One of the most well-known lenders in the world of IT startups. Silicon Valley Bank, Santa Clara, California, failed on Friday under the weight of bad judgments and scared clients, requiring the federal government to intervene. The California Department of Financial Protection and Innovation closed it down and assigned the Federal Deposit Insurance Corporation (FDIC) as a receiver. The FDIC quickly came into action and formed Deposit Insurance National Bank (DINB) to safeguard and protect depositors At the moment of closure, the FDIC, acting as receiver, promptly transferred all insured deposits of Silicon Valley Bank to the DINB. The bank's failure is the second largest in United States history, and the greatest since the 2008 financial crisis.
Why SVB Failed ?
The basic reason is that there is a significant variation in asset liability. The bank didn't have enough credit requirements to deploy the money while the deposit flood increased dramatically. For example, its deposits rose sharply by almost 125% to nearly $190 billion between 2019-2022. With these deposits, the bank acquired a huge quantity (over $80 billion) of mortgage-backed securities (MBS) for its Hold-To-Maturity (HTM) portfolio.
Around 97 percent of these MBS were now more than ten years old, with a weighted average yield of 1.56 percent. As the interest cycle revises and US Federal Reserve raised interest rates dramatically from last year, the value of these investments in longer-term bonds plummeted. Last Monday, the bank revealed that it needed to raise $around 2 billion through a share sale. After this announcement, the whole picture comes into the limelight of various authorities.
Throughout the following week, FDIC has a contingency plan. It will pay an advance dividend to uninsured depositors to safeguard their interest along with the certificate that represents their ownership. Later on after realisation of assets, FDIC will pay the final amount. Moreover, regular banking activities will not be going to a halt as SVB branches will continue their normal banking operations. Silicon Valley Bank official checks will continue to process as a part of normal banking activities. In the meanwhile, FDIC will do all its efforts to guarantee that customers' deposits are safe and sound.
Why Indian startup felt tremors ?
For the last 15 years, SVB has been the preferred choice for Indian startups also. It’s a common practice among Indian entrepreneurs to incorporate In the US and get the required venture capital from various investors. All such kinds of funds are deposited in SVB due to its liberal policies and used for operational expenses. Almost 90% of SAAS ( software as a service start-up) with a dominant customer base in the US are parked exclusively with SVB. Gaming business giant Nazara Technologies announced that two of its subsidiaries, Kiddopia and Mediawrkz, held around $7.8 million (Rs 64 crore) in SVB. The main issue is that these companies have money in Indian banks to cover their operational costs, but only to a certain level, and if this dilemma is not handled in the near future, there would be cause for concern. Nazara Technologies shares plunged 7% in today's session as a result of this disclosure, however, the company stated in an exchange that both of its subsidiaries were properly capitalized and generating positive cash flows with profitability. The SVB issue impacted the US currency as well as Monday sessions witnessed a sharp fall in the dollar index.
Impact on Indian Banks
Using lessons from the 2008 global financial disaster, the RBI established a better monitoring framework for the banking sector's soundness and later undertook a huge clean-up of poor assets through an Asset Quality Review (AQR) programme that began in 2015. The Reserve Bank of India (RBI) would not simply allow banks to store such large sums of money in such assets if their balance sheets are fragile.
Banks are required by RBI guidelines to keep 18 percent of their deposits in statutory liquidity ratio (SLR) bonds and another 4.5 percent in cash reserve ratio bonds (CRR). In comparison to a few years ago, Indian banks now have substantially better balance sheets. So one thing is sure the Indian banking system has a strong backbone and the chances of casualty are very low.