Silicon Valley Bank crisis: Uday Kotak says an 'accident' was waiting to happen

Industrialist Uday Kotak on Friday said that an accident like the recent Silicon Valley Bank (SVB) crisis was waiting to happen "somewhere". On Thursday, US-based Silicon Valley Bank (SVB) shares dropped by 60 per cent, following which investors lost around $80 billion in value from bank shares.  

This triggered a market collapse not just in the US’s Wall Street but also in India. Several experts have compared the current SVB crisis with Lehman Brothers and Evergrande's liquidity crisis in the past. 

Kotak reacting to the development said: “Overnight developments in US banking: markets, analysts, investors underestimate the importance of financial stability for the balance sheet of a bank. When interest rates move up 500 bps from zero in a year, an accident was waiting to happen somewhere.” 

Since 2022, the US Fed has revised its benchmark rate by more than 4.5 per cent, in a bid to tame the rising inflation. That's not all. This week, Fed chair Jay Powell said the central bank might have to return to half-point rate rises at the conclusion of its next meeting on March 22. 

As Fed is increasing the benchmark rates, the banks are weighed down by low-interest bonds that can't be sold in a hurry without losses. Therefore, if too many customers tap their deposits at once, it risks a vicious cycle. 

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Silicon Valley Bank crisis 

The California-based SVB, which is one of the prominent lenders for tech companies, announced its public offering of a $1.75 billion share sale on Wednesday to shore up its balance sheet. It liquidated nearly all of the securities in its portfolio that were on the market. 

In an investor prospectus, the company said it needed the fresh capital infusion to plug a $1.8-billion hole caused by the sale of a $21 billion loss-making bond portfolio consisting mostly of US Treasuries.  

The portfolio was yielding an average 1.79 per cent return, far below the current 10-year Treasury yield of around 3.9 per cent. 

“We are taking these actions because we expect continued higher interest rates, pressured public and private markets, and elevated cash-burn levels from our clients as they invest in their businesses,” SVB Chief Executive Officer Greg Becker said in a letter to shareholders Wednesday. 

Following this, the company's shares suffered their worst drop in over 35 years on Thursday. The company's stock dipped to its lowest level since 2016. The shares dropped further by 26 per cent after the market closed. 

On Thursday, the KBW Bank Index declined 7.7 per cent facing its biggest drop since June 2020.  

Besides, Bank of America Corp., Wells Fargo & Co. and JPMorgan Chase & Co. all slid nearly 5 per cent.  

Why the hue & cry 

Silicon Valley Bank (SVB) is one of the important lenders for early-stage businesses in the US. As per Fortune.com, the bank has been lending to 50 per cent of all venture-backed companies in the US. Venture or private equity funds make up approximately 56 per cent of the bank's global banking portfolio in 2022. 

The heavy selloff of SVB stock was on the back of investors' worries whether the capital raise would be sufficient for the bank. The bank serves a lot of tech startups that have been struggling since the pandemic ended. 

Moody's, which has downgraded SVB’s rating, said that rising interest rates in the US, increased macroeconomic uncertainty, venture capital investment activity, and high cash burn among SVB's clients have created challenging conditions for the firm. 

Effect on Indian markets 

The BSE Sensex was at a sub-59,000 level around 11 am while the NSE barometer Nifty hit a sub-17,350 level in a selloff that saw almost 65 per cent of stocks on BSE falling on Friday.  

The weakness on Dalal Street was much in line with the Wall Street selloff overnight, thanks to a collapse in the banking index there and its jitters across Asia. By 11 am, domestic stocks had lost Rs 1.67 lakh crore in market capitalisation (m-cap). 

Nifty Bank dropped 850 points intraday on Friday to touch the day's lows of 40,390.80 following the Wall Street rout. All 12 stocks in the index were in the red. 

 "This is a US-specific issue and will not have an impact on Indian banking stocks. But the sentiment impact can be negative. Today’s US jobs report will be crucial in influencing the Fed’s policy response and the market direction. If the jobs data show declining jobs growth, the US Fed will not be as aggressive as the market fears, and equity markets will remain resilient," said V K Vijayakumar, Chief Investment Strategist at Geojit Financial Services. 

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