The unforeseen rapid fall of SVB is an appropriate plot for a business novel. This was caused not by mismanagement. The unholy combination of substantial withdrawal of deposits and drop in value of government securities was the primary cause of this debacle.
Nearly 95% of deposits were above the insured limit. The government, the FED and FDIC have decided that all deposits will be repaid. This is possibly a moral hazard. There will hereafter be a clamour for such exemptions during any future bank failure.
HSBC (UK) has agreed to purchase SVB (UK) at a nominal price of 1 British Pound. SVB (UK) earned profit of 88 million pounds last year. Its deposit is 6.7 billion pounds and advances 5.5 billion pounds. HSBC has made a sensible decision.
There are two features in the American banking system which deserve a revisit. The moment loss exceeds the capital, a bank is declared insolvent and final rites are set in motion. Secondly, there is rarely any regulatory forbearance. The Indian system gives time for the bank to recover. The RBI does not hesitate to provide forbearance to a deserving bank.
The FED hopes that the SVB problem has been contained and there will not be any major fallout. But banking events have a tendency to upset the regulator's calculations.
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