The Shocking Domino Effect: How the Great American Banking Crisis Shakes the 🇮🇳 Indian Economy!
Government Aid Injection: The government provided financial assistance to businesses and individuals, injecting funds into the economy to stimulate growth and alleviate financial strains.
Emergency Intervention by the Federal Reserve: The Federal Reserve swiftly intervened by reducing interest rates, aiming to encourage borrowing and spending, thereby boosting economic activity.
Joe Biden's $1.9 Trillion Covid Relief Packages: President Joe Biden introduced substantial relief packages, which included direct cash payments of $1400 to most households. This infusion of funds significantly increased the purchasing power of consumers, stimulating demand in the market.
Consequently, businesses faced challenges in meeting the sudden surge in demand. They struggled due to inadequate labor forces and insufficient supplies, which resulted from escalating costs. Ultimately, these burdens were passed on to consumers, leading to the manifestation of inflation as a pressure valve.
Initially, the Federal Reserve believed that the inflationary surge would be temporary, but it has persisted longer than expected, akin to a persistent leech.
Thus, the Great American Banking Crisis commenced, marked by the downfall of prominent financial institutions such as Silicon Valley Bank, Signature Bank, and most recently, First Republic Bank.
The banking crisis in the United States was characterized by the collapse of several banks, including Silicon Valley Bank (SVB), Signature Bank, and First Republic Bank. The reasons behind their downfall varied, but there were some common factors.
Silicon Valley Bank experienced problems due to a significant reduction in interest rates. This led to a surge in deposits from venture capitalists and private equity firms, which were parked in the bank. However, the bank also paid higher-than-average interest rates. While deposits tripled, loans only doubled, creating an asset-liability mismatch. Additionally, a large portion of the surplus funds were invested in long-term government bonds with higher yields instead of short-term government bonds, leading to notional losses when bond prices fell due to rising Fed fund rates. The Silvergate affair, combined with a startup winter, caused a crisis, leading to the liquidation of investments at losses to address bank runs.
Signature Bank, the 19th largest bank in the U.S., faced a contagion effect following the collapse of SVB. Factors contributing to its downfall included a high percentage of uninsured deposits, liquidity risks, lack of FDIC oversight, and a possible warning against cryptocurrency dealings by regulators.
First Republic Bank, in addition to being affected by the contagion effect, had a large loan-to-deposit ratio of 111% and exposure to uninsured deposits. These factors contributed to its difficulties.
Looking ahead, the U.S. economy faces the prospect of further interest rate increases by the Federal Reserve, potentially leading to a short and shallow recession in 2023. While mid-sized banks may experience liquidity shocks, the overall banking system is considered robust. The FDIC guarantees repayment of deposits, and the Fed maintains that the collapsed banks were outliers.
The impact on India is primarily reflected in selling pressure on banking indices, which could lead to further depreciation of the Rupee. However, the Reserve Bank of India (RBI) has implemented a robust framework to protect Indian banks from such situations. Measures such as the liquidity coverage ratio and capital adequacy ratio ensure sufficient high-quality assets and prudent capital levels. Indian banks also have a higher capital adequacy ratio than the recommended Basel III norms. Moreover, a significant portion of deposits in Indian banks is held by the household sector, making them less prone to flight in times of crisis.
The RBI's proactive risk management and prudent measures, including disclosing the Asset Liability Management (ALM) system, contribute to the health of Indian banks. Key indicators like net interest margins, asset quality improvement, and credit growth demonstrate the isolation of the Indian financial system from the ongoing crisis. While investment sentiment may be affected, there is no apparent domino effect on the Indian banking system.