US banking crisis: Key developments explained

The bankruptcy of Silicon Valley Bank and the closure of Signature Bank in the United States has raised concerns about the security of depositors' funds worldwide, including in India.

IANS Photo
IANS Photo

NH Economic Bureau

Recent events in the US banking system, such as the failure of Silicon Valley Bank (SVB) and Signature Bank, highlight the need for cautious asset liability management, effective risk management, and sustainable growth in liabilities and assets in the banking sector, among others.  

While it raises concerns about the security of depositors' funds globally, The National Herald has compiled an explainer of things to know.

Why are the US banks failing?

Record inflation, shady balance sheets, and rising interest rates are reasons that the Federal Deposit Insurance Corp (FDIC), an independent government agency that oversees the banking industry and takes relevant steps to maintain stability and public confidence in the US financial system.

Martin Gruenberg last week warned of a $ 620 billion risk in the American financial system. Gruenberg in a speech pointed out that US banks' balance sheets were laden with low-interest bonds that had lost hundreds of billions of dollars in value because of the Federal Reserve's quick rate increases. This increases the likelihood that a bank may fail if withdrawals compel it to sell these assets at a loss.

What hit Silicon Valley Bank?

SVB accepted several uninsured deposits from hundreds of big depositors and placed a substantial amount of those funds in long-term securities, such as US Treasury securities and government-backed mortgage securities. This established a bank that was extraordinarily vulnerable to changes in interest rates: as interest rates rise, bond prices fall, and the magnitude of this move is particularly pronounced for long-term securities. As a result, the value of SVB's assets decreased when interest rates rose.

The impact

As news of Silicon Valley Bank's difficulties circulated last week, Signature Bank's business depositors began calling to enquire about the security of their deposits. Like business clients of Silicon Valley Bank, most depositors had more than $250,000 in their accounts, causing many to fear for their money’s safety. The FDIC, which seized Silicon Valley, covers deposits up to a maximum of $250,000. Signature Bank witnessed a deluge of customer deposits exiting its coffers, and its shares, along with the stocks of some of its competitors, plummeted.

Effects on the security of depositors' funds in India

While the bankruptcies of SVB and Signature Bank raise concerns about the security of depositors' funds around the world, Indian banking experts do not anticipate similar failures. India has a system in which local banks have a distinct balance sheet format. India Banks have a structure that prohibits large-scale withdrawals of deposits.

In contrast to the United States, India's bank deposits are dominated by household savings. In the United States, most bank deposits come from corporations.  Also, the State Bank of India, ICICI Bank, and HDFC Bank have been designated as Domestic Systemically Important Banks (D-SIBs) by the Reserve Bank of India, requiring them to set aside more capital and provisions to guarantee their operations. This rating assures that these banks are better positioned to handle potential risks and have a lower probability of failing.

Negative effect on Indian industry

Although the impact of the bank collapse in India may be modest, the global expansion of the crisis could restrict capital flows in India and other emerging nations. This could have a negative impact on the Indian economy and other economies dependent on capital inflows.

According to experts, the impact of the bank collapse in India would be modest, mostly affecting software start-ups and IT companies. Due to the banking crisis, it may be difficult for these firms to raise financing, as they rely heavily on foreign investors. It is anticipated that the impact on other areas of the Indian economy will be minor.

Positive effect

The SVB incident has triggered fears of a financial catastrophe that would result in a decline in crude oil prices. Considering India imports the majority of its oil needs, a decline in crude oil prices is viewed as beneficial for India. But while a reduction in crude oil prices may have a favourable effect on the Indian economy in the short term, a sustained decline in crude oil rates could have severe effects on the Indian economy, which is highly dependent on oil imports.

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