Adhithya Sakthivel

Abstract Drama Others

3.5  

Adhithya Sakthivel

Abstract Drama Others

CRISIS

CRISIS

10 mins
440



                                  

NOTE: This article is based on real-life incidents that happened in USA's Silicon Valley Bank.

Almost three lakh IT employees are going to be jobless in India. Even last month’s salary might not be given. Not only that what happens when many start-up companies are going to close down? Think about it. Many big companies have already laid off. Now if you ask what is the problem, yes SVB bank which went bankrupt is the reason for that.

What is the link between a foreign bank going bankrupt and people losing their jobs in our country? Yes, there is a connection. Our India which is said to be a developing country, an important sector that is capital for growth is IT. That is why most of the youngsters work in IT.

In this situation, something like this has happened now! I think everyone knows about the recession that happened in America in 2008. That means economic fall down. No business will go well at that time. The GDP of that country will become low where everything goes to loss. That country will start becoming weak.

Yes, this happened to America in 2008. I think some people will remember this. Because so many countries in the world, faced economic problems and falls. After the world war, it was the biggest recession and one of the main reasons for that recession is housing loan. Generally, if we want to get a loan, there will be some qualification for that.

How much is the income, did they have a stable work? If they take this loan, will they be able to repay the loan, like this they will think a lot. Once if they are selected in all categories they will give the loan. Otherwise, the application will be rejected.

But in 2008, it was a time when construction and real estate was booming. So banks used it in their favor. Who ever asked for a loan, without checking any qualification like can they pay back the loan, do they have any financial background for that, they gave a high amount of loan more than their amount due. This is the reason for that financial crisis.

Why am I talking about it now means, a similar situation is happening in USA now. In general, a bank plays a major role in a country’s economy. From an ordinary daily wage to rich ones, all of them put their savings in the bank and purchase loans. In this way, to depend on their livelihood, they trust the bank for their money.

But if that bank went bankrupt, how does it affect not only the people but also the economy of the country, a good example is the SVB, that is, Silicon Valley Bank incident that happened in America. America, one of the developed countries, has a total of 16 banks and a very powerful bank among them is this Silicon Valley bank.

Like all other banks, this bank also run on fractional banking method. What is fractional banking method means, if you deposit 100 rupees in the bank, bank will keep 10 rupees in it, and the remaining 90 rupees, they will give it as a loan. If not the case they will buy the government bonds, and will take profit when the maturity time is over.

Because when those bonds reach maturity, their values will be very high. In that case, the amount that comes in it is the income and profit, and from that only, they are paying interest for our deposited amount. Generally, a bank works in this process and takes profit.

But unlike the other banks, the place where Silicon Valley Bank is now is the world’s pre-eminent hub for technology. That means it is a home land for all the largest high tech corporations in the world. And a place that is the reason for the formation of many start-up companies.

So SVB bank made a loan base for start-up companies and made their profit. But since big companies and persons invested in all start-up companies in Silicon Valley, there came a situation where the bank is unable to provide loans to start-up companies. But only the loan was not required.

Most of the companies had their amounts in the SVB bank account. But what happens if no one took a loan and just put cash in the bank? It can’t take any profit from it. Because only when you take a loan from the bank, it will get an interest, and the interest becomes a profit.

If no one gets loan from them, they will not get income. At the same time, they have to pay the interest to the customers who put money in their bank. Without being able to pay the interest SVB bank went in loss.

SVB bank, which was in such a situation, began to become much worse in Covid. Because no one can come out at that time. When such a situation arises that you cannot work, many start-up companies emerged. Many projects were introduced for work from home and looking at the technology demand, at that time investors also began to fund all the projects since the investment amount profit rate is high.

So all those excessive amounts from investors was put in the SVB account. So the bank investment rate went three times higher than normal. Since the investment rate is too high, without money rotation, the entire bank was in loss. Now to tackle and fix this problem, SVB bank went for their second option to buy government bonds.

Those who invest will maximum invest in these kind of bonds. So now SVB thought that we can take profit from this. SVB thought that all the problems are over and there is no more problem. However, 2022 Russia-Ukraine war started.

As a result, the inflation problem has risen. Inflation is when the price increases at a high rate at a certain time. For example, during Ukraine-Russia war oil rate was at peak in our country, like that. Generally, there is a high demand during this type of inflation time. So the interest rate will get higher to run the government. Likewise, the American government increased their interest rate from 0% to 4.5%.

But if the interest rate is too high, the value of government bonds will decrease. Because of the high interest rate, the bond value began to decrease. And at that time only, 77% of SVB bank’s investment was put in bonds. Now the bank has no income. The value of the bonds bought in the 90% deposit has gone down.

So now only that 10% backup amount is in the bank. So now start-up companies came to withdraw money from the bank. But there is not enough amount in the bank. So, to fix this problem what bank did is, they decided to sell the shares and bonds of the bank. It is fine to decide like that.

Besides that, what they did for it gave them a big hit. In the advertisement they gave for the sale of shares and bonds. A thing which should not be mentioned and the things which should not be told out, they posted that kind of contents in the ad. That is, the situation of the bank, why they are doing these sales like this they shared sensitive matter.

A few hours after this ad came out, SVB bank share value began to fall down. Meanwhile, this ad created a tension for all the companies that had deposited the amount in the bank. So to save their amount(to take the amount), from the bank, everyone approached at the same time. All those who came to withdraw money, no sufficient funds in the bank and asked them to come after.

Generally all banks use fractional banking method. Because all the depositors will not withdraw at the same time. They withdraw only if they need, so that only they keep that 10% in the bank and use 90% amount for rotation. But because of the ad, all of them asked to withdraw the money at the same time.

They decided to sell the government bonds they bought and give that amount to them. But since no bond has ever reached it’s maturity date. They couldn’t sell the bonds. So now SVB bank is fully collapsed and went bankrupt.

At this point you may think even if bank is collapsed still there is an insurance amount. We can claim the insurance amount and get our money. But there is a twist in that. In SVB, customers FDIC(Federal Deposit Insurance Corporation), the insurance amount per customer is $2,50,000 on the basis of insurance. So who had 2,50,000 $ and less than that is safe and no guarantee for those who deposit more than that amount.

Now Silicon valley bank has gone bankrupt. Companies cannot take the amount from them. So companies will not be able to pay salary to their staffs. Companies are unable to pay salary and in such a situation many people are being fired. But if it goes like this, people will suffer. So many people may be unemployed.

Now there is only one way to prevent going without salary. What is it means, the American government should come forward and give a certain amount from their fund. That is the only solution to this criteria. But SVB bank is not only in Silicon Valley but, in many places across the world.

So the government thought about taking this decision. But this problem does not end there, followed by SVB bank, crypto based banks like, Silver Gate bank and Signature bank these two banks went bankrupt. Because of this, the crypto market share went down and caused a big loss globally.

Well, why should we worry about America’s problem means, that is not the case, maximum IT companies in India are running on American project’s base. There was a high demand in this Covid and they had recruited lots of people. Due to this problem, more than 3 lakhs people may loss jobs in our country and there is a possibility of not getting salary for work done.

In our country itself it is like this means, think how many people will be unemployed in that country. No one knew whether it will stop with these three banks. But this is not the end. And so far the government has given information only about SVB bank. Still they didn’t open their mouth regarding Silver Gate bank and Signature bank. It is not known exactly how much it’s impact will be.

This situation can happen not only to America but also to any other country. It is important how prepared we are when that happens. There is no way to tell if there will be another problem like demonetization. So here are a few tips for you on how we can survive the financial crisis when that happens.

It is not only in crisis but it is safe for you in general. Rather than investing your money in bank savings and un-growing assets like car and bike, invest your amount in growing assets. By doing so, you will have a profit and financial security. Maybe in future, even if there is any problem like this, there may be no worries.

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