Global banks are in trouble; how about those in India?

The UK allowed HSBC to takeover Silicon Valley Bank's England subsidiary for a jaw-dropping Rs 100 or so, while Switzerland seems to have literally put a gun on UBS' head to take over Credit Suisse.
Image for representational purpose. (Express Illustration)
Image for representational purpose. (Express Illustration)

Global banks are in trouble. Markets and analysts seem to have hung a skull and crossbones sign on the sector, symbolizing fear, danger and death. But policymakers and regulators aren't dropping their bundle, to make sure that uncontrolled bank failures don't crash out the global financial system.

In no time, the US handled three bank shutdowns and rescued another that was living on the borderline, while US President Joe Biden sent out a all-is-well assurance regarding the safety of bank deposits. One may not want to equate this to a systemic collapse and see the Treasury's 'whatever it takes' approach averting a banking crisis with next year Presidential elections in mind, but the happenings across Europe only remind us about the unpleasant memories of the 2007-08 global financial crisis.  

The UK allowed HSBC to takeover Silicon Valley Bank's England subsidiary for a jaw-dropping Rs 100 or so, while Switzerland seems to have literally put a gun on UBS' head to take over Credit Suisse. In fact, the Swiss President Alain Berset not only announced the deal himself, but also confirmed that an uncontrolled collapse of Credit Suisse would lead to 'incalculable consequences for the country and the international financial system.'

The speed and tenacity with which governments and regulators are proceeding makes one thing clear. No one wants a spectacular bank failure, or even a confidence crisis, at this point. For, global banks manage assets worth a staggering $140 trillion and even mild tremors can raze the very ground on which the global economy is standing.

Truth be told, we've got used to bank failures. About 532 banks collapsed between 2008 and 2019, or about 48 bank closures every year. So about half-a-dozen bank failures this year shouldn't really unnerve us. The trouble is, the amount of assets involved sets the 2023 bank shutdowns apart.

According to S&P Global, the total assets of just two bank failures (Signature and Silicon Valley Bank) amount to 87.6% of the total assets from the 25 closures seen in 2008. Worryingly, a new report has found that 186 banks in the US are at risk of failure due to rising interest rates and a high proportion of uninsured deposits. The research, posted on the Social Science Research Network titled Monetary Tightening and US Bank Fragility in 2023: Mark-to-Market Losses and Uninsured Depositor Runs? estimated the market value loss of individual banks' assets during the Federal Reserve's rate-increasing campaign. It warned that these 186 banks were at risk of a similar fate (SVB) without government intervention or recapitalization.  

Clearly, policymakers and regulators have failed to learn their lessons of avoiding trouble in the first place. But they seem to have boned up on the task of averting bank runs and a financial contagion with swift emergency rescue measures.

Take Switzerland. The urgency was such that, for the UBS-Credit Suisse merger, its government even waived some regulatory approvals, just like traffic authorities clearing road traffic for a life-saving ambulance to pass at full speed.

Hours after the deal, leading global regulators joined hands pitching in financial assistance including currency swap lines with the US Federal Reserve to stabilize markets. But they are in mood to listen and Asian markets were least pleased with the government-brokered merger of Credit Suisse on Monday. As it is, more than $600 billion dollars of market value evaporated from the 70 biggest US and European banks since March 6, according to Reuters. The turmoil in banking stocks seems endless at least for now, also given the central banks' predicament over policy rates.

Monetary authorities have only two key mandates -- price and financial stability. For the first time in at least a decade, they have the toughest task of picking one over the other. If they raise rates further, it's a kill-switch for weaker banks. If they don't, inflation will eat up growth prospects and job creation. Ironically, the choice is between bad and worse outcomes.

Indian banks, as RBI Governor noted, are resilient. Their credit risk is manageable. But what about interest rate risk, which dragged down Silicon Valley Bank? Turns out, on a systemic level, our banking system can withstand the ongoing rate hikes as confirmed by the RBI in its December Financial Stability Report.

As per its assessments, a parallel upward shift of 250 bps in the yield curve would reduce the system level CRAR by 73 bps. CRAR or capital-to-risk weighted assets ratio is a proxy for depositor protection and financial stability. At a disaggregated level, no bank would face a situation in which the CRAR falls below the regulatory minimum, although a few foreign banks could face substantial erosion in their capital in a stressed scenario.

RBI's study of 42 banks during Q1, FY16 and Q1, FY23 also found that interest income and other non-interest income (such as, fee and commission, underwriting, income from forex operations) can partly offset treasury losses in a rising interest rate scenario. Above all is RBI's countercyclical macroprudential tool called the investment fluctuation reserve (IFR) created by transferring the gains realised on sale of investments during easing interest rate cycle, act as a shock absorber in a tightening phase. The IFR guidelines were revised in April, 2018 under which all banks transferred net profit on sale of investment to the IFR, until it reached at least 2% of the Held for Trading (HFT) and Available for Sale (AFS) portfolios.

In fact, this buffer came in handy last fiscal, when in Q1, FY23 (the recent data available till date), banks could absorb resultant treasury losses to the tune of 4.9% of their operating profit.  

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