Silicon Valley Bank Collapse! When the global financial crisis erupted in 2008, prompted by the fall of Lehman Brothers, India remained a haven, with domestic institutions showing strength and resilience because of good and tough regulatory policies.
Notwithstanding the worldwide interdependence of the financial sector, Indian banks were unaffected when Silicon Valley Bank (SVB) and Signature Bank of the United States failed last week.
Are top Indian banks, particularly domestic systemically important banks (D-SIBs)–popularly known as too-big-to-fail–with operations outside, safe and sound in the age of start-ups and digitisation, especially considering ratings agency Moody's recent warning of more pain ahead for the US banking system following the collapse of SVB?
The tenacity of Indian banks after silicon valley bank collapse
The causes for SVB's demise are unlikely to play out in India as domestic banks have a different balance sheet structure, according to bankers. "In India, we don't have a system where deposits are withdrawn in such a mass quantity," said a senior executive from a state-run bank.
The banker stated that unlike in the US, where a substantial amount of bank deposits originate from corporates, household savings comprise a major component of bank deposits in India.
Nowadays, a big share of deposits is with public sector banks and the remaining deposits are with highly strung private sector lenders like HDFC Bank, ICICI Bank and Axis Bank. Hence, there is no need for people to worry about their money, he said, adding that anytime banks have encountered any crisis, the government has gone to their rescue.
In the banking industry, trust is essential."You don't need any capital if the trust is 100%, and no amount of capital would save you if the trust is gone," stated a representative from another state run bank.
"In India, the regulator's general policy has been that depositors' money should be preserved at all costs. "The best example is the rescue of Yes Bank, which received substantial liquidity support," said Rajnish Kumar, former chairperson of the State Bank of India (SBI).
The SVB issue caused stock market jitters, with bank shares falling and investors losing money.
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Which D-SIBs are there?
The Reserve Bank of India has designated State Bank of India, ICICI Bank, and HDFC Bank as D-SIBs. The increased Common Equity Tier 1 (CET1) requirement for D-SIBs was phased in beginning April 1, 2016, and will be fully implemented beginning April 1, 2019.
Besides the capital conservation buffer, the additional CET1 requirement will be required. This means these banks will have to designate additional capital and provisions to preserve their operations.
Drawing from the experience of the global crisis, the Reserve Bank issued a framework for dealing with D-SIBs on July 22, 2014. Beginning in 2015, the D-SIB framework compels the Reserve Bank to reveal the names of banks classified as D-SIBs and place these banks in relevant buckets based on their Systemic Importance Scores (SISs).
A D-SIB must meet an additional common equity criterion depending on the bucket in which they put it.
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Why are SIBs created?
The financial system is globally interconnected. During the 2008 financial crisis, the challenges encountered by several major and highly interconnected financial institutions hindered the orderly operation of the financial system, significantly impacting the real economy. In many jurisdictions, they deemed government action required to ensure financial stability.
According to the RBI, the expense of public sector intervention and the resulting increase in moral hazard demanded that future regulatory policies attempt to reduce the likelihood of SIB failure and the consequences of SIB failure.
In October 2010, the Financial Stability Board (FSB) advised that all member nations put in place a framework to manage risks associated with Systemically Important Financial Institutions (SIFIs) in their jurisdictions.
We view sIBs as 'Too Big To Fail (TBTF)' banks. This notion of TBTF promotes an expectation of government help for these banks in times of trouble. Because of this perception, these banks benefit from specific advantages in the funding markets.
Yet, the perception of government support increases risk-taking, weakens market discipline, produces competitive distortions, and raises the likelihood of future crises. According to the RBI report on D-SIBs, these factors cause that SIBs be subjected to extra policy measures to address the systemic risks and moral hazard issues they pose.
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