Introduction:

The recent failure of Silicon Valley Bank, a significant startup-focused lender, has shocked the entire world’s banking industry. Even though some experts have played down the crisis, others have expressed concern about the risk of contagion and how it might affect the larger banking system.

In this article we will look at what happened, what caused the crisis, whether Indian banks are vulnerable to identical risks, and what steps regulators are taking to ensure the stability of the banking sector as Indian investors watch with concern.

The Banking Crisis Timeline 2023

Five banks in the US and Europe collapsed over the course of 12 days in March 2023, shaking the world’s financial markets. Here is a brief explanation of what took place:

• Silver Gate Bank, a cryptocurrency-friendly bank that offered banking services to blockchain and cryptocurrency research and trading companies, was the first bank to fail. FTX, whose collapse four months ago marked a turning point in the cryptocurrency space, was one of its most notable clients. Following a rush of $8.1 billion in withdrawals from its customers in January 2023, Silver Gate Bank reported losses of almost $1 billion. On March 8, Silver Gate Capital made the voluntary liquidation of the bank as well as the closure of its banking division. All deposits were fully repaid.
• On March 10, Californian financial regulators took control of Silicon Valley Bank, a financial institution with ties to the state’s startup and venture capital sectors, after it experienced a run on its cash with customers rushing to withdraw nearly $42 billion. The move was justified by the bank’s insolvency, risky business practices, and insufficient liquidity positions. It had a $958 million negative cash balance as a result of the bank run. With assets of $206 billion, it was the second-largest bank failure.
• On March 12, state regulators took control of Signature Bank, a New York-based bank that supported cryptocurrencies, after depositors frantically withdrew their money and deposited it with other institutions. The Federal Deposit Insurance Corporation (FDIC) was appointed receiver after the New York State Department of Financial Services took control of Signature Bank. The FDIC is the federal deposit insurer that provides up to $250,000 in deposit guarantees for banks.
• To calm the public after Silicon Valley Bank and Signature Bank failed, First Republic Bank, which had not failed but had become incredibly fragile due to a loss of depositors, received $30 billion in deposits from 11 US banks, including JPMorgan Chase, Citibank, Wells Fargo, and Bank of America. These four major banks made a $5 billion uninsured deposit commitment, along with $2.5 billion from Morgan Stanley and $1 billion from five other banks.
• On March 20, UBS, a larger competitor, acquired Credit Suisse, a Swiss multinational banking group, in an all-share deal valued at $3.2 billion, or three billion Swiss francs. Shareholders benefited from the move while risky bondholders (additional tier 1) saw their investments reduced to zero. Bondholders are preparing and anticipating legal action.

The only direct connections between these five banks, which were dispersed throughout the US and Europe, are the general trends of central banks raising interest rates to fight inflation and the easy money policies of the COVID-19 pandemic era. Regulators around the world have hurriedly taken action to avert further crises as a result of the nearly simultaneous problems with these banks.

The effects of these bank failures and their causes:

Since investors and markets were alarmed by the prospect of a domino effect, the effects of bank failures were felt not only in the US but also internationally. The failures sparked panic in the financial markets and raised fears of a recurrence of the 2008 financial crisis. However, regulatory and policy measures were implemented to stop the crisis from spreading further.

Although there were many different factors contributing to the bank failures, there were some recurring themes, such as a significant amount of non-performing assets on balance sheets and sizeable bond investments that were subject to interest rate risks. Additionally, some banks were engaged in specialized industries like technology and cryptocurrency, which experienced slowdowns that adversely affected these banks. The COVID-19 pandemic-era easy money policies and the central bank’s raising of interest rates to fight inflation both made the situation worse.

Do Indian investors need to worry?

The Indian banking industry is not exempt from the risks that affect its counterparts in the US and Europe, and it is vulnerable to a special set of issues that make it particularly susceptible to these risks. With a sizable portion of their loan portfolios made up of corporate loans, Indian banks have a high exposure to the corporate sector. As a result, they are more susceptible to economic downturns or shocks in particular sectors, as was the case with the tech and cryptocurrency sectors during the US banking crisis.

In addition, the balance sheets of Indian banks contain a sizable amount of non-performing assets (NPAs). Borrowers aren’t paying back a sizable portion of their loans, which can cause a liquidity crisis and make it harder for the banks to fulfill their obligations. In addition, Indian banks’ portfolios contain a sizable number of government bonds that are vulnerable to interest rate risks. The value of these bonds could decrease due to an increase in interest rates, which would result in losses for the banks.

The Reserve Bank of India (RBI) has taken action to reduce these risks and increase the stability of the banking industry despite these threats. The RBI has put in place measures to raise the asset quality of banks and enhance their risk control procedures. The Indian government has also enacted reforms to enhance corporate governance and lessen the impact of insiders with political clout in the banking industry.

In conclusion, while Indian banks are not exempt from the risks that their counterparts in the US and Europe face, the sector’s resilience to potential shocks has been improved by the measures taken by regulators and policymakers. Investors in India should closely monitor the banking industry, but there is no need to panic as the industry’s stability is increasing overall. With the proper safeguards in place, the Indian banking system can continue to withstand crises as it has in the past.

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Happy Investing!

This article is for education purpose only. Kindly consult with your financial advisor before doing any kind of investment.