How India's regulations keep banks balance sheet safe. A lesson after Credit Suisse, US banks crisis
3 min read 21 Mar 2023, 07:07 PM ISTThe global banking crisis is expected to bring in regulatory measures across the sector after troubles at Credit Suisse and failures in some US banks. However, this will not have any major impact on Indian banks. Domestic lenders balance sheets are well protected.
PremiumBanks that are supposed to safeguard citizens' money and be a helper during times of emergency cash need -- are suffering from a crunch in their own liquidity in western countries. The collapse of Silicon Valley Bank and Signature Bank in the US, while the crisis in Swiss lender Credit Suisse rocked the market globally, sending shockwaves among investors and even orchestrating a panic selling in the banking systems. Globally, banks are still beaten up on exchanges. There is fear of contagion among banks. Does that mean, shall we worry about banks in India?
US banks' financial stability took a toll as the rate hike cycle began in FY23 due to inflationary pressure. SVB and Signature Bank met their doomsday due to illiquidity that meant their liabilities were higher than their assets. Similar issue was faced by Silvergate Capital which also met its end. And it is expected that these banks failure is 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?', released earlier this month, revealed that --- 10% of US banks have larger unrecognized losses than those at SVB. Nor was SVB the worst capitalized bank, with 10 percent of banks having lower capitalization than SVB.
The study said that "even f only half of the uninsured depositors decide to withdraw, almost 190 banks are at a potential risk of impairment to insured depositors, with potentially $300 billion of insured deposits at risk."
Overall, the study explained that the recent plunges in the bank asset values very significantly --- resulted in a substantial spike in the fragility of the US banking system to uninsured depositor runs.
After SVB and Signature Bank, investors are currently pulling out their money from First Republic Bank despite the latter receiving uninsured deposits worth $30 billion from major US banks. First Republic Bank is speculated to be the next big failure in the US banking system.
Then came mounting losses and outflows in Switzerland-based Credit Suisse that dulled investors' confidence in the lender. Troubled Credit Suisse faced relentless selling in the past few days, leading to billions of dollars of wipe out. To restore confidence, the regulators announced lending of $54 billion to the company from Swiss National Bank, and public tender offers for debt securities. However, after still failing to keep investors' confidence in the company, as an ultimate resort the regulators pushed for a takeover of CS by another major Swiss lender UBS.
The global banking crisis is expected to bring in regulatory measures across the sector.
Ajit Kabi, Banking analyst at LKP Securities said, "the current global banking crisis, especially Credit Suisse and few USA Banks is likely to bring some regulatory measures across the global banking system. The Auditing and financial reporting may be more stringent along with addressing liquidity and duration risk in a strict way."
Post the Great Financial crisis, Kabi explained that the regulatory changes have put more emphasis on Credit risk, however, these crises are exposing other risk factors like Liquidity, duration, and market risk.
He said, "liquidity infusion of $54bn by the central bank of Switzerland into Credit Suisse and UBS acquisition is a welcome move. Nevertheless, it is a reactive action post the crisis unfolded."
Accordingly, for global banks, Kabi said, "We expect the regulators and external auditors to be proactive to safeguard shareholders' wealth."
But LKP Securities analyst does not expect a major impact of the above on the Indian banking sector.
He said, "we believe there is no major impact on the Indian Banking sector."
Why? According to Kabi, the concept of the Liquidity Coverage Ratio introduced by RBI is likely to handle liquidity pressure. Public banks are more immune to liquidity risk as their LCR is higher as well as a low CDR (credit deposit ratio).
Further, he said that the loan-to-assets ratio for Indian banks is around 36% against 65% for SVB. Additionally, the investment is more into Govt. Sec on SLR account. The deposit base for Indian banks is very granular as the Top 20 depositors contribute ~9% of total deposits.
Hence, Kabi added, "the proactive risk management by the Indian Regulator is likely to protect the balance sheet under any adverse scenario. Therefore, we don’t see any material impact on Indian Banks except poor investment sentiment across the investor fraternity."
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decisions.
