The global banking crisis and YES Bank

The recent collapse of the Silicon Valley Bank (SVB) and the emergent scramble to rescue it grabbed global headlines. A seemingly small California-based institution had the potential to deal a devastating blow to the global financial system, reminding of the situation during the 2008 crisis. While the Federal Reserve salvaged SVB through a last-minute plan, the resultant chaos is expected to prevail in the system for long. A recent article in The Financial Times illustrates the situation in the US. A somewhat similar situation was seen with Credit Suisse in Europe.

These events coincided with the third anniversary of a similar event in India the rise, fall, and notable rescue of Yes Bank. Then, this financial institution was on the verge of collapse due to its rapidly deteriorating financial position and issues relating to liquidity, capital crunch, bad loans, governance and other critical parameters.

While the situation may have led to a total bank run, the Union government, the Reserve Bank of India and public sector banks worked together to prevent a contagion effect. As a result, Yes Bank was rescued by a consortium led by the State Bank of India (SBI) in March 2020, with the approval of a scheme of  ₹10,000 crore.

This was unique in many ways. It was the first instance where a large private sector bank was rescued earlier, the RBI had generally only bailed out public sector banks that had run into trouble. The size of the ₹10,000 crore bailout package also reflected the severity of the crisis at Yes Bank.