TeaThe banking sector in the developed world appears to be in dire straits. March 10 on Friday – luckily not Friday the 13thth – The Silicon Valley bank that served the venture capital business for nearly forty years through its 17 branches, had $200 billion in total assets, $180 billion in total deposits, and $70 billion in loans Closed by California regulators, who promptly appointed the Federal Deposit Insurance Corporation as receiver.
The nightmares of the 2008-09 global economic meltdown are back in the belly of high-profile Silicon Valley Bank (SVB).
The financial bankruptcy of Lehman Brothers brought the worst of the financial crisis. What was essentially a bank failure in the US became a global crisis, plunging the global financial structure into a vortex of doom. While the bank failure of 2008–09 and the resulting global economic crisis was more of an economic problem, the current bank bust appears to result in more political ramifications for the US domestically. Some supporters of Joe Biden’s Democrat lobby have already started accusing Republican Donald Trump supporters of launching mass withdrawals to create a ‘bank run’ among depositors.
The lack of global economic impact of the SVB failure points to the declining economic clout of the US financial system. Many countries, India included, are increasingly turning to the dollar as a reference point for bilateral currency trade. Dollar is still strong but seems to be losing some of its luster.
SVB recorded withdrawals of about $42 billion in a single day. Based on the ratio of the amount withdrawn to the number of transactions (1:10-about ten persons withdrawing the entire amount), it appears to be a deliberate attempt to drain the bank. No bank can handle such a huge cash outflow in less than a few hours. According to data available for the banking system in the US as a whole, banks hold approximately $75 billion in their vaults at any given time, which means that approximately $230 For every US resident. This doesn’t sound very reassuring because many Americans can have more than $230 in their accounts at any given time.
Incidentally, CEO Gregory Baker reportedly ran away Hawaii with his wife on a first class flight a few days after he was fired from his position. He has a $3 million townhouse there.
Lesson once again for countries like India
The US Federal Deposit Insurance Corporation (FDIC) only insures deposits up to $250,000. Bailouts create incentives for risky behavior, encouraging big-ticket depositors to be reckless with their deposits without doing adequate due diligence. The SVB has been advocating less stringent risk limits, arguing that its failure would not pose a ‘systemic’ risk. Shortly after SVB’s abdication, the US Treasury deemed SVB “systemically important”.
There is little insurance of depositors in the Indian banking system, but there are built-in mechanisms to protect small deposits. RBI facilitates quick bailout of failed banks through takeover by a stronger bank. Yet the question remains whether the depositors should suffer because of a faulty decision by the bank’s board.
Keeping in view the risks involved in the banking industry, the RBI has to adopt a continuous monitoring system not only to protect the investors but also to prevent interference in the smooth economic progress. In this regard, RBI may expedite the implementation and stricter compliance of the Audit System for Indian Banks (IND AS) provisions. While the SVB failure is not expected to impact Indian startups and tech companies, the government needs to watch the fallout for some time.
The banking crisis of 2008–09 provided valuable lessons for India and other emerging economies to learn from the mistakes of the developed world and take remedial measures. India, as well as many other emerging economies, swiftly went back to their respective drawing boards and reformed the banking system to make it strong enough to withstand another such crisis. Credit policies were changed to prevent excessive credit creation and creditor-investor asymmetry.
The SVB crisis is another financial challenge to the banking system. An important lesson here is to separate national banking systems from crises affecting developed economies. Global banking, currency and financial services are so closely, rather dangerously, intertwined that a local problem becomes a global problem in just a few keyboard clicks.
There is, therefore, an urgent need for India and the Global South to rework banking laws and weave a protective net around existing laws to allow time to calibrate an appropriate response mechanism to meet the challenges of such failures.
Taking a broader view, New Delhi may also raise the issue at the G20 finance ministers’ meeting and develop a G20 banking framework to protect emerging economies of the South from banking frauds perpetrated by the developed North.
Seshadri Chari is the former editor of ‘Organiser’. He tweeted @sesadrichari. Thoughts are personal.
(Edited by Prashant)