The Silicon Valley Bank, the preferred choice for start-ups, downed its shutters on March 10. Established in 1983, SVB is the 16th largest bank in US with focus on innovation economy. Silvergate Capital Corp and Signature Bank are the other two banks that collapsed.
These collapses have raised questions on the resilience of the US financial and banking system, impact of contagion for wider US and global economy, and the probability of the repeat of 2008 like financial crisis.
These bank collapses in the US are bad news for global economy especially at a time IMF and other global agencies have put out gloomy forecasts for global growth.
Currently, the US regulators are facilitating quick sales of SVB’s assets to other large, solvent and liquid financial institutions. Federal regulators have also assured all depositors of SVB and other closed banks access to all their money, while also making additional funding available to banks through a new “Bank Term Funding Program.”
Though the current crisis is not similar to the 2008 global financial crisis, an extended crisis can be avoided only through further assurances and action from the authorities.
Therefore, how well and how soon the crisis is managed by the US regulators with nil contagion effect is vital for both US and the global economy.
Since the current crisis was more of a liquidity problem rather than a solvency issue, focus must be on ensuring availability of sufficient liquidity in the system. Regulators world over must continuously assess banks’ asset-liability models to prevent a contagion.
It is also urged that financial institutions in US and elsewhere do a continuous assessment of their asset-liability models and plan the strategy in advance as any trigger event may lead to contagion and additional spill over to the real economy especially in a higher interest rate environment.
From that perspective, HSBC’s acquisition of SVB UK and the bank’s and UK regulator’s assurance to depositors is good news.
Meanwhile, the recent news about Credit Suisse is causing further panic in the financial markets.
But Credit Suisse’s problems are unique and not new to the world. The lender had already stacked up huge losses and had many governance issues. The bank was already undergoing restructuring after raising 4 billion Swiss Franc from the market and now with the new developments an additional 54 billion Swiss Franc liquidity support is to come from Swiss National Bank.
Regarding Credit Suisse, panic in the market is a bigger problem than its solvency and liquidity issues. However, with the lender being one of the systemically important financial institutions in the world, further regulatory stress tests and reassessment of exposure is advisable.
The bank failures in US also raise questions about governance in the banking system. The rating downgrade of SVB, though came after the incident, was also largely based on governance issues. Meanwhile, shareholders of SVB have sued its CEO and CFO for fraud.
Although banks have specific internal mechanism for risk identification, assessment and mitigation, it is surprising to see that risk management committees with the bank hardly knew about risk involved in asset-liability management and models. This also underlines the need for more independent and professional approach towards risk management. The balance sheet management should be supple including the asset and liability duration gaps.
Along with the bank’s internal failure, this should also be seen as a regulatory failure as US regulators were also clueless about the imminent crisis, even after having in place various risk management mechanisms such as stress testing, early warning etc. These models need a relook and lapses should be plugged at the earliest to avoid another crisis.
Another area which needs urgent attention is the role of international rating agencies. Rating agencies such as Moody’s and S&P downgraded these banks to junk after they collapsed. It is easy to downgrade and change outlook after the collapse and bankruptcy of any entity, but the purpose of these agencies is to give their impartial and expert opinion about creditworthiness and outlook for the benefit of larger investors and depositors.
Moody’s had assigned an A rating to SVB, repeating the same mistakes of the sub-prime market crisis in 2008. There are also questions being raised over why the rating agency didn’t warn investors and waited until the bank’s collapse.
Impact on India
The immediate impact is the short-term volatility in the financial markets, but it is too early to discuss about the contagion through other macro channels. US regulators moved quickly to prevent any spill over effect and assured start-ups and banks about liquidity. Therefore, impact through macro channels seems negligible to India and the world.
However, further follow up actions by the US regulators in the form of reassessment of the risk profile of the financial system in order to avoid any systemic risk is highly warranted to keep the global economy and also India safe.
There may be concerns for Indian start-ups incorporated in US with bulk of their customers in North America and deposits in SVB. The current reassurance from the US regulators about the safety of insured and uninsured deposits, and opening up of new liquidity channels may reduce stress in the sector and reassure start-ups.
However, more details about the assistance programme must be made public at the earliest, while the negative sentiment will remain in the market in the medium term.
The Indian banking system is more heavily regulated than the US system. The various monetary and prudential regulatory measures will insulate Indian banks, while the system has negligible direct and indirect exposure to SVB and other failed banks in US.
However, this is also a time for Indian banks and the regulator to reassess the efficacy of their independent risk management systems.
The writer is Director, Centre for Economics and Finance, Administrative Staff College of India Hyderabad
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