US BANKING CRISIS 2023.

  It is an irony that the 2022 Nobel prize in Economics were shared by three prominent American Professors-Ben S Bernanke, Douglas W Diamond and Philip H.Dybvig for their critical and rigorous research works on banking collapses and their impact on the macro and global economies as against  confronting with a similar situation in the US economy right now.Nobel laureate  and former US Federal Reserve chair person Ben Bernanke applying a combination of historical sources and statistical methods found that bank runs happen when people who have deposited money in a bank become worried about the bank's survival and consequently rush to withdraw their savings. If more people do it simultaneously then bank's reserves cannot cover all withdrawal and obviously it lead into bankruptcy and consequently it may lead to recession or depression.The economy did not recover unless and until the state implemented drastic preventive measures to prevent further bank panics. Douglas W Diamond and Philip H.Dybvig in their research on the other hand focused on why banks fail and what is the role banks  in smoothening the potential conflict between savers waiting access to their money and the economy's vital need to put savings into investment.Banks mobilise savings from households for making investments by borrowers. Here there is an inherent conflict. While depositors want instant access to their money when need arises borrowers need to know that banks won't suddenly demand their money back. Diamond and Dybvig model solves this conflict through the process called "maturity transformation " wherein banks serve as intermediaries between depositors and borrowers and create liquidity. While depositors accounts are short maturity liabilities since depositors can withdraw their money at any time, long term loans for the borrowers are long term maturity assets for the banks and they may not be repaid for many years But as long as depositors are unlikely to withdraw their money all the same time banks can transform short maturity liabilities into long term maturity assets in the form of loans to borrowers. To protect banks from vulnerabilities like panic withdrawal Diamond and Dybvig suggested measures like deposit insurance.It is to be noted here that USA was the first country to adopt Bank insurance in 1933 and India followed suit only in 1962.

 As soon as the news of SVB bank collapse spread depositors started competing to withdraw money leading to run out of bank's stocks. According to IT Minister India's start-ups have been impacted by collapse of SVB to the extent of $ one billion.  Virtually Contagion effect has resulted in the consequent collapse of the second bank namely Signature Bank.As the news of SVB crisis spread Signature Bank's customers abruptly became anxious to withdraw their money. Subsequently US regulators took control of the  New York based Signature Bank.It has been observed that Signature Bank had exposed itself highly to volatile crypto currencies by providing services to those investing in Virtual  digital assets.On  March16 US's another bank First Republic Bank customers also started wihdrawing their deposits. The  US Treasury Secretary Janet Yellen and other experts drew plans to rescue First Republic Bank with private sector lenders support to deposit billions of cash into First Republic Bank. Emergency measures  were jointly adopted by the regulators namely- Treasury Department, the Federal Reserve and the Federal Deposit Insurance Corporation to ease fears of depositors right to pull their money back. Measures consists of guaranteeing all deposits of failed banks designed to shore up wavering  confidence to the  banking system. US President observed that US was committed to maintaining a resilient banking system, and would move to simultaneously tighten regulations for banks to make it less likely for such failures to occur again. While the coordinated steps have restored a degree of control in most markets ,there are lessons that have been learnt. The executives of banks would loose their jobs once the Federal Deposit Insurance Corporation is taken over. Depositors Will get all their money back but shareholders of  banks would not be protected. 

  Fears over potential bank stresses have already reached Europe on March 16th due to the wild fluctuations in Europe's banking index .Consequentlly Credit Suisse the first major bank approached for emergency lifeline support first time since 2008 financial crisis.According to Raguram Rajan Credit Suisse has a dire situation 'Over the last few years it has participated in almost every scandal that has come to light There is a turnaround underway at Credit Suisse, but it needs investment.Credit Suisse was hard hit by US investment firm Archegos in 2021 and freezing of billions of supply chain finance funds.Moreover it does not have any business now. Credit Suisse sought credit of $54 billion from the Switzerland Central Bank to shore up liquidity and restore investor confidence which in turn provided tentative relief.

  Usually stressed banks will pay greater attention to the creditworthiness of all types of borrowers. Christine Lagarde, President of European Central Bank observed that "persistently elevated market tensions " could further constrict credit conditions that were already tightening in response to rising interest rates.According to Chief Economic Advisor of India 'the failure of SVB last week left many start-ups, tech companies, entrepreneurs and venture capital funds nervous and jittery.  The uncertainty has been on a rising trend and countries need to live with it not only this year but for the next year and beyond.' When you are facing uncertain times the key thing to do is to make sure that we have margins of safety in our operations, whether it is for corporates or for investors.Allow for margins of safety in fiscal planning, corporate planning, household balance sheet or savings account planning.On the other hand RBI Governor emphasised the need for 'ensuring prudent asset liability management, robust risk  management and sustainable growth in liability and assets, undertaking Periodic stress tests and building up critical buffers for any unanticipated future risks.' Stress test is  a quantitative evaluation of bank capital that demonstrates how a hypothetical macro economic  recession scenario would affect capital ratios.The stress test was further improved by US Federal Reserves in 2013 into 1. The Dodd-Frank Act  Test and 2.The comprehensive Capital Analysis and Review (CCAR).In 2020 Federal Reserves replaced the CCAR evaluation with stress capital buffers. Our RBI Governor also mentioned apprehensions and challenges posed by both crypto currencies and stress from interest rate risks.According to OECD "Global economy may grow but recovery is expected to be fragile".'Impact of tighter monetary policy have started to appear in parts of the banking sector, including regional banks in the US. Higher interest rates could also have stronger effect on economic growth  than expected."

It has been observed that due to revised regulatory capital rules, stress testing and increased supervisory programs the Federal Reserve have more than doubled their common equity capital in aggregate since 2009 crisis. But it  may not be sufficient to meet the increasing panic demand to withdraw deposits. In any case global growth will be impacted adversely.Similarly decline in crude and stock market prices is increasing the demand for investment in gold shooting up gold prices.As far as India is concerned the fall of US SVB is bound to affect our start-ups at least marginally. Unless  prolonged, the probability of present banking crisis impacting India is very remote possibility because our fundamentals are relatively very strong in terms of credit quality, diversification  safety buffer, foreign exchange reserves and fiscal stability.