Banks – which are expected to protect citizens’ money and be helpful in times of emergency cash need – are suffering from their own liquidity crunch in western countries. The collapse of Silicon Valley Bank and Signature Bank in the US, while the crisis at Swiss lender Credit Suisse shook markets globally, sending shock waves among investors and even causing panic selling across banking systems. Globally, banks are still beaten down on exchanges. There is a fear of spreading infection in banks. Does this mean that we should worry about banks in India?
american bankInflationary pressures impacted financial stability as the rate hike cycle began in FY23. svb And Signature Bank met its doomsday due to illiquidity, which meant that their liabilities exceeded their assets. A similar problem was faced by Silvergate Capital, which also folded. And hopefully these bank failures are just a teaser!
The Social Science Research Network study, titled ‘Monetary tightening and US bank fragility in 2023: Mark-to-market losses and uninsured depositor runs? Compared to SVB. Nor was SVB the worst capitalized bank, with 10 percent of its banks being capitalized less than SVB.
The study states that “even as only half of uninsured depositors decide to withdraw, approximately 190 bank insured depositors are at potential risk of loss, potentially putting $300 billion in insured deposits at risk.” Is.”
Overall, the study reports that bank asset values have declined significantly recently—resulting in a substantial increase in the fragility of the US banking system to uninsured depositors.
After SVB and Signature Bank, investors are currently pulling their money out of First Republic Bank despite receiving $30 billion worth of uninsured deposits from major US banks. First Republic Bank is predicted to be the next major failure in the American banking system.
Then came the mounting deficits and outflows based in Switzerland credit Suisse This eroded investor confidence in the lender. Troubled Credit Suisse has faced a relentless sell-off over the past few days, wiping off billions of dollars. To restore confidence, regulators announced a $54 billion loan to the company from the Swiss National Bank and public tender offers for debt securities. However, after still failing to retain investor confidence in the company, regulators pushed as a last resort for the acquisition of CS by another major Swiss lender, UBS.
The global banking crisis is expected to bring about regulatory measures across the sector.
Ajit Kabi, banking analyst at LKP Securities, said, “The current global banking crisis, especially Credit Suisse and some USA banks, is likely to bring about some regulatory measures in the global banking system. Auditing and financial reporting along with addressing liquidity May be more stringent. And duration risk in a stricter manner.”
After the great financial crisis, Kabi explained that regulatory changes have placed more emphasis on credit risk, however, these crises are exposing other risk factors such as liquidity, duration and market risk.
“The $54 billion infusion of liquidity by Switzerland’s central bank into the Credit Suisse and UBS acquisitions is a welcome move. Still, this is a reactionary action after the crisis unfolded,” he added.
Accordingly, for global banks, Kabi said, “we expect regulators and external auditors to be proactive to protect shareholders’ wealth.”
But analysts at LKP Securities do not expect a major impact of the above on the Indian banking sector.
“We believe there is no major impact on the Indian banking sector,” he said.
Why? According to Kabi, the concept of Liquidity Coverage Ratio introduced by RBI is likely to handle the liquidity pressure. Public sector banks are more immune to liquidity risk as they have higher LCR as well as lower CDR (Credit Deposit Ratio).
Further, he noted that the loan-asset ratio for Indian banks is around 36% as against 65% for SVBs. Additionally, investment is high in government. Section on SLR account. The deposit base for Indian banks is very thin as the top 20 depositors contribute ~9% of the total deposits.
Therefore, Kabi said, “active risk management by the Indian regulator is likely to protect balance sheets under any adverse scenario. Hence, we do not see any material impact on Indian banks except poor investment sentiment in the investor fraternity.”
Disclaimer: The views and recommendations given above are of individual analysts or broking companies and not of Mint. We advise investors to do due diligence with certified experts before making any investment decision.
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