Lessons for Bangladesh from US bank collapse

Black_cats · Mar 14, 2023

Lessons for Bangladesh from US bank collapse

AKM Zamir Uddin
Tue Mar 14, 2023 08:00 AM Last update on: Tue Mar 14, 2023 08:32 AM

A worker tells people that the Silicon Valley Bank headquarters is closed on Friday in Santa Clara, California. The bank was shut down on Friday morning by California regulators and was put in control of the US Federal Deposit Insurance Corporation. US President Joe Biden yesterday said the American people and businesses can have confidence that their bank deposits will be there when they need them. Photo: AFP

A worker tells people that the Silicon Valley Bank headquarters is closed on Friday in Santa Clara, California. The bank was shut down on Friday morning by California regulators and was put in control of the US Federal Deposit Insurance Corporation. US President Joe Biden yesterday said the American people and businesses can have confidence that their bank deposits will be there when they need them. Photo: AFP

Silicon Valley Bank (SVB), the 16th largest lender in the United States, has not reportedly faced any scam or lack of corporate governance. Still, it could not avoid the collapse.

The ongoing macroeconomic stress in the US economy seems to be responsible for the failure of the lender, worth more than $200 billion.

And the authorities have allowed the closure of the bank, which backed startups and technology companies that usually face difficulties in securing loans from conventional financial institutions.

Two economists and a senior banker in Bangladesh think the country's banking sector could learn a lot from the process.

Many banks in Bangladesh have been facing scams and a lack of corporate governance for a long. But no bank is allowed to liquidate here, a phenomenon that ultimately erodes the strength of the entire financial sector, they said.

"We should follow the US path to strengthen our banking system. The weak banks that have been engaged in irregularities should be allowed to liquidate," said Ahsan H Mansur, executive director of the Policy Research Institute of Bangladesh.

"Allowing such liquidation is good for the economy."

WHY SVB WENT DOWN

Started as a California bank in 1983, SVB expanded rapidly over the last one decade.

During the coronavirus pandemic, it gained popularity among tech-based startups. Tech companies preferred SVB to park cash used to pay salaries to employees and meet operating expenditures.

Like other lenders, SVB invested the majority of the deposits. It had invested a large amount of deposits in long-term US treasury bonds, considered safe investment tools.

But the bank began coming under pressure when the Federal Reserve, the central bank of the US, increased its key interest rates repeatedly to tackle higher inflation.

There is a reverse relationship between the price of bonds and the key interest rates of the Fed. If the key interest rates go up, bond prices decline.

So, when the Fed started to hike rates rapidly, SVB's bond portfolio started to lose significant value, according to the Guardian.

Had the lender held the bonds until their maturity, which is 30 years, it would have been able to get back the capital with interest.

However, as economic conditions soured over the last year, with tech companies particularly affected, many of the bank's customers started drawing on their deposits. But SVB did not have adequate cash to repay the depositors as it invested those like other banks do, said the Guardian article.

So, it was forced to sell bonds at losses to tackle the situation, spooking the confidence of investors and depositors.

The situation worsened on March 8 when the lender announced to raise $1.75 billion from the capital market. Clients reckoned that the lender was in deep financial trouble, bringing about an ultimate bank run.

It collapsed two days later.

WHAT US AUTHORITIES DID

Another US lender, Signature Bank, collapsed on March 12 owing to a risk of systemic bank failure cited by regulators, according to Reuters.

Both the Fed and the Federal Deposit Insurance Corporation (FDIC) issued a joint statement to strengthen the confidence of the US depositors.

The statement said, "Depositors will have access to all of their money starting March 13. No losses associated with the resolution of Silicon Valley Bank will be borne by the taxpayers."

In the case of Signature Bank, it also took a similar decision.

WHAT BANGLADESH CAN LEARN

Mansur says that the problems in Bangladesh's banking sector are quite different as many banks have been facing malpractices and scams for a long.

In an ideal scenario, any company facing continuous losses can't survive, he said.

"But the government and the Bangladesh Bank do not allow banks to get liquidated despite their vulnerable health. But this is not good for the economy."

Shareholders of weak banks usually claim that if a bank faces liquidation, it will create severe risk in the entire banking sector, he said.

"But if a weak bank is allowed to continue operation, it creates a systemic risk," said the former official of the International Monetary Fund.

"We should allow weak banks to face liquidation. During liquidation, the interests of the depositors should be protected fully, not the shareholders."

Zahid Hussain, a former lead economist of the World Bank's Dhaka office, also echoed a same sentiment.

"The market will determine which banks will survive and which will not."

Syed Mahbubur Rahman, managing director of Mutual Trust Bank, says if a weak bank is permitted to run its business despite a vulnerable financial health, the risk will spread.