We need proactive regulation to fend off SVB-like bank failures

Source: The post is based on the article “We need proactive regulation to fend off SVB-like bank failures” published in Live Mint on 13^th April 2023.

Syllabus: GS 3 – Economy – Money and Banking

Relevance: measures needed to prevent bank crisis.

News: The article discusses the Silicon Valley Bank (SVB) crisis and provides measures to prevent such a crisis.

About Silicon Valley Bank (SVB) crisis

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What were the steps taken by the US to minimize the impact of the crisis?

To calm down the financial markets, the US Treasury Secretary announced special protection even for uninsured deposits held with failed banks.

It is estimated to cost the US Federal Deposit Insurance Corp (FIDC) over $20 billion.

The US Federal Reserve also opened up a special liquidity window, in the midst of its policy tightening to control inflation, against the face value of securities.

What were the scenarios at the time of the SVB crisis?

The gap in the value of assets and liabilities of US commercial banks stood at $2,137 billion. Mark-to-market losses were over $2 trillion which was more than 40% of the capital of all banks.

More than 50% of SVB’s long-dated securities had fewer financial values, with facing mark-to-market losses. Its capital ratios were unfavourable and its customer profile skewed in favour of bulk deposits.

What can be done to prevent a bank crisis?

It is necessary to come up with laws that bridge gaps and provide real-time necessary information on fresh developments, including the use of technology for financial transactions and the behaviour of participants.

There is also a need to constantly scan big data using machine learning and artificial intelligence. 

It will help to model alternate scenarios and provide solutions for authorities to intervene in time to avert disasters and minimize large-scale mishappening.