Why SVB isn't second Lehman — not for India, not for the world

Ever since that fateful day September 15, 2008, the world’s been looking for a second Lehman. If not for anything else, then for a juicy pivot moment to describe macro meltdowns. Several European banks have had close shaves, the entire Cypriot banking system blew up in 2012-13, Greek sovereign default in 2015-16 triggered extreme stresses, Italian and Portuguese macro weaknesses have had bank spillovers. Closer home in India, defaults by IL&FS and DHFL engendered a similar ‘Discovery of Second Lehman’ search. The collapse of Silicon Valley Bank (SVB) in the US last week, in the middle of a politically and economically uncertain world, has sparked off a eureka moment in the search. Unique aspects of SVB’s failure SVB’s failure has two distinctive features. It’s perhaps the first bank that collapsed not because of credit losses leading to a crisis of depositor confidence, but because of sudden interest rate shock on an otherwise seemingly high-quality asset portfolio. A second feature makes decibel levels on its demise a lot louder than it would have been if it was servicing farmers in the US Midwest. Though a mid-sized bank, it was the favoured bank of America’s famed Silicon Valley ecosystem. Notwithstanding all that, it’s not likely a second Lehman – not for the world, not for India. Things not unique “Asset liability mismatch.” Really? Matching short-dated deposits with longer-dated assets (like mortgages) is what the societal purpose of the banking business is. It’s a feature, not a bug. “Higher systemic interest rates.” Managing interest rate risks is another core feature of a banking business – would such risks be rather borne wholesale by ordinary depositors? The primary issue with SVB, it would seem, lies with the quality of regulations. Post global financial crisis (GFC), the largest banks in the US, and elsewhere, were brought under enhanced regulations – higher capital requirements, diversification rules, higher loss reserves. SVB, though reasonably large – it’s the 16th largest American bank by assets – doesn’t fall under such enhanced oversight. In 2018, regulations were loosened for regional banks like SVB – among other things, it reduced the amount of potential loss reserves mandated for these banks. Once the bank came under a fire alarm though, regulators have moved quickly to staunch the bleed. Given the small size and relatively concentrated depositor/creditor base, SVB’s network effects on the financial system are likely to be small. Since 2008, more than 500 small banks have failed in the US – but most were absorbed by other institutions, and depositors have mostly been protected. From an Indian perspective, this brings into sharp relief the merits of RBI’s conservative regulatory approach. All commercial banks have the same regulatory minimum requirements on capital, provisions and reserves. Increasingly, cooperative banks, hitherto outliers to this, are also being brought under similar prudential norms. How India managed India’s dominant public ownership of the banking market is also a great marker of stability and confidence. Memories are short, but for several years in the recent past, some banks have had their capital buffers substantially eroded, banking losses were high on aggregate, there were a few outright bank failures as well. But not even for a day was there a crisis of confidence about any bank, we didn’t have queues in front of bank ATMs/branches. Confidence is at the essence of banking stability – if even 15-20% of all depositors turn up one morning to withdraw their monies, the most solvent bank in the world will instantly collapse. Key to maintaining public confidence is quality of regulation – it is world-class in India, something to be justifiably proud of. And it’s publicly-owned – a quality not given enough credit to sometimes. Start-ups: Too much ado The other sensationalised impact is the one on Indian start-ups, derived from putative effects on Silicon Valley start-ups. However, “exposure lists” in popular media are misleading – most of the named Indian start-ups got money from SVB, they are not depositors. SVB either lent them money (as venture debt) or invested in them in the form of equity. It realised its profits via a sale or got repaid by the companies, depending on the structure. Ergo, there is no impact on the start-ups themselves. Some start-ups with deposits in SVB are impacted, but apocalyptic prognoses are way off mark. The search for a new Lehman continues. Perhaps there will be another one. Till then, systemic vigilance rather than panic reactions would be key. Usually, India’s finance is quite good at it. The writer is Chief Investment Officer, ASK Wealth Advisors