Search for White Cockroach

Around the era when I was busy decoding the correlation between “Hindu Rate of
Growth” and religion as quoted by our former Governor of RBI, Raghuram Rajan
(thought he also became Nationalist) in an recent press conference where he said
India again reached the phase of 4% growth rate . I was not very sure he was
appreciating India but then when our current RBI Governor ShaktiKanta Das got
Governor of Year Award, this was moment of happiness and gives me faith on our
economic policies. Then again, I got setback when I read that Hindenburg Research
pointed issues over stock manipulation, Insider Trading over Adani Group of
Companies, this lead many Adani stock fell by more than 80% which got heighted by
the downgrading of Adani ‘s bond by Credit Suisse . This news was a devastating as
now but the great news like India became the third largest start up economy having
102 unicorns, below China (312 unicorns) and USA (661 Unicorns). Idea of
Entrepreneurship fuelled by the web series like Shark Tank, Pitchers gives me lot of
bullishness and then I researched more I got to know Silicon Valley is the ultimate
destination of all startups and having account in Silicon Valley Bank (SVB) became
my dream, This bank which started in 1983, funds, nurture ideas of many startups,
have accounts of more than 10,000 startups with an asset base of more than 212
billion $. On 16th February 2023 Forbes released the names of America’s best banks,
in that Silicon Valley Bank (SVB) holds 20th ranking. They have invested in many
startups in India like One97 Communication, BlueStone, InMobil, Snapdeal, Carwalla
etc.

Although well known speculator, philanthropist George Soros warns India against
present government and its policies, emergence of Adani Group in world’s business
and even invited opposition leader to talk about Indian democracy in Oxford College .
This great gesture coupled with idea of boycotting traditional Indian festival made
me to ignore Holi and finally the morning of Friday, 10th March was a surprise as I
never expected that this would be called as BLACK FRIDAY because of bankruptcy of
Silicon Valley Bank (SVB) as this would be day of second largest US Bank collapse
after Washington Mutual ( 119 year old Bank) which on 27th September 2008 decided
to sell off its banking operations to JP Morgan Chase, this was in succession of
bankruptcy of Lehman’s Brother (4th largest Investment Banking , 150 year Old)
having employee size of 25000 filed for bankruptcy on 15th September 2008. The firm
which funded great ideas like Shopify, Pinterest share price fell from 600$ to 40$.
Three days after the collapse of Silicon Valley Bank (SVB), another US Bank called
Signature Bank (110.36 billion $ of Asset) having presence in Crypto trading, Real
Estate etc filed for bankruptcy, likewise banks like Silver Gate, First Republic Bank
(share fell by 65.61%). Seeing so much financial bloodbath, Business Today quoted
that global financial stocks lost 465 billion $ . Bankruptcy and collapse of so many
financial institutions created panic and possibility of another Financial Crisis after
2008 as actions of Federal Reserve before this crisis correlated with the similar
interest rate change between 2001 to 2008. Interest Rate in 2001 and 2020 (COVID
era) was around 0.25% and then in 2008 and in Jan 2023 it reached approximately
5%. Inflation in USA reached 41 year high so to curtain this central bank had to
increase the interest rate but this actions of Jerome Powell created the possibility of
another meltdown , although the joint statement by US Government, FDIC ( Federal
Deposit Insurance Corporation) and Federal Reserve gave assurance of all possible
financial assistance to all account holders in these banks. Like 5 lakh ₹ bank
insurance in India, in USA 2,50,000$ is insured by FDIC but the problem in case in
SVB is that more than 85% of deposits are uninsured . US Federal Reserve is
expecting to come with emergency loan of 2 trillion $ in banking system to ease
liquidity crunch. Many banks in USA are structurally very weak, if one more bank
collapse then it will create domino effect and many other banks can collapse. USA
banking system is sitting on 620 billion $ ticking time bomb. Federal Reserve has
created a window of collateral based borrowing for all financial institutional for 1
year at Market Rate + 0.1% so that liquidity and solvency issue of any financial
institution can be avoided. Silicon Bank got bankrupt because of liquidity issue.
Silicon Valley bank which had deposit around 61.76 billion $ in 2019, got 189.20
billion $ in 2021 (post COVID era). Bill passed by Donald Trump in 2018 giving
freedom to regional banks about reserve to be maintained against liabilities were
relaxed, this made banks like Silicon Valley bank to go aggressive for liability asset
conversion. Out of 189 billion $ of deposit approximately 89 billion $ was non-
interest-bearing deposits but the remaining 100 billion $ was interest bearing
deposits. Inflation in USA that time was 5%-6%. This means at that time keeping
money in bank yields 0.25%. Short term bond return was around 0.8-1% while long
term government bond was giving 1.5% while the long-term MBS (Mortgage Based
Securities) was 1.5%-1.6%. So the management of SVB decided to invest their 100
billion $ in the following manner assuming there won’t be increase in Interest rate in
future.

80 billion $ in MBS for 10-year Period

100 billion $
(Extra with bank)

20 billion $ , long term Treasury

All deposits are like liabilities to the bank. These liabilities banks need to convert into
assets by dispersing the same at high interest rate and difference between interest
rate of assets and liabilities is net interest margin, which is like profit for the bank.

In Silicon Valley Bank (SVB), there was no chief Risk Officer from last eight months.
Chief Administrative Officer (CAO) of Silicon Valley Bank (SVB) was Joseph Gentile,
who was CFO of Lehman’s Brothers. MBS (Mortgage Backed Securities) played very
critical role in collapse of Lehman’s Brother. Hedging was not implemented here.
Gradually Inflation increased in USA, it reached highest at 8.4%. When inflation
increases, central bank increase interest rates, Federal Reserve likewise increased
interest rate from 0.25% in 2020 to 4.75% in January 2023. Because of this reason
pricing of those bonds issued during COVID time trading in all time low in open
market. So the market value of 100 billion $ investment by Silicon Valley Bank (SVB)
was trading at loss. Now when Venture Capital around could not raise fund from the
market because of high interest rate went to bank to get the funds so to manage
their working capital. Cash deposit maintained by SVB was around 5% and Signature
Bank had maintained cash deposit of 3% against the industry average of 13%.
Similarly 55% of SVB asset were parked in fixed income securities while the industry
average is 24%. Since SVB had liquidity crunch so they could not able to meet the
cash requirement of depositors. Then Credit Rating Agency Moody’s downgraded
their credit rating from A3 to Baa1 negative, this magnified their problem when they
tried to sell their bonds in open market incurring after tax loss of 1.3 billion $ and on
9th March 2023, when the firm tried to come out with 2.25 billion $ share sale , this
was rejected by the market and then Venture Capital firms like Founder’s Fund, USV,
Coatue gave instructions to their portfolio’s firm to liquidate their deposit in SVB
bank , this created BANK RUN leading to bankruptcy of Silicon Valley Bank. Seeing to
what happening in US financial market,

 Japanese Index TIPOX fell by 7%, ,

 European bank index STOXX 600 lost 120 billion euro since March 8th
 Span bank Santander, German Bank Commerzbank lost 10% of their value.
 NIFTY and SENSEX went below 17k and SENSEX went below 58k support
level
 Rajiv Chandrashekhar, Minister of state for skill development and
entrepreneurship in our country held meeting with all start-ups to discuss this
issue and gave assurance of all possible supports.
 Famous market analyst and author of novel Rich Dad Poor Dad, Robert
Kiyosaki , who predicted Lehman Brother’s bankruptcy predicted the next to
be collapse of Credit Suisse . The same prediction about Credit Suisse was
done by our former Governor, Raghuram Rajan. To save themselves from this
scenario, Credit Suisse is likely to borrow 54 billion $ from Swiss Central Bank to
 shore up liquidity and investor confidence.

Getting to know about these events made me confuse that Hindenburg Research
never realized what is happening in their economy, where putting all efforts to do
short selling over Indian Market and firm like Credit Suisse Group AG based in
Zurich having ₹ 20,000 crore asset base in India (16th largest foreign bank in our
country) , have prominent presence in derivative market which definitely got
benefitted from volatility in Indian Stock Market. Although scenario became
different when share price of Credit Suisse crashed by 77% in last one year to 1.7
CHF , their problem got heighted when their largest investor Saudi National Bank
Chairman, Ammar Al khudiary, declined to invest more. Last year Saudi National
Bank acquired 9.9% stake in Credit Suisse through an investment of 1.4 billion
CHF, out of which 500 million CHF has been wiped off in last month. Although
there are many reasons for the fall in performance of Credit Suisse, few I am
highlighting here

 Annual Report of 2022 shows material weakness in internal control over

financing reporting.
 Significant deposit and net asset outflow in 4th quarter
 Dip in Revenue by 34% year on year to CHF 14.9 billion
 Involvement in scandals and no proper business. In January 2022, Antonio
Horta-Osorio resigned as chairman for breaching COVID-19 rules, just eight
months after he was hired to fix the ailing bank. In July, new CEO and
restructuring expert Ulrich Koerner unveiled a strategic review - but failed to
win over investors. An unsubstantiated rumour on an impending failure of the
bank in the autumn sent customers fleeing.

Now the important questions coming in my mind that how much Indian economy
is insulated from this crisis. Moody predicted two US bank failure not to impact
banks in India, APAC region. Few of the point which support my logic is that

 Household Saving constitute a major part of bank deposit in India , this is

different from USA where large portions of bank deposits are from
corporates.
 In India the approach of the regulator has been that depositor’s money
should be protected at any cost. The best example is Yes Bank where lot
of liquidity support has been provided.
 In India, RBI has created D-SIBS (Domestic Systematically Important
Banks) . D-SIBS constitute India largest bank like SBI, ICICI Bank, HDFC
Bank. These banks maintain additional common equity tier 1 as
 percentage of Risk Weighted Asset (RWA) as 0.2%-0.6% apart from
maintaining current CRR (Cash Reserve Ratio) of 4% and SLR (Statutory
Liquidity Ratio) of 18.75% and Capital Adequacy Ratio of 9% . All these
percentage are calculated on net demand and time liabilities.
 Indian Banks in September 2022 reported 5% NPA, which is 7 year low..
Even in worst case scenario of SVB collapse, this is not direct threat to
Indian Economy as 20,000 crore of asset base what they have in India is
hardly 0.1% of total banking assets of Indian Banking Industry.

So I believe we need the ideology of RBI in like considered to be white cockroach

which make our Indian banks insulated in all economic scenarios.