Beyond the Big Bank Theory

The collapse of Silicon Valley Bank highlights the need for regulatory scrutiny beyond only large lenders and conventional finance

- RAGHU MOHAN

A chain is only as strong as its weakest link. The message that comes across from the dramatic collapse of the Silicon Valley Bank (SVB), and Signature Bank, is that new risks are coming to the fore in an increasingly interconnected world; and the idea of systemically important institutions may have to be rethought. SVB now threatens the start-up ecosystem, which is already in the throes of a funding winter due to raising interest rates, the tightening of the regulatory framework and the resultant question marks on many of their business models.

In India's rear-view mirror, the mess at YES Bank, Infrastructure Leasing & Financial Services, and the erstwhile Dewan Housing Finance Corporation led to a swift realignment of oversight by the Reserve Bank of India (RBI) by cutting down on regulatory arbitrage. But another aspect never came under the arc light: though not a Domestically Systemically Important Bank (D-SIB) even "Lilliput" Punjab and Maharashtra Co-operative Bank (PMC Bank) caused havoc for depositors. It had to be taken over by the CentrumBharatPe combined with a little bit of forbearance (it now exists as Unity Bank).

So the question should be the threshold for being classified as D-SIB?

A little under a decade ago, RBIS in its "Framework for dealing with DSIBS" (22 July, 2014) noted, "It is felt that systemic importance of all banks need not be computed as many smaller banks would be of lower systemic importance, and burdening these banks with onerous data requirements on a regular basis may not be prudent. Hence, the sample of banks for identification of DSIBS may exclude many smaller banks." The blowout at PMC Bank turned this approach on its head.