[ad_1]
Aarti Srivastava
America’s two big banks- Silicon Valley Bank (SVB) and Signature Bank have come to a standstill. The effect of which is being seen all over the world. After the financial crisis in the year 2008 (which started from America itself), this type of crisis is being seen for the first time. In fact, both these banks have access reserve i.e. a large reserve of safe capital, yet the stalling of these two banks raises many questions. It is generally seen that when the bad loan (non-payment of loan by the lender) of a bank increases a lot, then it is called credit risk. In this situation, the functioning of the banks comes to a standstill. But credit risk has not been an issue with Silicon Valley Bank and Signature Bank. The main reason for the closure of these two banks is said to be the rapid increase in interest rates and the problem of liquidity. The reality is that customers started withdrawing money from both the banks on a large scale, due to which the banks collapsed. Due to this crisis, hundreds of startup companies of India are also facing trouble.
This is how the bank crisis increased
During the Corona epidemic in the year 2020-21, with the boom in technology, Silicon Valley Bank received a large amount of deposits, i.e. deposits and invested that income in treasury bonds for a long period, when the interest rates were low. Like others, this bank also invested a major part of the deposits in the hope of return and kept a small part with itself. This strategy of the bank was working perfectly, until the US Federal Reserve Bank raised interest rates last year to reduce inflation. But when the Federal Reserve raised interest rates for tech companies, the bank’s woes escalated. After this increase, investors got scared that the bank would become bankrupt. Due to this fear, a large number of institutional investors pulled out their money at once. Due to this, the bank’s shares were broken by more than 60 percent and the matter reached the lockout.
In fact, Silicon Valley Bank was forced to sell some of its investments when they were undervalued in order to meet withdrawal requests from startup companies. In this sequence, he suffered a loss of about two billion dollars.
This reason is also responsible for the panic spread among the investors.
SVB customers also panicked because the US agency, the Federal Deposit Insurance Corporation (FDIC), had initially said that only up to $250,000 deposited by customers was insured and if anyone had more money in their accounts, So they contact on a toll number. This caused panic among customers, as most customers had more than $250,000 in SVB deposits. In such a situation, they knew that if the bank collapses, their money will not be safe. Roughly 88 per cent of the deposits in SVBs were not insured.
Signature Bank amount also uninsured
Signature Bank also faced the same problem as SVB. After the closure of SVB, Signature’s customers also got scared and started withdrawing their deposits, as almost 90 percent of the deposits in this bank were uninsured.
There are visible signs of becoming like 12 years ago.
With the collapse of one bank after another in America, the possibility of a 2008-like situation seems to be getting strengthened. In the year 2008, when the American banking firm Lehman Brothers declared itself bankrupt, after that the whole world including America came under the grip of economic recession. It had a very bad effect on the world economy. Examining American banking history, it is known that after the crisis on the banking sector here 12 years ago, the second crisis came in the form of the closure of Silicon Valley Bank. Soon after, Signature Bank closed and now First Republic Bank is facing lockout crisis. However, to overcome this crisis, the American authority has intervened. But veteran American investor Bill Ackman believes that even after the intervention of the authority, this crisis on the banking sector can drown many more banks. SVB is likely to impact many more banks.
What is interest rate risk
Interest rate risk, that is, the situation of interest rate risk comes when there is a rapid increase in interest rates within a short period. In such a situation, a problem arises in front of the banks. This has happened in America since March 2022. The Federal Reserve Bank, ie the central bank of America, is aggressively increasing the interest rates, so that rising inflation can be controlled. The Federal Reserve has increased interest rates by 4.5 percentage points since last year. As a result, interest recovery on loan has increased at a proportionate rate. For this reason, interest recovery on one-year US government treasury notes reached a 17-year high of 5.25 percent in March 2023, which was less than 0.5 percent in early 2022. As the yield on a security increases, its value decreases. For this reason, the sharp rise in interest rates in such a short period of time has led to sinking of previously issued loans, be it corporate bonds or government treasury bills. This is especially the case with long term loans. A large portion of Silicon Valley Bank’s own assets, 55 percent, were invested in fixed-income securities, for example in US government bonds.
Interest rate risk becoming a problem
Interest rate risk due to a fall in the market price of a security is not a major problem as long as the borrower holds the security until maturity, where he can recover the value he would have earned without any loss. Originally denominated on paper, but if the taker of the security has to sell his security before maturity at a time when the market price is less than the face value, the unrealized loss hidden in the balance sheet becomes a realized loss. goes. This is exactly what happened with SVB earlier this year. When its customers started withdrawing their deposits to tide over the cash crunch. Such a situation gives rise to liquidity risk, i.e. liquidity crisis.
Meaning of Liquidity Risk
Liquidity risk refers to the situation when an individual investor, business or financial institution is unable to meet its short-term debt obligations. For example, if you spend 150,000 of your savings to buy a house and in the meantime you need some or all of that money to meet some other emergency, but you cannot easily convert it into cash. Can, because he is trapped in the house. In such a situation, you are facing the consequences of liquidity risk, as you are short of cash.
some important facts
-
SVB was established in 1983. It is the 16th largest bank in America.
-
SVB mainly invests in startups based in Silicon Valley. It used to provide banking related services to startups as a venture capitalist.
-
SVB had invested in nearly half of the US-backed startups. By December 31, 2022, the total assets of this bank were worth about $ 209 billion. While $ 1743.4 billion was deposited in its accounts.
-
According to the bank’s website, it had more than 1500 customers in the meteorological and sustainability sectors.
[ad_2]
Source link