US Banking Fragility and Indian Banks: An Alternative Viewpoint
The sudden collapse of three US banks in 2023 was a major financial event that rocked the world of finance for a time. The event was described as localised but was different from the 2008 global financial crisis, in the sense that 2008 was a crisis that started in investment banking, but the 2023 episode was a crisis in commercial banking. This makes the gravity of the 2023 crisis much more serious, as depositors’ money was involved. 
Even if the incident did not inflict much loss, a hindsight view suggests that it had the force of a major crisis. The Silicon Valley Bank (SVB) collapse in the US prompted the Bank of England to put its UK subsidiary under watch and eventually sold it to HSBC. The collapse of the three banks has inflicted major losses in the pension fund industry; a point not well appreciated in India, at least. The SVB collapse wiped out half of the holdings of Alecta — Sweden's largest pension fund. The losses to local pension funds in the US are also substantial with five NYC pension funds losing $30mn (million). Major pension fund CalPERS also reported losses. 
The rating agencies, namely, Moody’s, have revised their outlook on US banking to “‘negative’ from ‘stable’, citing heightened risks for the sector after the rapid unraveling of SVB Financial Group fueled fears of contagion.” This rating outlook has, so far, not been revised. 
Every crisis has a signature mark. In 2008, it is the collapse of large banks that started the entire domino effect. As we enter 2023, most of the global systemically important banks (SIBs) have adequate capital buffers. The levels of NPA are low. However, it never occurred in 2008 that a sudden collapse of a cluster of small banks can also pose a similar risk of contagion. Then, the crisis in the three banks originated from the investments book, and the ongoing trends in rising interest rates do not subside this risk either.
In this context, the debate in India was—what was the risk of contagion to Indian banks? It was reported that Indian start-ups had exposure of US$1bn (billion) in SVB and some of these funds have now been relocated to GIFT City. Banks in India have, so far, not reported any direct losses due to the sudden collapse of the three banks in the US. But that still is no comforting factor to assume that there is no risk to the Indian system given the negative outlook on the entire US banking.
Hoping for the best and preparing for the worst is the guiding principle in risk management. The conclusion that Indian banks are well-insulated is rather pre-mature and lacks any appreciation of even the publicly available data on international banking. Perhaps, the only exception to this view, even if tangential, is from the ministry of finance which acknowledges that global financial stability does pose a risk to India. 
Thus, there is a case to look at the Indian banking system’s exposure to the US and how it has evolved over time. 
The RBI data, as of 2022, reports that there are eight foreign offices opened by Indian banks in the US. Data on international banking statistics of India inform that the Indian banking system exposure to the US on an ultimate risk basis is around US$29bn. Available data indicates that derivatives and guarantees form major heads, indicating that exposure is off-balance sheet.
Now, on an immediate country risk basis, some further segregation is possible. The maturity profile of the Indian banking system’s exposure to the US indicates that exposure is predominantly short-term to the tune of US$18bn.    
The sector-wise claims on an immediate risk basis suggest that exposure to the US banks is the highest and is the only component that is rising over time. This exposure stands at US$15.2bn. 
Thus, from an Indian banking perspective, there is sizable exposure to US banking with clear vulnerability to any new episode of financial instability in the US. Furthermore, just like in the US, banks in India have insulated banking books with low NPAs and high provisioning. But the transmission mechanism of a possible future event in the US may be from off-balance sheet exposure. 
Now, RBI does conduct a stress test for banks’ derivatives portfolios using four separate shocks on interest and foreign exchange rates. Using these scenarios, RBI assesses that the market-to-market (MTM) impact is, by and large, muted for public sector banks (PSBs) and private banks. However, the present case of the collapse of banks in the US is beyond the scope of the RBI financial stability report (FSR) and no stress scenario is tailored for the current situation of clustered bankruptcy in FSR. 
Further, the exposure to the Indian banking system can increase in case of joint defaults leading to higher losses.
In conclusion, the prevalent opinion that Indian banking is insulated is not convincing. There is exposure to the tune of $15bn which may rise with joint defaults in banks and non-finance sectors of the US economy. It should be appreciated that even if there is a loss-absorption capacity in banks, any erosion of capital buffers negatively impacts domestic growth. In all, there is a case to expand the current scope of RBI FSR stress scenarios and include plausible scenarios of bank failures in major countries and understand the impact on Indian banking.
(The author is an economist in the banking system. The views expressed here are personal) 
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