Why did Silicon Valley Bank Collapse?
Silicon Valley Bank (SVB) was a bank that provided services to tech startups in the USA. However, in March 2023, the bank collapsed and was taken over by regulators. This was a big deal because it raised questions about the safety of other banks and made people worried about their money in the bank.
The reason for the collapse of SVB was due to a few different things. One of the main reasons was that the US Federal Reserve decided to increase interest rates. This meant that investors were less willing to take risks with their money, and so they started withdrawing their money from the bank. The bank had invested some of its money into things called bonds, which are like loans that pay back interest over time. But when the bank needed to give its customers their money back, it didn’t have enough cash on hand because most of its money was tied up in those bonds.
To try and fix this, the bank sold some of its bonds for less than what they were worth, causing it to lose a lot of money. To make up for this, the bank tried to sell some of its shares to investors, but some of its clients were advised by their venture capital firms to take their money out of the bank. This scared away the investors and caused the share sale to fail. In the end, the bank couldn’t get enough money to keep itself afloat, so regulators took over.
Can the same scenario happen with an Indian Bank? How does RBI use Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) to control the scenarios of a bank collapse?
In India, the central bank, which is the Reserve Bank of India (RBI), has two important tools called Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) to help make sure that banks don’t collapse.
The CRR is like a rule that requires banks to keep a certain percentage of their money with the RBI. This means that when banks receive money from their customers, they can’t just use all of it. They have to set aside a part of it with the RBI. Think of it like a piggy bank. When you receive money, you put a certain percentage of it in a piggy bank and you can’t use it until you decide to break the piggy bank.
Similarly, the SLR is like a rule that requires banks to keep a certain percentage of their money in the form of cash or other easily convertible assets like government securities. This is to make sure that banks have enough money to meet the needs of their customers. For example, if a lot of people want to withdraw money from their accounts, the bank needs to have enough cash to give to them.
By using these tools, the RBI can ensure that banks have enough money to meet the needs of their customers and prevent situations where they don’t have enough cash on hand. This way, the RBI can help prevent banks from collapsing.
