American Banking Crisis: Is India Next?

American Banking Crisis

Is the Indian banking sector immune to the global banking crisis? Let’s find out more about it.

Last week we spoke about the Silicon Valley Bank collapse. If you haven’t read about it, click here and unlock the mystery behind its downfall. 

Meanwhile, the American banking crisis is still making headlines, causing people to wonder if a similar situation could happen in India. 

If it does happen, is the Indian banking sector equipped to handle such a challenge? 

Let’s find out.

What’s Happening?

The world watched in horror as the Silicon Valley bank and Signature bank collapsed within a week, sending shockwaves through the global financial market. And just when we thought the worst was over, another bank based in San Francisco, the First Republic bank, is on the brink of collapse as depositors withdrew about $40 billion in hours, and the stock price plunged in no time! 

But this crisis is not just limited to one bank. Moody’s, a leading credit rating agency, has released a list of banks that could be similarly affected, including Zions Bank, Western Alliance Bancorporation, Comerica Bank, UMB Financial Corporation, and Intrust Bank. 

These banks are all sitting on piles of unrealised losses, holding onto assets that have lost value and could result in massive losses if sold today. 

The next bank we will tell you about is said to be too big to fail! But, after a critical statement, its share price tanked by 66.31% in just five trading sessions from 14th March to 20th March 2023. This bank is none other than Credit Suisse Bank

So, after the SVB collapse, the regulators began checking the books of different banks, and they did the same for Credit Suisse Bank’s cash flow statements for 2019-2020. To be precise, there was nothing fishy about the bank’s statement. 

But as we know, in the world of finance, even a hint of something wrong can initiate a storm of fear, and that’s what happened when the bank said a statement while justifying its delayed annual report. The statement stated, ‘As of 31st December 2022, the group’s internal control over financial reporting was not effective’.

Later, a major Credit Suisse investor gave the bank a thumbs down. This investor is Saudi National Bank, which holds about a 9.9% stake. This triggered a credibility crisis, leading to a steep drop in the bank’s share price.

But Credit Suisse Bank wasn’t going down without a fight. They borrowed $54 billion from the Suisse Central bank to keep their heads above water and even agreed to repay their debts in advance through a buyback agreement. This means they are selling bonds with the agreement to repurchase them later.

That’s the story till now. But is there more to come? Well, nobody knows. But we do know about the Indian banking sector. 

Is the Indian Banking Sector Vulnerable to Spillover Effects?

The safety of people’s money worldwide is being questioned due to the banking crisis. However, in India, such failures are less likely. 

According to Livemint, the RBI has labelled the State Bank of India, ICICI Bank, and HDFC Bank as Domestic Systemically Important Banks. These banks must put aside more money to protect their operations to be better prepared for risks and are less likely to fail.

Moreover, considering the regulatory response to the Yes Bank crisis, depositors of private sector banks believe that the government will protect them if needed. Although some cooperative banks and non-banking financial institutions have faced problems, such as Punjab and Maharashtra Cooperative Bank collapsing in 2019, regulatory measures have been taken to strengthen the regulation of cooperative banks too.

Lastly, according to Economic Times, on Friday, RBI governor Shaktikanta Das said that the Indian banking system continues to be stable and resilient.

So we can breathe a sigh of relief!

*The companies mentioned in the article are for informational purposes only. This is not investment advice.

That’s it for today. We hope you’ve found this article informative. Remember to share the word. Until we meet again, stay curious!

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