Sansad TV: Silicon Valley Bank Collapse | Current Affairs & Hindu Analysis: Daily, Weekly & Monthly - UPSC PDF Download

Introduction

• President Joe Biden has reassured the American people and businesses that the collapse of Silicon Valley Bank will not endanger taxpayer money. He emphasized that bank deposits will remain secure and accessible when needed. The Biden administration has announced that depositors of the failed Silicon Valley Bank will be able to access their funds starting Monday.
• In a joint statement, the US Treasury, Federal Reserve, and Federal Deposit Insurance Corporation (FDIC) assured depositors that they would have full access to their money by that time. Silicon Valley Bank, based in California and ranked as the 16th largest bank in the United States, was closed by the California Department of Financial Protection and Innovation on Friday. The FDIC was appointed as the receiver for the bank.

Regulatory takeover of the bank

• Silicon Valley Bank was shut down by the California Department of Financial Protection and Innovation on Friday, shortly after the bank attempted to persuade clients not to withdraw their funds amidst concerns about its dwindling cash reserves. 
• The FDIC was appointed by the regulator as the receiver for the bank. To facilitate the transition, the FDIC established a new bank called the National Bank of Santa Clara, which will hold the deposits and assets of the failed bank. The FDIC confirmed that the new entity is operational, and checks issued by the old bank will continue to be processed without disruption.

Impact of Silicon Valley Bank collapse on the Indian financial sector

The collapse of Silicon Valley Bank (SVB) could potentially impact the Indian financial system if exporters reliant on the US market experience a slowdown in their businesses. This could affect job growth and their ability to repay debts to Indian banks. Additionally, the flow of venture capital investment into India may also slow down as a result of SVB's downfall. While experts believe that the Indian banking system is unlikely to witness a major impact, there could be some repercussions on investor sentiments.

• Limited impact on Indian banks: Experts suggest that the collapse of SVB will not have a significant effect on Indian banks due to the insulation and regulation of the Indian banking system under the supervision of the Reserve Bank of India (RBI).
• Concerns about higher interest rates: Silicon Valley Bank, like other banks, invested a large portion of its deposits in bonds with the aim of earning returns. However, the collapse of SVB raises concerns about potential impacts on interest rates.
• Worries about contagion: Although SVB is relatively small compared to the largest banks in the US, there are concerns that its failure could trigger panic among customers and investors, leading to deposit withdrawals from other banks. This worry was reflected in the decline of shares for banks like First Republic Bank and Signature Bank, while some of the largest banks such as JPMorgan, Wells Fargo, and Citigroup experienced a slight increase in their share prices after an initial slump.

The Impact of the 2008 Global Financial Crisis

• Silicon Valley Bank (SVB) was a significant institution, catering primarily to the technology sector and venture capital-backed companies. However, other banks had a more diversified presence across various industries, customer bases, and geographical locations, making them better equipped to withstand a severe economic downturn and a substantial increase in unemployment.
• Nonetheless, if the repercussions of SVB's collapse or the rise in interest rates were to affect other foreign banks, it could trigger a flight to safety among global investors. This could lead to a reduction in capital flows into emerging markets, causing potential challenges for their economies.
• The notion of contagion effects highlights the possibility of an economic crisis or prosperity spreading across countries or regions. The underlying factor driving this scenario is the efficient flow of information, where price movements in one market are influenced by shocks or volatility in another market.