The Domino Effect: How the Failure of US Banks Impacts India’s Economy
Business Connect Magazine
Business Connect- A magazine of new era for the business community! We Aspire to Inspire! Connecting the Business world!
Prior to the financial crisis,?Silicon Valley Bank (SVB),?a regional bank in the US with its main office in Santa Clara, California, was ranked as the 16th largest bank in the US. Because it was one of the?first banks?to concentrate on start-ups and venture capitalists, SVB, a bank established in 1983, was seen as being particularly trendsetting.
As of December 2022, their limited partners were securing 56% of the company’s debts to VCs and PEs. SVB is owned by SVB Financial Group, which conducts business in ten countries outside of the US, including India.
The record inflation, dubious balance sheet, and rising rates may be symptoms of a bigger issue that highlights flaws in the American financial system.
In the US financial system, there is a $620 billion risk, according to Martin Gruenberg, the head of the Federal Deposit Insurance Corp (FDIC). On Sunday, three big banks were in a dramatic battle, with Silvergate Capital Corp becoming the third to fail.
Rising Interest Rates
A bank is vulnerable to interest rate risk when rates climb rapidly over a brief period of time. This is exactly what is taking on in the US, where the Federal Reserve has been aggressively raising interest rates since March 2022. The federal government has thus far raised interest rates by 4.5 percent in an effort to curb inflation. This led to an equivalent rate increase.
领英推荐
According to the AP, the yield on US government Treasury notes with a one-year maturity reached a 17-year high of 5.25% in March 2023, up from less than 0.5% at the start of 2022. The 30-year Treasury yield has increased by approximately 2%. As a result, the price of the security starts to decline as the yield increases. The market value of previously issued debt, such as corporate bonds or government treasury bills, plummets when rates climb so quickly and in such a short period of time, especially for debt with longer maturities.
According to an AP explanation story, a 2 percent increase in a 30-year bond’s yield, for instance, can result in a 32 percent decline in the bond’s market value. Simply said, as long as the owner can hang onto the security until maturity, at which point it will be able to collect its original sum without suffering any loss, interest rate risk that causes a decrease in market value of a security is not a major issue. The only losses will remain undetected on the bank’s balance sheet and eventually vanish.
However, the unrealized loss turns into an actual loss if the owner is forced to sell the security before it matures at the same time as the market value is less than the security’s original face value. In order to deal with their own cash shortages, the Silicon Valley Bank started withdrawing deposits at a time when interest rates were high, which led to a major confrontation.
The ability of regulators to take effective action to safeguard banks and customers is even being called into serious question in light of this.
Read Full Article Here: https://businessconnectindia.in/us-banks-impacts-on-india/
Must Read:-