Introduction
The collapse of Silicon Valley Bank (SVB) in March 2023 — the second-largest bank failure in US history — was remarkable not merely for its scale but for its speed. A bank with $209 billion in assets was rendered insolvent within 48 hours, its demise accelerated by a social media-fuelled bank run that demonstrated how the digital information environment has fundamentally altered the dynamics of banking crisis. Within days, Signature Bank had also failed, and Credit Suisse had been emergency-acquired by UBS through a government-brokered deal that imposed write-downs on Additional Tier 1 bondholders — a creditor class that many investors had believed was better protected than ordinary equity.
These events prompted a global reassessment of bank resolution frameworks. Regulators asked whether their tools — deposit insurance, liquidity support, resolution planning, bail-in mechanisms — were adequate for the speed and contagion dynamics of a modern banking crisis. In the United States, the Federal Deposit Insurance Corporation (FDIC) commissioned a detailed post-mortem. In Europe, the SVB experience accelerated discussions about the Banking Package reforms pending before the EU Council. In India, the RBI and the government reviewed the adequacy of existing crisis management mechanisms and found, once again, that the legislative gap identified since the failed Financial Resolution and Deposit Insurance (FRDI) Bill of 2017 remains unfilled.
Legal Framework
India’s bank resolution framework rests on a set of legacy statutory provisions that were designed for a different era and a different conception of banking crisis. The principal mechanisms are:
Section 45 of the Banking Regulation Act 1949, which empowers the RBI to make a scheme for reconstruction or amalgamation of a bank in the public interest. This provision was invoked in the Yes Bank reconstruction in 2020, where a consortium of banks led by SBI acquired Yes Bank’s shares and injected capital, preventing failure at the cost of significant losses to AT1 bondholders.
The Deposit Insurance and Credit Guarantee Corporation (DICGC) Act 1961, as amended in 2021, which provides deposit insurance up to Rs. 5 lakh per depositor per bank and, critically, the 2021 amendment requiring DICGC to pay insured amounts to depositors within 90 days of a bank being placed under moratorium.
The Insolvency and Bankruptcy Code 2016, which provides for insolvency of financial service providers under separate rules — but whose application to banks and systemically important financial institutions requires specific notification by the government, and which is not designed as a bank resolution tool in the same way as the FDIC’s Orderly Liquidation Authority.
The FRDI Bill 2017, which would have established a comprehensive Financial Resolution Corporation with bail-in powers — the ability to write down or convert the liabilities of a failing bank to recapitalise it — was withdrawn in 2018 after public concern about the bail-in provisions and their implications for depositor funds. The legislative gap it would have filled remains.
Contemporary Issues and Analysis
The SVB failure’s primary lesson — that deposit concentration and asset-liability mismatch in a rising interest rate environment can create fatal vulnerabilities very rapidly — has specific Indian resonances. Several Indian cooperative banks and small finance banks have experienced similar concentration risks: large institutional depositors, limited deposit diversification, and portfolio concentrations that leave the institution vulnerable to sector-specific downturns.
The digital bank run risk, demonstrated by SVB’s collapse, is particularly acute for India’s cooperative banking sector, where depositor confidence is less robust, regulatory oversight has historically been less rigorous, and the DICGC’s 90-day payment timeline — while an improvement on the pre-2021 position — may not be fast enough to prevent panic withdrawal in a digitally connected environment.
The bail-in gap in India’s framework is the most structurally significant deficiency. In most major bank resolution regimes, bail-in — the conversion of creditor claims into equity or the write-down of eligible liabilities — is a central resolution tool that allows a failing bank to be recapitalised without public funds. India has no bail-in power. When a bank fails, the choices are: (a) DICGC pays insured deposits and the bank is wound up (destroying uninsured depositor and creditor value); (b) the government provides capital (taxpayer expense); or (c) a forced merger is arranged under Section 45 (which distributes losses through the acquiring bank’s shareholders and, in practice, through AT1 bondholders as the Yes Bank precedent established). None of these options is designed for the speed or precision that modern bank resolution requires.
The AT1 bondholder write-down in the Yes Bank resolution and the Additional Tier 1 write-down in the Credit Suisse emergency takeover have raised questions about the legal protections available to AT1 investors. In India, AT1 bonds — perpetual bonds without maturity that count as bank capital — are sold primarily to retail and HNI investors through wealth management channels, often without adequate disclosure of the write-down risk. The RBI has tightened disclosure requirements and set minimum lot sizes, but the fundamental risk remains and is inadequately understood by many investors.
Comparative and International Perspective
The FDIC’s handling of SVB and Signature Bank involved invoking the Systemic Risk Exception — which allowed FDIC to guarantee all deposits, not just insured deposits — combined with the organisation of bridge banks that continued operating while the FDIC sought acquirers. The speed of the FDIC’s response, enabled by years of resolution planning (living wills) required of large banks, prevented wider contagion.
The EU’s Bank Recovery and Resolution Directive (BRRD) established a comprehensive bail-in regime with a detailed creditor hierarchy. The Single Resolution Board (SRB) has bail-in powers applicable to all significant EU banks, and resolution plans are reviewed and updated annually. The SVB episode has prompted EU proposals to extend proportionate resolution planning requirements to mid-size banks that previously operated below the threshold.
The UK’s Resolution under the Banking Act 2009, operated by the Bank of England as resolution authority, includes bail-in, bridge bank, and asset transfer tools comparable to the FDIC and BRRD frameworks.
Practical and Policy Implications
For Indian banks and their creditors, the absence of a comprehensive resolution framework creates heightened uncertainty about the treatment of creditor claims in a failure scenario. AT1 bondholders, sub-debt holders, and large uninsured depositors have no clear statutory framework specifying their position in a resolution — only the precedent of the Yes Bank case, which was improvised under emergency conditions and may not be replicated in the same way in a different bank failure.
For the financial system as a whole, the absence of resolution planning requirements for systemically important banks means that the resolution toolkit, even as it currently exists, cannot be deployed with the speed and precision that modern banking crisis management requires.
Suggestions and Reforms
India should revive the FRDI Bill in a reformed version that addresses the political concerns that led to the original withdrawal. The new version should make clear that DICGC-insured deposits (Rs. 5 lakh and below) are exempt from bail-in and that retail depositors are insulated from any loss in resolution. The bail-in power should apply to AT1 bonds, Tier 2 bonds, and senior unsecured debt — not to insured deposits, and with regulatory safeguards ensuring appropriate creditor hierarchy.
Resolution planning (living wills) should be required for all Domestic Systemically Important Banks (D-SIBs) and all banks with assets above a threshold. Plans should be reviewed annually by the RBI and updated to reflect material changes in the bank’s business model, funding structure, or risk profile.
Conclusion
India’s bank resolution framework is significantly behind the international standard, and the gap has been documented in successive Financial Stability Board peer reviews and IMF Financial Sector Assessment Programs. The SVB experience is a reminder that banking crises can escalate faster than regulatory improvisation can contain. The political will to address this gap — particularly by reviving a bail-in framework that was withdrawn under public pressure — is the essential precondition for meaningful reform, and it requires both executive leadership and a public communications strategy that accurately explains the protection that a well-designed framework provides to ordinary depositors.
