Moneycontrol Pro Panorama | Silicon Valley Bank saga continues

The general consensus seems to be veering to the conclusion that there won’t be any global systemic impact because of Silicon Valley Bank’s collapse. (Source: Reuters)

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Stock markets across the world continue to be in turmoil, thanks to the fallout of Silicon Valley Bank’s collapse. The US Federal Reserve’s emergency measures over the weekend have invoked memories of the Lehman Brothers Holding Inc collapse in 2008, but the consensus seems to be veering to the conclusion that there won’t be any global systemic impact because of SVB’s collapse, as this piece opines.

A big difference from the 2008 crisis is that the assets that banks are holding this time around consist of US treasury bonds, supposedly the safest in the world. In the run up to the Global Financial crisis 15 years ago, banks have invested in so-called sub-prime assets and opaque derivatives which no one understood beyond a few maths geeks.

The US Fed backstopping the deposits of banks “will allow firms and individuals to take money out as per their requirements. This would therefore restore confidence among depositors and ideally stop the run on banks knowing that their money was safe. It would also prevent the domino effect of other banks failing, ” writes our columnist Prosenjit Datta in this piece.

While the Fed has been lauded for acting quickly and decisively, as yesterday’s Panorama pointed out, the US central bank is responsible for the crisis in the first place. How did regulators miss seeing this crisis?  That SVB faced concentration risk would have been evident from its annual numbers — at the end of 2022, it held $157 billion in deposits in just 37,000 accounts, reported the FT.

Regulators, like generals, are trained to fight the last war, writes Gillian Tett in the FT (free to read for MC Pro subscribers). Simply put, they were worried about the credit risk and liquidity risk — the defining features of the last two crises — while interest rate risk slipped under the radar. Read more here.

Why are markets reacting so adversely to the Fed move? Shishir Asthana addresses this question in his column which you can read here.

Another question that investors are now asking is if the Fed will pause its rate hike.

“The markets seem to think so -- the dollar has weakened and yields have mellowed as the SVB crisis has played out. If this turns out to be true and the Fed does pause in its policy meet scheduled on 21-22 March, widening spreads against Indian yields can be expected to make Indian assets more attractive for foreign investors. If not, long-term investors should use any significant correction as an opportunity to reduce their average cost of holding fundamentally strong companies,” writes Ananya Roy. Read more here.

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Ravi Krishnan
Moneycontrol Pro