On March 10, 2023, Silicon Valley Bank (SVB), the 16th largest commercial bank in the US and a major provider of banking services to tech and life science companies, collapsed with astounding speed. The bank’s failure was caused by a combination of risky investments, rising interest rates, and a run on deposits, resulting in a massive loss of value and confidence. The US federal government stepped in to guarantee customer deposits and prevent a wider banking crisis, but the impact of SVB’s collapse was felt across the global financial markets and various industries. In this blog, we will explore what went wrong with SVB and what Nepal’s central bank, Nepal Rastriya Bank (NRB), can learn from it to avoid a similar fate.
Silicon Valley Bank was established in 1983 and grew rapidly by providing banking services to tech and life science companies, especially startups and venture capitalists. The bank had a reputation for being innovative, flexible, and supportive of its clients.
SVB Failure Reason
SVB failed because it could not cope with the changing market conditions and customer behavior. Here is how each factor contributed to its collapse and its impact:
- Risky investments: SVB invested heavily in unproven and volatile sectors, such as cryptocurrency, biotech, and green energy. These sectors offered high returns but also high risks, as their value depended on market sentiment, innovation, and regulation. When the interest rates started to rise in 2022, these sectors faced a downturn, and SVB’s assets lost value rapidly. This eroded SVB’s capital base and reduced its ability to absorb losses or shocks. It also made SVB’s investors and creditors more nervous about its financial health.
- Rising interest rates: The Federal Reserve raised interest rates nine times since 2022 to fight inflation. This increased the cost of borrowing and reduced the demand for credit. This also affected SVB’s profitability and liquidity, as it had to pay higher interest on its deposits and liabilities, while earning lower interest on its loans and investments. This squeezed SVB’s net interest margin, which is the difference between the interest income and interest expense. It also reduced SVB’s cash flow, which is the amount of money available to meet its obligations or fund its operations.
- Run on deposits: Some of SVB’s largest customers withdrew their money from the bank, fearing a collapse. These customers included tech startups, venture capitalists, and founders of color, who relied on SVB for their banking needs. The withdrawal of deposits created a liquidity crunch for SVB, as it had to sell its assets at a loss or seek emergency funding to meet its obligations. This worsened SVB’s financial situation and triggered a vicious cycle of more withdrawals and more losses. It also disrupted the operations and financing of SVB’s customers, who faced difficulties in accessing their funds or securing alternative sources of funding.
- Failed capital raise: To fill the funding gap caused by the loss of value and deposits, SVB announced a stock sale of $2.25 billion on March 9, 2023. However, the stock sale collapsed as some of the investors backed out, spooked by the deposit withdrawals and the market turmoil. SVB was unable to raise enough capital or find a buyer to rescue it, and eventually failed on March 10, 2023. This marked the end of SVB’s existence as an independent bank and resulted in a huge loss for its shareholders and bondholders. It also raised questions about the regulation and supervision of the US banking system, especially the non-traditional and innovative activities of SVB.
The collapse of SVB had a huge impact on the global financial markets and various industries. The bank’s failure triggered a sell-off in tech stocks and bonds, as well as a drop in the value of cryptocurrencies. The bank’s customers, many of whom were tech startups and founders of color, faced difficulties in accessing their funds and securing alternative financing. The bank’s collapse also raised questions about the regulation and supervision of the US banking system, especially the non-traditional and innovative activities of SVB .
NRB and it’s focus areas
Nepal Rastriya Bank (NRB) is the central bank of Nepal, established in 1956 under the Nepal Rastra Bank Act 1955. The bank is responsible for monetary policy, financial stability, foreign exchange management, banking regulation and supervision, and payment systems. The bank also provides banking services to the government and other financial institutions. The bank faces many challenges in fulfilling its mandate, such as low financial inclusion, high inflation, weak economic growth, political instability, natural disasters, and external shocks.
Also read: How to make Dollar Card in Nepal
Let’s get acquainted with some of the focus areas for Nepal Rastriya Bank:
- Monetary Policy: NRB formulates and implements monetary policy to achieve its objectives of price stability, economic growth, financial stability, and external sector balance. NRB uses various instruments such as interest rates, reserve requirements, open market operations, foreign exchange intervention, and moral suasion to influence money supply and credit conditions in the economy. NRB also conducts regular reviews and revisions of its monetary policy stance based on the macroeconomic situation and outlook. The monetary policy of NRB has a significant impact on the inflation rate, exchange rate, interest rate, output growth, investment, saving, consumption, trade balance, and public debt of Nepal.
- Financial Stability: NRB monitors and assesses the soundness and resilience of the financial system and takes necessary measures to prevent or mitigate systemic risks. NRB also acts as the lender of last resort to provide emergency liquidity support to solvent but illiquid banks and financial institutions. NRB also oversees the deposit insurance scheme and the resolution framework for troubled banks and financial institutions. NRB also conducts regular stress tests and publishes financial stability reports to enhance transparency and confidence in the financial system. The financial stability role of NRB has a crucial impact on the safety and efficiency of the financial intermediation process, the protection of depositors’ interests, the prevention of financial crises, and the promotion of economic development in Nepal.
- Foreign Exchange Management: NRB manages the foreign exchange reserves of Nepal and intervenes in the foreign exchange market to maintain exchange rate stability. NRB also regulates and supervises the foreign exchange transactions of banks, financial institutions, individuals, firms, and other entities. NRB also administers the exchange rate regime and the exchange rate policy of Nepal. NRB also participates in regional and international cooperation and coordination on foreign exchange issues. The foreign exchange management role of NRB has a vital impact on the balance of payments position, the external debt situation, the international competitiveness, and the external sector sustainability of Nepal.
- Banking Regulation and Supervision: NRB regulates and supervises the banking sector, including commercial banks, development banks, finance companies, microfinance institutions, cooperatives, non-governmental organizations (NGOs), and other non-bank financial institutions. NRB issues licenses, sets prudential norms and standards, conducts on-site inspections and off-site surveillance, imposes corrective actions and sanctions, enforces compliance and accountability, and promotes good governance and transparency in the banking sector. NRB also fosters competition, innovation, inclusion, and consumer protection in the banking sector. The banking regulation and supervision role of NRB has a significant impact on the quality and quantity of banking services, the financial inclusion and literacy level, the consumer rights and welfare level, and the overall development of the banking sector in Nepal.
- Payment Systems: NRB develops and operates various payment systems such as cheque clearing system, electronic funds transfer system (EFTS), real time gross settlement system (RTGS), national payments interface (NPI), national payments switch (NPS), mobile money system (MMS), etc. NRB also regulates and supervises other payment service providers such as card companies, payment gateways, payment aggregators, digital wallets etc. NRB also sets rules and standards for payment instruments such as cheques, cards, e-money, etc. NRB also promotes the use of digital and electronic payments and enhances the security and efficiency of the payment systems. The payment systems role of NRB has a crucial impact on the facilitation and settlement of payments, the reduction of transaction costs and risks, the promotion of financial innovation and inclusion, and the support of monetary policy and financial stability in Nepal.
Lessons for NRB
NRB can learn from the collapse of SVB by avoiding some of the mistakes that SVB made and by strengthening some of the areas that SVB neglected. For example,
- NRB should maintain a prudent balance between risk-taking and risk management in its lending and investment activities. NRB should diversify its portfolio across different sectors and regions, and avoid excessive exposure to unproven and volatile markets. NRB should also monitor the market developments closely and adjust its risk appetite accordingly.
- NRB should ensure adequate liquidity and capital buffers to cope with unexpected shocks and stress scenarios. NRB should conduct regular stress tests and contingency planning to assess its resilience and preparedness. NRB should also have access to emergency liquidity facilities from other central banks or international institutions if needed.
- NRB should enhance its regulation and supervision of the banking sector, especially the non-traditional and innovative activities that may pose new risks or challenges. NRB should adopt a risk-based and forward-looking approach to supervision, and use both on-site and off-site tools to monitor the banks’ performance and compliance. NRB should also coordinate with other regulators and supervisors at the national and international level to ensure effective oversight and information sharing.
In this blog, we have discussed the collapse of Silicon Valley Bank (SVB) and what Nepal Rastriya Bank (NRB) can learn from it to avoid a similar fate. We have seen that SVB failed because of its risky investments, rising interest rates, run on deposits, and failed capital raise. We have also seen that the collapse of SVB had a huge impact on the global financial markets and various industries. We have also compared and contrasted the situation and challenges of NRB with those of SVB. We have suggested that NRB should maintain a prudent balance between risk-taking and risk management, ensure adequate liquidity and capital buffers, enhance its regulation and supervision of the banking sector, and coordinate with other regulators and supervisors at the national and international level.
We hope that this blog has provided you with some useful information and insights about the status of FDI in Nepal. We also hope that this blog has stimulated your interest and curiosity about this topic. We invite you to share your opinions or feedback on this blog in the comments section below. Thank you for reading!
