💎 'Too big to fail' is a misnomer

We witnessed two of the largest banks in the US collapse within a week, so what's happening?

In the past 25 years, the US has gone through nearly 563 bank failures, with the cumulative asset size of these banks accounting for more than $1 trillion. 31% of this failure came from the recent two bank failures:

• Silicon Valley Bank - $209 billion
• Signature Bank - $118 billion

Obviously, the equity market felt jitters, and 4 of the top banks in the US lost ~$52 billion market value in a single day.

In this week's edition of Three Point Five, let's understand why these banks failed and any possible spillover effect they can have on Indian markets.

Before we dive deeper into the subject, let me give you a brief overview of these banks:

• Silicon Valley Bank (SVB): - SVB, which was formed in 1983, was named so as it was initially formed to provide banking services to technology and innovation companies in Silicon Valley.

• Signature Bank : -Signature Bank is a full-service commercial bank based in New York City. It was founded in 2001 and has since grown to become one of the largest banks in the country.

What led to the downfall?

At the core of this problem is the interest rate risk these banks face. The US Federal Reserve has been hiking interest rates for the last year to tame inflation. This has led to a sharp yield (commensurate with the interest rate) jump. Yields and price have an inverse relationship; for any interest rate increase, the bonds' price falls and vice versa.

These banks had a massive share of their assets invested in fixed-income securities, which witnessed a sharp fall in their value. While the bank could have continued to hold these securities until maturity and realized their total value, they had to sell these securities at a loss as depositors started withdrawing cash.

To plug these losses, SVB tried to raise capital in the market, which sent out shock waves among the depositors, leading to a bank run.

{bank run: A bank run is a situation where a large number of depositors withdraw their money from a bank all at once because they are worried the bank might not have enough money to give back to everyone resulting in the bank's inability to service the withdrawals}

The US authorities had to step in and bail out the bank to avoid any major financial crisis.

With Signature Bank facing a similar issue, the US Federal Reserve may be compelled to end its rate hike cycle. This could have significant implications for the global economy, including India.

While the regulators and the Central Bank were quick to step in and take measures to relieve depositors and investors, the stock markets are reeling under the impact of these collapses.

Will this contagion spread to the Indian economy?

While the failure of SVB and Signature Bank has caused panic amongst investors and depositors, such failures are less likely in India. Vaibhav, my co-founder, has written an interesting analysis this week on this crisis and why there is no need to panic but definitely learn some lessons.

Read the entire post here -

The grapevine drama

In an unexpected turn of events, the abrupt end of the Silicon Valley Bank has left a 116-year-old bank in India at the wrong end of the rumour grapevine.

I'm talking about Mumbai's SVC Co-operative Bank. After news of the Silicon Valley Bank's collapse spread, SVC Bank was unexpectedly caught in the crossfire.

Rumours began to circulate about the Indian bank being impacted by the SVB collapse, prompting SVC Bank to release a statement to dispel all such reports.

It looks like the contagion has spread uniquely, after all!