Banking crisis: Central banks globally must copy RBI template for collaborative ecosystem, says SBI

The Reserve Bank of India's (RBI) template for a collaborative ecosystem, fostered by champion banks and supported banks and supported by the government's full deposit insurance, should be a “cut, copy and paste template” for central banks worldwide as Indian banks are the epitome of resilience in terms of global claims, SBI's economic research wing has said in its latest report.

"Indian banks are the epitome of resilience. Foreign claims on India are $104.2 billion on an immediate counterparty basis and $ 81.5 bn on a guarantor basis. India has the least Foreign Claims, both as a counterparty basis and also as a guarantor basis (among major economies). Further, our ratio of foreign claim to domestic claims is also least among (such) countries ...maturity wise also, international claims on India are the least among major countries," says the report.

It comes in the backdrop of the latest banking crisis amid the Silicon Valley Bank fall and its ripple effects on the banking sector globally, including the crises in two other significant banks -- Signature Bank and First Republic Bank. Switzerland's second-biggest bank Credit Suisse (CS) could also about meet the same fate, though the Swiss authorities have jumped in to save the bank and now its rival and Switzerland's largest banking group UBS Group AG has agreed to acquire the crisis-hit Credit Suisse Group AG in a historic deal.

The recent rise in the policy rate of 50 bps by the European Central Bank (ECB)...was "grossly miss-timed" and could not have been more counter-intuitive, amid the "mayhem" that sparked a massive sell-off in the pack of banks, including systemically important banks from EU and UK, eroding $ 60 billion in a single day on March 15 alone, the report said.

However, could the myopic view of the larger central banks exacerbate the downward spiral evident in the banking domain? The fissures of the present shock, after a year of war and three years of the pandemic, may prove to be quite a "costly affair" for the health of the beleaguered European banking system going forward even as ECB continues branding the Euro area banking sector as "resilient", writes Soumya Kanti Ghosh, Group Chief Economic Adviser, SBI Research. "Clearly, Central banks cannot be alpha-centric, but have to consider systemic beta more in their policy experiments/responses," he adds.

For cross-country deposit insurance coverage and per capita income, the ratio of deposit insurance cover and per capita income is 2.53 for India, one of the highest, says the report, adding that the government notified a revised and incremental deposit insurance in 2020 after 27 years.

An analysis of insured customer deposits across multiple geographies initiated in the wake of bank runs across developed economies reveal USA’s top 10 bank deposits are insured in the range of 38.4% to 66% and smaller bank deposits at 30-45% only. In contrast, smaller bank deposits in India such as regional rural banks, cooperative banks, and local area banks are better protected at 82.9%, 66.5%, and 76.4%, respectively, it adds.