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Bank Runs and Market Jitters

Updated: Jun 16, 2023

No three letters sent more jitters this week than SVB - Silicon Valley Bank. When the USA's 16th largest bank and one that has been there for 40 years collapses, it is natural for everyone to notice.

So why did SVB bank collapse?

The collapse happened for multiple reasons, including a lack of diversification and a classic bank run, where many customers withdrew their deposits simultaneously due to fears of the bank's solvency.
  • Many of SVB's depositors were startup companies, who deposited large deposits during the pandemic due to high tech demand.

  • Silicon Valley Bank invested a large amount of bank deposits in long-term U.S. treasuries and agency mortgage-backed securities. However, bonds and treasury values fall when interest rates increase.

  • When customers wanted to withdraw money as free money dried, SVB had to sell these Bonds at a loss of US$ 1.8Bn.

  • The final nail was when SVB announced a capital raise of US$ 2.25Bn; this sent alarm bells and a classic bank run began!!

As one can see from the chart below, the low interest rate policy since 2009 and its quick reversal causes many problems.

What does it mean for Indian Banks?

It would be foolhardy to say that this won't happen in India. Indian banking regulation is a lot tighter and our banking balance sheets are in much better shape today. But again the bank didn't collapse because of a financial risk but perceived health risk!!

What should Individual investors do?

  1. Are you chasing yield with lower rung banks? Ensure you have FDs in more than one bank and that too in reputed ones.

  2. Your bank balance is only insured for Rs 5 Lakhs. Anything beyond isn't. Leaving large sums in bank balance is lazy and there are safer and more efficient ways to invest them - such as liquid funds, overnight funds etc.

Not just the rich but even salaried employees should focus on asset allocation.

Source: Moneycontrol, visualcapitalist

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