Although the causes of the financial issues on both sides of the Atlantic are distinct, they serve as a reminder of the inherent weaknesses of the banking industry. Banks are essential to economic growth, but in order to do so, they must borrow money quickly and give it out slowly. A mismatch in liability and asset maturity results from this.
Source: The Economic Times
As performance and governance issues have already rocked Credit Suisse, its problems were largely anticipated. But, the SVB situation is more intriguing because it appears that it complied with all accounting and legal requirements. According to the regulations, banks do not need to recognise any unrealized losses on the market value of bonds they keep in the category known as held-to-maturity (HTM). HTM securities made up 43% of the assets held by the SVB.
When interest rates rise, the same government bonds that were formerly seen as secure investments suddenly seem to be a weak link. How much of a danger do government bonds pose to Indian banks?
It is challenging to withdraw deposits immediately because 65 percent of deposits in Indian banks have a maturity of more than a year. The problem caused by HTM securities encountered by the SVB is constrained in the case of Indian banks even if there is a panic withdrawal by retail depositors, as the RBI has set a maximum on the bond holdings in this category at 23%. The goal is for this restriction to gradually decrease to 19.5 percent beginning in June 2024. As a result, banks need to start getting ready to record some losses.
Source: Study IQ IAS
According to reports, the government has requested information about public sector banks’ bond portfolios. Nonetheless, the implicit government support that foreign banks get prevents bank runs in the US-style. Regarding private sector banks, the RBI is required to conduct stress tests on their bond assets and issue alerts in the event of issues.
The function of deposit insurance is a final point to be made. The SVB debacle has prompted demands for full deposit insurance. Large depositors are purposefully kept uninsured under the current system because they have enough sway to keep banks in check. If a legislation mandated a 100% deposit guarantee, banks would be enticed to forgo risk management and take bigger risks in the sake of profit.
In India, 98 percent of depositors are protected by the Rs 500,000 deposit guarantee threshold. In order to keep Indian banks safe, the RBI and the government can supplement regulation and oversight with pressure from the remaining 2% of significant depositors.
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