India remained a safe haven throughout the 2008 global financial crisis that was brought on by the fall of Lehman Brothers because its local banks displayed strength and resilience thanks to good and strict 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.
In the age of start-ups and digitisation, are the top Indian banks, particularly the domestic systemically important banks (D-SIBs) — also known as too-big-to-fail — with operations abroad, safe and sound, especially in light of ratings agency Moody’s recent warning of more pain ahead for the US banking system after the collapse of SVB?
According to bankers, India’s local banks have a distinct type of balance sheet structure, making it unlikely that the causes of SVB’s failure will manifest there. A top employee from a state-run bank claimed, “In India, we don’t have a system where deposits are withdrawn in such a mass quantity.
According to the banker, household savings make up a sizable portion of bank deposits in India, as opposed to the US, where corporate deposits make up a sizable portion of bank deposits. Currently, a sizable portion of deposits are held by public sector banks, with the remainder being held by highly powerful private sector lenders like HDFC Bank, ICICI Bank, and Axis Bank. Customers shouldn’t be concerned about their savings, he added, adding that anytime banks have encountered difficulties, the government has stepped in to help. “Confidence is a key component in banking. If the trust is 100 percent, you don’t need any cash, and if the trust is gone, no amount of capital will be able to save you.
“In India, the regulator’s general stance has been that depositors’ money must be protected at all costs. The rescue of Yes Bank, where substantial liquidity support was given, is the best example, according to Rajnish Kumar, a former chairman of the State Bank of India (SBI).
Yet, the SVB situation caused concern in the stock markets as bank shares declined and investors lost money as a result.
When the global financial crisis peaked on September 30, 2008, then-finance minister P Chidambaram and regulators SEBI and the RBI intervened to calm the markets after the benchmark Sensex fell 3.5% to its lowest levels in two years and panic gripped ICICI Bank customers, who lined up outside ATMs in some cities to withdraw deposits. Their guarantees were effective because the market ended 2.1% higher.
In an unusual statement, the RBI declared that the biggest private bank in the nation was secure and had enough cash in its current account with the federal reserve to cover depositor needs. Regarding the security of individual banks, the central bank stated, “The RBI has planned to provide ample cash to ICICI Bank to meet the demands of its clients at its branches and ATMs. ICICI Bank rebounded from a two-year low on that day, closing 8.4% higher.
Yet, the SVB situation caused concern in the stock markets as bank shares declined and investors lost money as a result.
State Bank of India, ICICI Bank, and HDFC Bank have been designated as D-SIBs by the RBI. Beginning on April 1, 2016, the additional Common Equity Tier 1 (CET1) requirement for D-SIBs gradually increased until it was fully implemented on April 1, 2019. The capital conservation buffer will be in addition to the extra CET1 requirement. This implies that in order to protect their business operations, these banks will need to set aside more capital and contingencies.
On July 22, 2014, the Reserve Bank released a strategy for dealing with D-SIBs after learning from the global financial crisis. Beginning in 2015, the D-SIB framework mandates that the Reserve Bank reveal the names of banks that have been designated as D-SIBs and group those banks appropriately based on their Systemic Importance Scores (SISs). A D-SIB may be subject to an additional common equity requirement depending on the bucket it is placed in.
Based on information gathered from banks, HDFC Bank, SBI, and ICICI Bank were all categorised as D-SIBs as of March 31, 2017. Based on information gathered from banks as of March 31, 2022, the latest update was created.
The Financial Stability Board (FSB), a G20 initiative located in Basel, identified the list of globally systemically important institutions after consulting with the Basel Committee on Banking Supervision (BCBS) and national authorities (G-SIBs). Currently, there are 30 G-SIBs. JP Morgan, Citibank, HSBC, Bank of America, Bank of China, Barclays, BNP Paribas, Deutsche Bank, and Goldman Sachs are among them. Unfortunately, the G-SIB list does not include any Indian banks.
The worldwide financial system is interconnected. The 2008 financial crisis saw several huge and intricately linked financial institutions struggling, which disrupted the smooth operation of the financial system and had a detrimental effect on the real economy. In many jurisdictions, government involvement was seen as required to guarantee financial stability. The expense of government intervention and the resulting rise in moral hazard necessitated that future regulatory policies focus on lowering the likelihood of SIB collapse and the consequences of these banks’ failure, according to the RBI.
The Financial Stability Board (FSB) advised in October 2010 that all member nations put in place a framework to lower risks associated with Systemically Important Financial Institutions (SIFIs) within their borders.
SIBs are thought of as “Too Big To Fail” (TBTF) institutions. Because of this view of the TBTF, people anticipate that the government will assist these banks when they are in trouble. Some banks benefit from some benefits in the funding markets as a result of this impression. Yet, the anticipated expectation of government assistance promotes risk-taking, weakens market discipline, distorts the competitive market, and raises the likelihood of future crises.
While Basel-III Norms call for a capital adequacy ratio (CAR) of 8% for banks, the Reserve Bank of India has gone one step further and required that the CAR for scheduled commercial banks be 9% and for public sector banks be 12%.
