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