It does not matter how small or big a bank is; it is a totally different story with even a whisper of a “run ”. Panic sets in and justifiably so. And this is precisely how it unfolded in California at the Silicon Valley Bank, SVB, when word spread that against a backdrop of companies withdrawing deposits the bank had to sell part of its bond holdings at a loss of around US$ 2 billions leading to questions of viability and eventually a perception no one wanted to think about—bank run.
What happened in the West Coast of America may have had nothing to do with how the financial crisis of 2008 set in but the parallels had already been drawn in minds. The difference this time around being that the Biden administration led by the man sitting in the Oval Office acted quickly instead of giving lectures on capitalism and how the banking industry should figure a way out. The President effectively did two things: calmed frayed nerves by insisting that deposits are fine and that tax payers are not the ones to be heading the cheerleading crowd and bailing out the beleaguered banking institutions.
The financial and banking crisis did not stop with SVB; soon institutions with huge investments in bonds and exposed to the technology industry came under the lens and started quivering starting with New York’s Signature Bank; and as stock values started plunging, soon it was the turn of First Republic Bank and Western Alliance Bancorp and also reaching the shores of Europe by way of Credit Suisse. In fact investors watched with awe that it was not just the small and medium entities that were facing the heat; even the traditional biggies like Bank of America, Wells Fargo and JPMorgan were facing the music.
Europe and by extension the western world may have heaved a sigh of relief at the intervention of Swiss authorities to Credit Suisse; and likewise aside from the guarantees of the Feds, major banking and financial institutions in the United States jumped into rescuing the failing banks with a view to putting the brakes on any contagion and triggering fears of yet another global financial crisis the system could ill afford. In all this there is the impression that the banking and the financial systems have learnt the lessons of a debilitating crisis that took place some 15 years ago and that an element of resilience has emerged as also in a conviction that the current environment has little to do with what took place earlier. In a different but related context economists have started pondering the extent to which the present crisis will impact American and world economic growth in 2023 and beyond.
Still in a globalized setting it is difficult to look at SVB as a local phenomenon or that the U.S. Federal Reserve’s interest rate hikes to meet rising inflation as having no wider impact. Asian authorities, markets and banking institutions including in India are watching the developments closely. And the first question that needs to be considered is if the collapse of the Silicon Valley Bank had only to do with their over exposure to bonds or if there is a deeper cause that rattles the banking industry. Until such time federal investigators in the United States get to the bottom of the malaise there is bound to be a continuing unease. Assuring depositors that their money is safe according to insurance limits or more is at best a temporary solace.
The writer is Editor-in-Chief of New India Abroad
