From Yes Bank to Silicon Valley Bank: How RBI and US' Fed navigated fallout from the collapse of two mid-sized banks

From Yes Bank to Silicon Valley Bank: How RBI and US' Fed navigated fallout from the collapse of two mid-sized banks

RBI's actions in the wake of Yes Bank's collapse mirrors Federal Reserve's ongoing actions now with the collapse of SVB.

Experts opine that the likely difference could be in the form of bank resolution by way of sale or restructuring. Experts opine that the likely difference could be in the form of bank resolution by way of sale or restructuring.

'Moratorium, liquidity support, and a market-based restructuring of the bank.' That was the template the country's banking regulator, the Reserve Bank of India (RBI), followed in the most recent collapse of a mid-sized Yes Bank. The Federal Reserve, the central bank of the United States, has also taken the first two steps in the case of the failed Silicon Valley Bank (or popularly known as SVB). Let's look at where the Federal Reserve would write a different script.

The SVB has already been put under the watch of the Federal Deposit Insurance Corporation (FDIC), which is sort of like placing it under a moratorium. The FDIC, which is an independent agency created by US Congress, insures public deposits, takes customer protection measures, and manages receiverships of insolvent banks and financial institutions. In India, there is a Deposit Insurance and Credit Guarantee Corporation that protects and insures public deposits.

When Yes Bank was under a moratorium, the RBI moved quickly to give the private sector a special liquidity window of around Rs 60,000 crore. This was done to help the bank pay back the depositors who were withdrawing their money. In fact, an emergency credit line for an extra Rs 50,000 crore was created soon after. Similarly, the Federal Reserve has also come out with a plan to provide liquidity support to vulnerable banks, including SVB depositors. In fact, the SVB's depositors, which are mostly start-ups, will have access to all of their deposited money starting March 13.

While the causes of the failure of these two banks were different, the first two outcomes were similar as hassled depositors queued up to withdraw their deposits, which forced the bank in question to liquidate its holdings and then the banking regulator's action followed. SVB failed because of higher investment losses, whereas Yes Bank folded up because of a deteriorating lending book. The fast-paced rise in US interest rates to tame the historically high level of inflation depreciated the value of SVB's bond holdings, which were invested when the interest rates or yields were near zero. In the case of Yes Bank , the tight monetary policy and a series of shocks from demonetisation, GST, RERA, coupled with the massive collapse of IL&F, etc., pushed the economic growth down and created stress in the mid-corporate segment, leaving banks like Yes Bank vulnerable.

New generation Yes Bank was mostly the lender to emerging and midsized companies. SVB is a specialised bank for start-ups.

Experts opine that the likely difference could be in the form of bank resolution by way of sale or restructuring.

Let's look at the action and conduct of the RBI just when the financial position of the private sector bank was deteriorating in the early 2020 period. The RBI, though criticised by some experts for acting late, was actually waiting for the bank to raise the capital.

"It did give a long rope or trust the bank to mobilize capital from private equity investors," a consultant explained. The bank, however, tried but failed. "A timely action by regulator could have saved the bank," he added.

The deteriorating liquidity position of the bank resulted in the flight of investors from the bank, and later, depositors started leaving the bank as well. The RBI was keen that a market-based rival plan be given priority over regulatory restructuring. But what prompted the RBI, which was in discussion with the bank and also inspecting its books, to put it under moratorium were the serious governance issues at the heart of Yes Bank, along with the outflow of high level of liquidity.

In March 2020, the RBI imposed a moratorium under Section 45 of the Banking Regulations Act, which included superseding its board and replacing its management. SVB management, too, is out of the bank. The story was also similar when Federal Reserve Board Chair Jerome H. Powell said that shareholders and certain unsecured debtholders would not be protected. This is what happened in the case of Yes Bank. In fact, the Yes Bank bond holders are still fighting their case in the country's highest court to get their money back.

With blessings from the government, the RBI came out with a restructuring plan for Yes Bank where domestic banks, led by the country's largest bank, the State Bank of India (SBI), which ended up investing Rs 10,000 crore in the bank. Currently, SBI owns 26 per cent in the bank. In fact, this kind of revival was probably the first in the history as there was no single bank or investor who was interested in taking over Yes Bank.

So far, the Federal Reserve has made it clear that no losses associated with the resolution of SVB will be borne by the taxpayer. This is exactly the same as the Yes Bank resolution, which was market-led, though some would argue that the public sector bank money is actually the taxpayers' money.

Two days ago, Elon Musk has gone on record saying that he is open to the idea of buying out SVB and turning it into a digital bank. What will finally come out of it, the ink, for sure, isn't dry yet on this issue.

Also read: BREAKING: HSBC buys UK arm of Silicon Valley Bank

Also read: Signature Bank becomes next casualty of banking turmoil after Silicon Valley Bank

Also read: 'Those responsible will be held accountable': Joe Biden reacts after Silicon Valley Bank, Signature Bank collapse

Published on: Mar 13, 2023, 12:56 PM IST
Posted by: Mehak Agarwal, Mar 13, 2023, 12:51 PM IST