It’s been raining bank-failures internationally! Sad, in the last four months, we’ve already seen four of the best names in International Banking, of which three are in the US alone which includes the second-biggest bank-failure in US history, viz that of the First Republic Bank with Assets (loans given) $230bn and Deposits (taken) $110 and the American Resolution-Regulator, Federal Deposit Insurance Corporation (FDIC) resolving a deal with JP Morgan Chase for just $10.6bn!
The billion-dollar question is now of course, who ultimately foots the bad loans of the 200bn taken over and pays off 110 bn of Deposits? For information here, the FDIC is mandated to pay upto $2,50,000 per deposit-account in case of Insured Fixed Deposits. Just for an order of the magnitude, in the Mortgage Crisis of 2008, the total assets involved were $370 bn, this year in just four months it’s already a total of $550bn only in the US and if I were to add Credit Suisse to this, it’s well over a trillion dollars of loans and 570 bn of Deposits in question.
My Take: I thought it worthwhile to take a look at these four cases of Bank Failures, viz the Silicon Valley Bank (SVB), the Signature Bank, the Credit Suisse and the First Republic, try and find out in simple lay-terms what all of this means to the depositors there, what that means to the Country’s Economy and finally how much does that impact India and what safe-guards should be thought of.
It’s unfortunately, a big-ticket shock, capable of causing unpleasant bumps on an already bumpy road due to a multitude of reasons like the Russian Invasion of Ukraine and global commodity markets and Logistics; downslides in the China story et-al.
But before I start, let me just recapitulate what a “
Bank Failure” is. In simple words, a bank-failure is the closing down of a bank by the Banking Regulatory Agency eg. the RBI in our case or the US FED or the FDIC in the US. Generally, a bank is closed when it is unable to meet its obligations to depositors or a bit more clearly, when the realisable value of its loans (termed “assets”) falls below the market-value of its deposits, mainly because of some of the following reasons:
a) Bad Loans – Assets are not fully realisable – causing consequent liquidity crisis, whilst Books might even show profits
b) Bad Governance in policies of Interest payments
c) Mismatch in Assets and Liabilities (Receivable and Payables), their timings, duration and their immunisation and
d) Poor Risk Management.
We saw the incidence of Reasons a) and b) above with profound dominance in the 2008 Mortgage Crisis. I’m not going into the details of those two reasons in today’s discussions. I would concentrate more on my diagnostics of the current crisis – Reasons c) and d) here.
To understand these two reasons, I must take you back to the 6-trillion-dollar-Pandemic Stimuli which the US Government most liberally went on sanctioning! Deposits in US Banks started jumping up but not the corresponding lendings. So, it was rate-reduction and increased inflation. Till again the rates had to be tightened April 2022 onwards, in just 12 months last year the Fed increased rates by a good 5%. Most certainly the spinoffs on Treasury Bonds were not foreseen so the existing Bonds (with old rates) held by the banks (particularly the Silicon Valley) started incurring huge mark-to-market losses. I don’t also think a proper duration and immunisation policy had been followed (in matching loan repayments to come vis-a-vis deposits maturing and to be paid), trading it off seemingly with greater short-term return which never really materialized from the Start-Up community. So not only did SVB start selling off old bonds at losses, it made also the blunder of announcing a stake-sale of $2.3 bn, an ideal recipe for a Bank Run, “lets get our money back fast!’. Ironically, the Silicon Valley Bank, the 16th largest Bank in the US, had been adjudged the “Bank of the Year (2022) by Forbes, just a week before it collapsed!
To the depositors, it obviously means uncertainties, of amounts which are uninsured. In India, a national-media-report quoted the Government as saying, Indian Start-ups had around $1bn deposits with SVB a small part of which has been recovered. To normal investors, the Sensex lost over 4000points down to 57000 on the banking turmoil, and the Rupee fell to 82.61 (down from 81.13) in just one day.
Unfortunately, the Bail-Out policies do continue (even after Ms Janet Yellen’s proclamation of “no bail-outs”), The First Republic reportedly received a rescue of $50bn from a financing-house as also the Swiss National Bank handed out $54 bn to ease liquidity to the Credit Suisse. In the long run, these policies will not be healthy for a global economy which is already constrained. It helps at best a focussed few!
In such a scenario, Indian exports may well suffer – notwithstanding the utmost care which the Indian Government is taking in terms of cost-effective logistics. But the silver-lining here is, in the clouds – the crude down to $70/- a barrel.
In all of this, three things stand out: the swift week-end deals of Resolution of the crises by the FDIC so that market confidence does not falter – finance ultimately is a business of confidence and trust!
The fact that RBI does well to be on a slow and conservative side proves positive!
And before I conclude, the uncomfortable realisation, who foots the last-mile loss – of the bad investments, the mismatches, and the bail-outs? it’s the economy and its major stake-holders – most of all (in numbers), the common man oblivious to all of this mumbo-jumbo!
(Binayak Datta is a Finance Professional)
