A faltering bank, this time on the US West Coast, triggered a déjà vu moment in global markets last week, as fears of a Lehman redux sent banking stocks around the world into a sharp decline and investors made a beeline for safe-haven assets like gold. . However, in the four days since Friday, regulators in the world’s largest economy worked diligently to bolster public confidence in the banking system. The Federal Deposit Insurance Corporation (FDIC) first acquired Silicon Valley Bank in California, and took control of New York-based Signature Bank on Sunday, announcing in conjunction with the Federal Reserve and the Treasury Department that Depositors of both banks will be paid in full, Regulators said, however, that shareholders of the two banks would not be protected. On Monday, US President Joe Biden sought to reassure the nation and global markets that the US is committed to maintaining a resilient banking system, while also taking steps to tighten regulations for banks so that such To reduce the chances of recurrence of failures. While the coordinated steps have, at least for now, restored some degree of calm to most markets, there are lessons that have been learned and others that perhaps can be gleaned over time.
The case of Silicon Valley Bank is quite unique. Clients were geographically and regionally concentrated, with a depositor base of start-ups and venture capitalists, mostly from the tech hubs of Silicon Valley. The bank also invested heavily in a portfolio of US Treasuries and mortgage bonds, which accumulated unrealized losses as a result of recent sharp interest rate hikes by the inflation-battered central bank that was in the midst of a crisis. It was too expensive to finish. Signature, on the other hand, exposed itself to highly volatile cryptocurrencies by providing services to investors in digital assets. This, along with a run on deposits ultimately proved to be its undoing. Blaming the Fed’s monetary tightening as the proximate cause of bank failures is a case of being unable to see the wood for the trees. Interest rates move in cycles and all banking is basically dedicated to managing the risks associated with interest rate changes as well as ensuring that deposits banks accept to make loans that are always commensurate with income or holdings. form that can be used to complete the withdrawal. The Reserve Bank of India’s 2018 guidelines recommend banks to build up an investment volatility reserve, a type of countercyclical instrument that has kept Indian lenders relatively insulated from interest rate risks. Nevertheless, the RBI must remain vigilant to ensure that neither global contagion nor management missteps threaten any local lender.