bank Crisis:

• The world experienced long periods of low-interest rates and after the Great Recession, the FED reserve has kept the interest rates low in an attempt to meet the 2% inflation target.
• The global economy faced multiple shocks due to the COVID-19 pandemic, the supply chain crisis, and Russia’s invasion of Ukraine. As a result, Federal Reserve increased the interest rates, setting off a chain of rising rates across the world.
• The SVB adopted a rate arbitrage strategy, where they were providing very little interest rates on the deposits and were investing in super-safe securities.
• As the Federal Reserve increased the rates, there was a decline in the price of long-term treasuries. It led to an imbalance between the assets and liabilities of SVB and its balance sheet went down.
• It should be noted that Forbes named SVB as one of the best banks in America and Moody gave it an ‘A’ rating.
• However, it has turned out to be the second-largest bank failure in the history of the U.S.
• It is suggested that it is a clear case of regulatory failure. Some experts and senators have blamed the Deregulation bill of the previous U.S. administration.
• It is also argued that the Central Bank of the U.S. lacked in its supervisory role.
• There was a lack of research on central banking and monetary policies.
• It is suggested that the Basel Norms were not abided by the SVB. 

Concerns associated with the crisis:

• The contagion risk of bank failure is very high as the world economy is fragile and weak after the pandemic.
• The networking of SVB with other institutions in different countries is also an issue, as it will result in more widespread impacts.
• There are about 10000 depositors of SVB that will be impacted. Moreover, one lakh employees in the U.S. will also be directly affected.
• It will further raise the risk of the impact of the interest rate hike on other institutions in America.
• It is often suggested by some experts that the problem is not about the interest rate hike, but it is more about the lack of liquidity, relations with the tech sector, and the private equity market in the U.S.
• It will be a moral hazard if the depositors receive an unsecured part of their deposits. It will put a lot of pressure on FDIC for future potential defaults of banks.
• It will also create an impact on the upcoming U.S. elections (in 2024).

Impact of the Silicon Valley Bank Failure:

• The European banks are highly regulated and thus the impact will be quite less.
• SVB was heavily financing Indian-American entrepreneurs and the startup culture.
• It will also affect the remittances received in India.
• SVB has been deeply entrenched in the tech startup ecosystem. It was a one stop shop for tech visionaries.
• The U.S.-India Strategic Partnership Forum research shows that seventy percent of startups have an immigrant co-founder. The statistics for 2022 show that over 50 CEOs of public companies are of Indian origin.
• Moreover, Indian startups are already suffering from a shortage of adequate capital and the SVB crisis would further worsen the situation.
• Any event in the U.S. will have a ripple effect across the world as the U.S. is at the centre of the world in the financial sector.

Also read: Startup Ecosystem in India

Way Ahead:

• It should be effectively contained in time. 
• There should be an Indian solution to the problem. The domestic financial sector can respond with a sort of funding instrument or package.
• It is also highlighted in the U.S. that depositors in SVB will have access to their money and will not be impacted.
• Indian officials should continue to emphasize their growth prospects, innovation potential, and rising human capital. In other words, India’s growth story should be sold.
• Though tighter regulations are suggested, they should not hamper innovation and dynamism.

Read more on Digital India and Financial Inclusion

Read all the previous Sansad TV Perspective articles in the link.

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