SVB crisis: What is contagion risk, and is it expected to spread to India?

SVB collapse: Just a couple of days after US regulators shut the bank down on Friday, Signature Bank also shut its doors, spreading the fears of contagion

The collapse of the Silicon Valley Bank (SVB) has spread fears not only in the tech industry but also in the banking sector. Just a couple of days after US regulators shut the bank down on Friday, Signature Bank also shut its doors. According to Reuters, it is the third largest bank in US history to fail after Washington Mutual Bank (2008) and SVB.

This has spread fears of contagion risk in the industry.

What is contagion risk?

Contagion risk is the risk that financial difficulties at one or more banks will spill over to other banks or the financial system as a whole. In simpler words, it is the tendency of a financial crisis to spread to other markets and regions.

It is worth noting that this term is not used exclusively in the finance sector. The crypto industry also saw contagion after the collapse of FTX in November last year. Since then, several crypto firms like BlockFi and Core Scientific have filed for bankruptcy.

What is the US doing to reduce contagion risk?

The US sprung into action almost immediately after the collapse of SVB. The Fed announced a new emergency loan programme for banks. The institutes can pledge collateral at par and not at the current market value to get a loan.

Later, in a joint statement, the US Secretary of the Treasury Janet Yellen, Federal Reserve Board Chair Jerome Powell, and FDIC Chairman Martin Gruenberg on Monday said that the depositors would get access to all of their money and that the taxpayer would bear no losses associated with the resolution.

According to experts, the collapse of SVB may cause some contagion for regional banks, but the Biden administration's steps are likely to help reduce the risk in the whole banking sector.

Can SVB's contagion risk spread to India?

Government officials have said that the SVB crisis is not expected to have any lasting macroeconomic ripple effect on India. At the same time, Fintech and venture capital firms have come to the aid of Indian start-ups. Recur Club said it was allocating $15 million to all Indian founders affected by the crisis.

Also, Minister of State for Electronics and IT Rajeev Chandrasekhar will meet representatives of start-ups this week to assess the impact of their exposure to the SVB.

"The collapse of SVB, which is the sixteenth largest Bank in the US is going to have ramifications in the financial world in the US with a contagion impact on the entities having dealings with them. Luckily our Banking system is well-regulated and it is likely to have a limited effect on the Indian Banking system," said Jyoti Prakash Gadia, managing director (MD) at Resurgent India.

"All in all, the start-up ecosystem will need to keep its fingers crossed and show agility in taking the future steps in the right direction with an emphasis on strong fundamentals instead of reliance on speculation," he added.