Turmoil in America’s Silicon Valley Bank in 10 points

But given the very limited or negligible exposure of the Indian economy and banking system to the fallout of the US banking system failure, the collapse is expected to have no direct financial impact on us.

However, this SVB crisis offers important lessons. But before learning these, it becomes necessary to know and understand what are the reasons for the failure of this huge banking system in America.

So, here’s a simple explainer on the turn of events:

1. It all started on a very promising and bright note, with most US Silicon Valley big tech-startups raising huge funds in a funding spree from venture capitalists and large investors and pooling their surplus/unutilized funds with SVB Let’s deposit

2. Instead of keeping these deposits in liquid form (cash), SVB invested in US Treasury bonds. It is pertinent to mention here that these US treasury bonds were adequately backed by the US government with minimal default risk.

3. When the Fed raised the federal interest rate (the US central bank lending rate like the repo rate in India) in a continuous series to curb inflation in the US, a time bomb ticked off.

4. There is an inverse relationship between interest rates and bond prices. Therefore, an increase in the US federal interest rate resulted in a fall in the prices of US Treasury bonds, which form a major part of SVB’s investment portfolio.

5. The market value/net realizable value of these US Treasury bonds constituting the investment portfolio of SVB fell below the carrying value/book value of these investments in SVB’s balance sheet.

6. At the same time, Silicon Valley start-ups started posting cash losses and faced funding freezes and stopped receiving money from investors.

7. This liquidity crunch forced these startups to ask for their money/deposits.

8. To honor such deposit withdrawal demands from Silicon Valley start-ups, rising federal interest rates and falling bond prices forced SVB to sell its investments in US Treasury bonds at a loss of approximately $1.8 billion . To recover the loss, SVB announced the sale of its equity. This caused panic among Silicon Valley startups, and further accelerated the process of withdrawing their deposits from SVB.

9. With the increase in the federal interest rate, fresh deposits also became more expensive for SVBs.

10. All this led to a 60% drop in SVB’s share price in the US capital market, and eventually led to the collapse of SVB, and the Federal Deposit Insurance Corp (US regulatory body) assumed regulatory control of the bank.

lessons Learnt: The SVB crisis was not caused by its bad loans or non-performing of its advances, but because SVB failed to anticipate and assess the serviceability/repayment timing of the deposits it had taken from Silicon Valley startups and Instead they were retained. Deposits in liquid or short-term investment instruments, invest them in long-term US Treasury bonds.

In India, there is the Cash Reserve Ratio (CRR). It is a specified fraction of total deposits that commercial banks have to keep either in the form of cash or as deposits with the RBI to ensure that banks do not run out of cash to meet the payment demands of depositors. Be CRR is an important monetary policy tool and is used to control the money supply. Presently CRR is 4.50%.

Second, SVB was caught off guard and ran out of cash because it failed to predict the very basic correlation between rising US federal interest rates and declining US Treasury bond prices, the formation of its investment portfolio and its As a result, its mark-to-market losses (book losses) on the forced sale of its investments in US Treasury bonds, to meet deposit withdrawal demands by the Silicon Valley startup, suddenly turned into realized losses.

Mayank Mohanka is the founder of TaxAaram India, and partner at SM Mohanka & Associates.