2023 is turning out to be an awful year for banks! First, it was the collapse of the Silicon Valley Bank. Then the Signature Bank followed. Now, it's the turn of Switzerland's 2nd largest bank: Credit Suisse!
Between March 19th to March 24th; in 5 days, Credit Suisse lost 70% of its market cap, falling from $5.6B to $2.4B! But, what most people don’t know is that this collapse was a long-time coming.
A) Credit Suisse’s market cap never recovered after the 2008 crisis
B) They have witnessed multiple high-profile scandals
C) The last hit was when in Feb 2023 actual customers started fleeing the bank
Now, Credit Suisse is being rescued by Switzerland’s largest bank, UBS group for $3.5 billion.
But the question is: How do these events impact India as a whole?
SVB is known for its expertise in serving early-stage startups, and many Indian startups have relied on SVB for funding, mentorship, and networking opportunities. SVB bankruptcy led to a broader impact on the startup ecosystem in India. Many startups are heavily reliant on venture capital funding, and if one of the key players in that space were to falter, it could have ripple effects throughout the ecosystem.
Reduced investment: Because of the banking crisis, investors became more risk-averse, which could lead to a decrease in foreign investment in India. This could lead to a slowdown in economic growth in India.
Currency exchange rates: A banking crisis in the US could cause the US dollar to depreciate, which could lead to a depreciation of the Indian rupee as well. Many people may get confused here, how come a depreciated dollar will depreciate Indian Rupee. The explanation is mentioned here. Currency exchange rates are influenced by a variety of factors, including interest rates, inflation, political stability, trade balances, and market sentiment, among others. Additionally, it's worth noting that exchange rates between any two currencies are determined by the relative strength or weakness of both currencies. Therefore, a change in the value of one currency alone doesn't necessarily guarantee a corresponding change in the value of the other currency. Therefore, it's not always the case that a depreciation of the US dollar will lead to an appreciation of the Indian rupee. This could lead to inflation in India and higher import costs.
Impact on Indian banks: If Indian banks have significant exposure to the US banking system, they could face losses if the US banking system is in trouble. This could lead to a liquidity crunch in the Indian banking system and a credit crunch for Indian businesses and consumers.
Trade impact: A banking crisis in the US could lead to a decrease in global trade, which could hurt India's exports and lead to a decrease in revenue for Indian businesses.
However, it's important to note that these are just potential effects, and the actual impact of a banking crisis in the US on India would depend on a number of factors, including the severity of the crisis, the response of policymakers, and the strength of the Indian economy at the time. However, a reversal of capital flows could affect the economy, with interest rate increases in developed economies potentially leading to further financial institution failures. But I can say that Indian banks are well-capitalised and financially stable, with better regulation and supervision than in the West. I personally feel that the RBI is monitoring movements in global financial data and taking them into consideration when making decisions.