Uday Kotak, an industrialist, stated on Friday that an accident similar to the recent Silicon Valley Bank (SVB) debacle was “somewhere” waiting to happen. On Thursday, shares of Silicon Valley Bank (SVB) in the United States fell by 60%, costing investors approximately $80 billion in value.
Details about Uday Kotak says an ‘accident’ was waiting to happen after seeing Silicon Valley Bank crisis
This prompted a market collapse not only on Wall Street in the United States, but also in India. Some commentators have likened the present SVB problem to the previous liquidity crises of Lehman Brothers and Evergrande.
“Overnight developments in US banking: markets, analysts, and investors misunderstand the importance of financial stability for a bank’s balance sheet,” Kotak stated in response. When interest rates rise 500 basis points from zero in a year, an accident is bound to occur somewhere.”
Since 2022, the US Fed has raised its benchmark rate by more than 4.5 percentage points in an effort to contain increasing inflation. That isn’t everything. Fed Chair Jay Powell stated this week that the central bank may have to return to half-point rate increases at the conclusion of its next meeting on March 22.
As the Fed raises interest rates, banks are burdened by low-interest bonds that cannot be sold quickly without incurring losses. As a result, if too many clients withdraw their deposits at once, a vicious cycle may ensue.
SVB, a leading lender to technology businesses based in California, launched a $1.75 billion share sale on Wednesday in order to strengthen its balance sheet. It liquidated practically all of the marketable securities in its portfolio.
In an investor prospectus, the company stated that the new cash would be used to fill a $1.8 billion hole left by the sale of a $21 billion loss-making bond portfolio dominated by US Treasuries.
The portfolio returned an average of 1.79 percent, well below the current 10-year Treasury yield of roughly 3.9 percent.
“We are taking these moves because we anticipate ongoing higher interest rates, pressured public and private markets, and increased cash-burn levels from our clients as they invest in their businesses,” SVB Chief Executive Officer Greg Becker wrote in a letter to shareholders on Wednesday.
Following this, the company’s stock dropped to its lowest level in over 35 years on Thursday. The shares of the corporation has dropped to its lowest level since 2016. Once the market closed, the shares fell another 26%.
The KBW Bank Index fell 7.7 percent on Thursday, the largest decrease since June 2020.
Moreover, Bank of America Corp., Wells Fargo & Co., and JPMorgan Chase & Co. all fell about 5%.
About 11 a.m., the BSE Sensex fell below 59,000, while the NSE barometer Nifty fell below 17,350, in a selloff that saw nearly 65 percent of companies on the BSE decline on Friday.
Dalal Street’s weakness mirrored the overnight selloff on Wall Street, owing to a drop in the banking index there and concerns across Asia. By 11 a.m., the market value of domestic stocks had fallen by Rs 1.67 lakh crore (m-cap).
After the Wall Street rout, Nifty Bank fell 850 points intraday on Friday, reaching a low of 40,390.80. The index’s 12 stocks were all in the red.
“This is a US-specific issue that will have no bearing on Indian banks equities. Yet, the emotional impact can be detrimental. The US jobs data due out today will be critical in determining the Fed’s policy response and market direction. If employment growth slows, the US Fed will not be as aggressive as market expectations, and equity markets will stay resilient “Geojit Financial Services’ Chief Investment Strategist, V K Vijayakumar, agreed.