Why a US Bank Failure Shows Up a Strong RBI

THE FEAR MONGERING in India about the collapse of the 16th largest US bank- the Silicon Valley Bank (SVB) - and its impact on the Indian economy is completely unfounded. Indian startups, whose funds were in SVB, are safe.

- Srinath Sridharan

There is no contagion effect on the Indian banking sector. But there sure are learnings for the Indian private investors - whose investments have shaped Indian startups - to keep their treasury operations well-run and diversified. They should not be swayed by the greed of a higher interest rate to put all their deposits into one single entity.

The lesson for Indian financial institutions is simple. They should improve their risk management framework and have real-time analysis of the Asset Liability Management (ALM). With every interest rate swing, the ALM needs reinforcement. Here is where the Reserve Bank of India’s (RBI’s) abundant caution and perceived-intrusive-regulations and supervision becomes useful.

US Bank Failure

The Silicon Valley Bank had been in business for forty years and had been a banker of first choice for technology firms and the venture capital industry. It was the Silicon Valley’s largest bank by deposits, just before its collapse and held assets worth $209 billion and deposits of $175 billion. In US history, this is the second-largest bank failure, and the first blow-up after the 2008 Global Financial Crisis (GFC). The Silicon Valley Bank was not large enough to be ranked as a systemically important financial institution (SIFI) in the US. For India bank watchers, only SBI, HDFC bank and ICICI bank are in SIFI league from a banking perspective.

The Silicon Valley Bank held excellent assets, such as US Treasury and government-backed mortgage securities, which are safe bets. But when the Fed aggressively increased interest rates, the value of the SVB holdings reduced drastically.