The Indian Panorama

Tag: SVB

  • US banking crisis: Lapses in regulatory oversight led to the collapse

    The US authorities are scrambling to protect depositors’ money after the back-to-back collapse of Silicon Valley Bank (SVB), Silvergate Capital Corporation and Signature Bank, which were major lenders to the crypto sector and tech startups. In a desperate bid to affirm the stability and credibility of the American banking system, the Joe Biden administration has granted SVB customers access to their money. Depositors of Signature Bank, which was closed on Sunday by the New York state financial regulator, have been promised compensation ‘at no loss to the taxpayer’. Silvergate has said that it would be winding down operations and liquidating its bank.

    SVB was among the top 20 American commercial banks till last year. It is the largest bank to be shut in the US since the 2008 financial meltdown, whose prime casualties included Washington Mutual and the Lehman Brothers’ global investment bank. A link between them has surfaced: SVB’s Chief Administrative Officer Joseph Gentile had worked with Lehman Brothers as Chief Financial Officer until he quit in 2007, a year before the 158-year-old giant went bankrupt, nearly bringing down the global financial system.

    President Biden has stated that he is ‘firmly committed to holding those responsible for this mess fully accountable and to continuing our efforts to strengthen oversight of larger banks so that we are not in this position again.’ It is evident that lapses in regulation — coupled with an aggressive, risk-prone monetary policy aimed at taming inflation — brought things to such a pass. The writing was on the wall, but it was ignored. Short-seller William C Martin, former manager of a now-closed hedge fund, had already warned in January that SVB would blow up sooner rather than later. The fiasco holds a bitter lesson for US regulators and stakeholders: set your own house in order before losing sleep over smaller yet fast-growing economies. The key takeaway for India, which was rocked by the Punjab National Bank scam in 2018, is that no one can afford to ignore the warning signs. The regulatory system needs to be proactive rather than reactive to prevent a financial bloodbath and ensure the safety of people’s deposits.

    (Tribune, India)

     

  • Silicon Valley Bank collapse sends shockwaves across the banking industry

    Silicon Valley Bank collapse sends shockwaves across the banking industry

    • SVB is one of the largest lenders to fail since the 2008 Global Financial Crisis

    SANTA CLARA, CA (TIP): The collapse on Friday, March 10 of Silicon Valley Bank that catered to many of the world’s most powerful tech investors sent shockwaves across the banking industry, hammering shares of other smaller and regional lenders. SVB is one of the largest lenders to fail since the 2008 Global Financial Crisis.

    California’s banking regulators shut down Silicon Valley Bank and put it into receivership under the Federal Deposit Insurance Corp. (FDIC). That effectively gives control of the bank to the FDIC, which created a new entity to oversee it. Regulators announced the takeover after what was effectively a run on the bank. Depositors rushed to withdraw their money amid fears SVB wouldn’t be able to meet redemption requests.

    Although it was not in the same league as, say, Goldman Sachs or J.P. Morgan Chase, Silicon Valley Bank, or SVB, punched above its weight during its 40-year history.

    Based in Santa Clara, Calif., its clients included venture capital firms and startups, and it became a big player in the tech sector, successfully competing with bigger-name banks.

    “They really developed a niche that was the envy of the banking space,” says Jared Shaw, a senior analyst at Wells Fargo. “They are able to provide all the products and services any of these sophisticated technology companies, as well as these sophisticated venture capital and private equity funds, would need.”

    Silicon Valley’s business boomed as tech companies did well during the pandemic. That filled the lender’s coffers, and SVB had about $174 billion in deposits. But in recent months, many of Silicon Valley Bank’s clients had been withdrawing money at a time when the tech sector as a whole has been suffering.

    SVB said earlier this week, that in order to make good on those withdrawals, it had to sell part of its bond holdings at a steep loss of $1.8 billion. Bonds and stocks have been hammered since last year, as the Federal Reserve has raised interest rates aggressively, and SVB also noted it wanted to pare down its bond portfolio to avoid further losses. But that announcement spooked the bank’s clients, who got worried about SVB’s viability, and then proceeded to withdraw even more money from the bank — a textbook definition of a bank run.

    That led to a major slump in SVB’s shares. The bank’s stock price fell by 60% on Thursday, and as its share price continued to sink overnight.

    Trading was halted on Friday morning, and by midday, SVB had been taken over by the FDIC.

    Though the problems appear to be isolated at SVB, the run on the bank sparked concerns about the banking sector as a whole. On Thursday, shares of all kinds of lenders, including the big banks, sagged. J.P. Morgan, Wells Fargo, and Bank of America were all down about 5%.

    Investors feared that other lenders, especially smaller and regional ones, would suffer a similar surge in withdrawals and would struggle to meet the redemptions.

    The troubles at SVB come as Wall Street had already been on edge. Earlier this week, Silvergate, a California-based bank that caters to the cryptocurrency industry, announced plans to unwind its operations.

    Yet by Friday, fears about the health of the broader banking sector had eased, even before the FDIC took over SVB.

    Bank analysts at Morgan Stanley said in a note “the funding pressures facing” Silicon Valley Bank “are highly idiosyncratic and should not be viewed as a read-across to other regional banks.”

    “We want to be very clear here,” they wrote. “We do not believe there is a liquidity crunch facing the banking industry.” Wells Fargo analyst Shaw also said other banks were hit by panic selling.

    “It’s really just a fear that has gripped the market, and is sort of self-perpetuating at this point,” says Shaw.

    The entity created by federal regulators to oversee SVB, the Deposit Insurance National Bank of Santa Clara, has quite a few things to sort out. The FDIC said those with insured deposits with SVB, typically up to $250,000, would be able to access their money by no later than Monday.

    The fate of those with deposits at SVB that exceed insurance limits is less certain, however, with the FDIC saying they will receive an “advance dividend” for a portion of their funds along with “certificates” accounting for their uninsured funds. The regulator did not spell out what that would entail for these uninsured depositors.

    Investors will also continue to monitor for any further impact on other banks. The Treasury Department said Secretary Janet Yellen discussed the situation at a meeting she convened with financial regulators.

    “Secretary Yellen expressed full confidence in banking regulators to take appropriate actions in response and noted that the banking system remains resilient and regulators have effective tools to address this type of event,” the statement said.
    (With inputs from agencies)