The Great U.S Banking Bloodbath
Source: News9plus
On March 8th, 2023, a significant event unfolded as the Silicon Valley Bank experienced a collapse, marking the onset of a catastrophic situation within the U.S. banking sector. For over four decades, this bank had played a pivotal role in catalyzing the startup revolution not only in the United States but also across the globe. It contributed trillions of dollars to the economy and generated billions of jobs, establishing itself as a vital support system for startups, entrepreneurs, and the entire U.S. ecosystem.
The downfall of the Silicon Valley Bank, however, was not a result of the risks it had undertaken in supporting startups. Rather, it stemmed from a flawed investment decision. The bank's predicament arose from a misjudgment in investing short-term funds, obtained from investors, into 30-year U.S. Treasury bonds. Initially, this strategy might have seemed reasonable. However, when the U.S. government raised interest rates, it created a twofold predicament for the bank. Suddenly, the bank had more deposits to manage, while also needing to make net interest payments.
The repercussions of this situation led depositors to flock to the bank to withdraw their funds, which they then placed elsewhere. This phenomenon, known as a "bank run," forced banks to tap into their long-term deposits to meet the demands of their depositors. Such occurrences significantly affect a bank's financial stability.
In March 2023, the stock of First Republic Bank experienced a significant downturn, prompting other US banks to intervene. These banks mandated the creation of a $30 billion surplus package to ensure the stability of First Republic Bank. By April 2023, it appeared that the crisis had subsided as people's concerns lessened. However, on April 25th, 2023, an alarming announcement was made by First Republic Bank, revealing that a total of $100 billion in deposits had been withdrawn. Merely five days later, First Republic Bank faced further distress and was ultimately acquired by JP Morgan Chase bank.
In the Lemon brother episode, the connection with various institutions, including banking and other financial entities, as well as the range of financial instruments and services they employed, isn't articulated in the present scenario. As previously mentioned, unlike some other banks, these institutions have achieved substantial diversification. They possess notable resources, with significant figures associated with Citibank, Chase, JP Morgan, and Bank of America.These establishments have encountered certain unhedged and unaccounted losses, yet they remain capable of absorbing these losses due to their substantial capital reserves. This positions them well to manage the transient decline in their assets, and over time, they are anticipated to recover and offer necessary support.
The underlying causes of this crisis can be attributed to the regulators' swift shift from quantitative easing to quantitative tightening. This transition had a more pronounced impact on smaller banks compared to larger ones, and it can be seen as an unintended consequence of the rapid policy changes.
Contrasting this situation, the Reserve Bank of India (RBI) and the finance ministry have collectively implemented substantial measures to fortify the Indian banking system against global shocks. The RBI consistently monitors the entire system, assessing specific asset and liability exposures of banks. India's banking institutions are well-regulated, with the RBI maintaining reasonably strict capital norms. Consequently, India's robust approach minimizes the likelihood of financial contingencies or imminent banking crises within the country.