Secondly, in India, the Asset-Liability Management (ALM) framework is regarded as a critical aspect of banking and is taken seriously by both the banks and the RBI. Thus, no Indian bank can emulate SVB’s strategy of investing 71% of its deposits in government securities. The SLR currently ranges from a minimum of 18% to a maximum of 40%. In India, the Reserve Bank of India (RBI) mandates that a portion of banking deposits must be invested in approved government securities, referred to as the Statutory Liquidity Ratio (SLR) requirement. Let us now delve into why such a scenario is unlikely to occur with Indian banks. If the deposits had not been withdrawn, and interest rates had subsequently fallen below 2%, the bank would have remained financially stable. Ironically, SVB had non-interest-bearing demand liabilities, akin to current accounts in India, worth $94 billion. However, when the 10-year US yields surpassed 4%, both the AFS and HTM portfolios incurred significant losses, with marked-to-market losses amounting to $16 billion, equivalent to SVB’s entire net worth of $16 billion. SVB’s AFS portfolio was yielding 1.6%, while the HTM portfolio was yielding 1.9%. While changes in the fair value of the AFS portfolio must be reflected in the profit and loss statement, changes in the fair value of the HTM portfolio need not be. The increase in interest rates results in a decrease in the value of investments due to an inverse price-to-yield relationship. In brief, HTM stands for securities Held Till Maturity, while AFS refers to securities Available For Sale. However, before we delve further, it is essential to define the aforementioned terms. It is worth mentioning that the investments constituted around 71% of SVB’s deposits, of which, 77% were classified as HTM.
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