Global central banks could take a leaf out of the Reserve Bank of India (RBI)’s book and focus on maintaining systemic stability, instead of focusing only on inflation, a State Bank of India (SBI) Ecowrap research report said on Monday.
“Central banks cannot be alpha centric, but have to consider systemic beta more in their policy experiments/responses. We take a cue from former RBI governor YV Reddy; many central banks in the developed world focus only on containing inflation, and not maintaining the stability of the financial system! Balance should tilt towards systemic stability,” the report said.
The report comes in the wake of US Federal Reserve and other major central on Sunday announcing a coordinated effort to improve banks’ access to liquidity.
While the failure of Silicon Valley Bank, Signature Bank and Credit Suisse has raised questions over the health of the banking system across the globe, the SBI
“… the short-term borrowing like uninsured deposits by FRB (First Republic Bank) of $30 billion from a suite of 11 different US-based banks for an ultra-short term period of 90 days is short-sighted if we compare such packages in India in 2008 and 2020, when the consortium of banks or champion banks handheld the ailing banks for a multi-year period (for example in 2020, it was for at least three years!),” the report said.
“We also find the US ‘investment’ pattern inconsistent, non-secular with asset sizes of participating banks! As many banks in the list are predominantly investment banks, having secured funds from diverse clients (and, not customers or depositors in common sense) with a clear mandate to generate alpha a la (in the manner or style of) hedge funds, we are apprehensive of another ALM mismatch, this time possibly for larger players if select clients question the wisdom behind the move.”
Top deposits of top 10 US banks are insured in the range of 38.4-66%. On an average, top banks’ deposits are insured to the tune of around 50-55%, while their smaller bank deposits are insured in the range of 30-45% only.
On the other hand, smaller bank deposits in India such as regional rural banks, co-operative banks and local area banks are better protected at 82.9%, 66.5%, and 76.4%, respectively.
In comparison to foreign countries, India has the least foreign claims, both on a counter-party basis and also on a guarantor basis. The ratio of India’s foreign claim to domestic claims is also least among countries, signifying that India’s banking and financial system is disciplined and no international balance sheet contagion can start from India, the report said.