In order to limit the risk to the broader financial system, US authorities have intervened aggressively in the case of Silicon Valley Bank. Government and the regulators have taken the extraordinary step to guarantee that depositors get access to “all their money”, even the uninsured deposits. This bold move was aimed at lowering the risk and shoring up confidence in the banking system. However, the ripple effects from the collapse of SVB continue to be felt across the financial system. As per some reports, depositors are turning to the larger US banks. And late Monday, Moody’s Investors Service placed the ratings of six US banks on review for possible downgrades over concerns about the health of regional financial firms.
At its core, SVB’s problems can be traced to tightening financial conditions. In an era of low interest rates, the bank had parked its deposits in safe securities. But with the US Federal Reserve aggressively hiking rates to tackle inflation, the bonds held by the bank fell in value. In order to meet the surge in withdrawal demands, the bank announced that it had to sell securities it held at a loss and that it would also have to raise money to shore up its finances. This triggered panic among customers who rushed to withdraw their money, causing the bank to collapse. In a highly globalised world, the ripple effects from SVB’s sudden demise were felt across markets. But, SVB isn’t alone. As per the FDIC, at the end of 2022, unrealised losses at US banks stood at $620 billion. This episode raises troubling questions. For one, considering that a large share of the depositors in SVB were concentrated in a particular sector, and that 93 per cent of the deposits were uninsured with the Federal Deposit Insurance Corporation according to some reports (the FDIC insures deposits up to $2,50,000), shouldn’t this have raised regulatory concerns? And while it is difficult to ignore the political economy implications of this move, guaranteeing all depositors money in excess of deposit insurance also raises questions over the pricing of risk and moral hazard.
The implications of SVB’s collapse will be felt beyond the tech and start-up ecosystem. Considering the rapid increase in interest rates by the US Fed, there is a possibility of similar episodes causing stress to the financial system fructifying as per analysts. In view of this, there is an increasing likelihood that the Fed will now rethink its approach to monetary policy. Prior to this episode, there were indications of the Fed hiking rates by 50 basis points when it meets next. But, market expectations now seem to have changed. Concerns over financial stability may trump inflation management. Considering the heightened uncertainty, policymakers across the world should be careful as they navigate this challenging period.
