Troubles rarely come with a word of warning in advance. Little did anyone in the United States — the world’s richest economic powerhouse-know that trouble was brewing in their own country’s financial landscape when majority of their media houses were debating the Adani-Hindenburg controversy. First things first. It is a fact that bank collapse is not something to celebrate –even by the staunchest rivals of that country-because these institutions hold the hard-earned money of small businesses and households. The collapse of America’s start-up-focused financial institution, Silicon Valley Bank (SVB), is however a moment of inquiry into a lot of things.
Was it bad management of the institution-critics are now saying that SVB concentrated too heavily on startup companies- or are rising policy interest rates in the US to blame? The latter seems more blame-worthy because the drop in the value of SVB’s holding of treasury bonds had dealt a blow to the share price of SVB Financial, which upset the deals that the bank was about to enter into with institutional investors to raise funds. But then, policy rate hikes in the US are widely expected to continue, at least during the first half of 2023, thanks to consistently high prices and a hot labour market.
Now, another big New York-based bank, Signature Bank, said to be serving largely to the highly speculative cryptocurrency industry, has also met the same fate in quick succession. The question is, are more financial institutions, especially regional and small to mid-sized banks, in the US and/ or Europe and other comparable economies under threat? Can the SVB event trigger a wider financial crisis just like what happened when Washington Mutual, considered ‘too big to fail’, was put under the receivership of the Federal Deposit Insurance Corporation (FDIC) in 2008?
SVB failure exposes vulnerabilities
The US financial system is largely considered fool-proof, with ability to mount immense resilience to unanticipated events like a deep economic downturn or defaults by some big-ticket borrowers. But is it? Impressive-sounding terms like startups, technology companies, breakthrough innovations were all there in the scene where the ill-fated SVB operated. Tech companies like Apple and Microsoft grew their market capitalisation in the post early-COVID-19 global market rally, but these and other big stocks could not sustain the gains when central banks across the world adopted a rigidly hawkish stance last year to deal with record-high inflation in their respective economies.
Underneath the apparently resilient us financial system. Lie Vulnerabilities that started to become visible in 2022 when people realised that cheap money days are over
Underneath what appears to be extremely resilient– either one talks about stocks listed on Nasdaq or NYSE, or future revenues prospects of big American companies like Walmart and Apple, or the country’s economy as a whole — are vulnerabilities that started to become visible in 2022 when people realised that cheap money (policy interest rates were kept at near zero levels in the US, Europe and most other advanced economies until last year) days are over. There are genuine fears that the SVB episode could prompt many depositors–across North America, Europe, and other locations–to withdraw money.
The FDIC insures only a limited amount of every deposit, which is also the situation in most other economies–advanced or emerging–and hence, depositors would not want to be in the same precarious situation as the customers of SVB. A bank run–a scene where a large number of depositors throng the bank to withdraw money, thereby causing the bank to struggle in meeting excess demand–is although not very likely, but nothing can be ruled out considering prevailing uncertainties in the global economy.
A broader fallout?
SVB was not among the top ten banks of America, nor it had a very broad customer base. It indeed has geographically distributed customers, some even in the Indian startup scene, but SVB’s downfall might not deal a major blow either to the global financial sector or the world economy. Banking stocks in the US, Europe and many other markets have been losing value in the aftermath, however being too much apprehensive can only worsen the situation for all stakeholders–bank depositors, equity market investors, financial institutions, the wider industry, and governments.
But there is also this growing fear that at least the advanced economies of the world could be hit in the near term, even if the shock is not as bad as the 2007-2008 financial crisis, which came at the same time when Washington Mutual collapsed. First, the economies of these advanced countries are behaving so abruptly that most predictions on next month’s price inflation or jobs market or wages or consumer sentiment data are proving wrong. Even the equity markets of these countries surprisingly gained in the first month of 2023, after a very bad year in 2022, and then started to pare gains in February.
Second, and perhaps a more powerful force, is the pace at which the Federal Reserve, the European Central Bank, and other monetary policy managers in advanced countries have increased interest rates after holding them low levels during the pandemic phase. Rising rates deal a big blow to the value of government bonds, which financial institutions hold as a part of their reserves. Separately, a deeper economic downturn that has until now remained out of the picture might hit in the latter half of 2023.
Troubles rarely come with a word of warning in advance. It is often the short-sightedness of watchdogs, managements, governments, and other stakeholders that trigger a collapse like the SVB event. It is pertinent to recall how the global media–including the BBC, which is gripped in its own Gary Lineker suspension controversy these days–chose to discuss India’s SBI and LIC’s holdings in Adani Group (stocks of which have posted a stunning rebound) and brushed their own problems under the carpet. That said, the solidly emerging economy of India – which has been receiving record FDI inflows over the past years –has nothing to worry. It is in fact time that foreign countries start recognising their own domestic problems instead of meddling in the affairs of others.