Banking Collapse in America: Will India Feel the Ripple Effects?

Banking Collapse in America: Will India Feel the Ripple Effects? - Web News Orbit

The recent collapse of several American banks has raised concerns about the stability of the banking sector in the United States.

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This article explores the reasons behind the sinking of American banks and examines whether India is likely to be affected by these developments. By analyzing expert perspectives, learning from past crises, and discussing the potential impact on the Indian economy, we aim to shed light on this pressing issue.

American Banks Sinking: An Overview

The sinking of American banks has been a recurring phenomenon, with First Republic Bank being the latest addition to the list of bankrupted banks. Despite being previously sold multiple times, First Republic Bank found itself struggling once again. The Federal Reserve's increased interest rates, coupled with mass withdrawals by depositors, contributed to the collapse of these banks.

First Republic Bank's Troubled History

First Republic Bank's history of ownership changes dates back to 2007 when Merrill Lynch & Company acquired it for $1.8 billion. Bank of America subsequently purchased it in 2009, followed by General Atlantic and Colony Capital in 2010. Although it later became a public entity, it faced significant challenges leading up to its recent downfall.

Reasons Behind the Bank Failures

The rapid increase in interest rates by the Federal Reserve aimed to curb rising inflation. However, it resulted in depositors withdrawing substantial sums of money from the banks, including First Republic Bank. Depositors withdrew approximately $102 billion from First Republic Bank alone, causing its share prices to plummet. The Federal Reserve attributed the collapse of these banks to poor management, weak regulation, and lax government oversight, which led to a loss of trust in the American banking system.

Expert Perspectives on the Banking Crisis

Siddharth Rajhans, a policy officer at the United Nations, offers valuable insights into the banking crisis. Rajhans explains that the failure of Silicon Valley Bank (SVB) was the catalyst for the subsequent collapse of other banks. SVB had been providing funding to major tech companies for an extended period, leading to increased funding reliance on banks during the dotcom bubble. This reliance, combined with economic slowdown and lay-offs in the tech industry, resulted in significant financial strain. SVB and other banks faced massive withdrawals as depositors lost trust, exacerbating the crisis.

Impact of Startup Lending Industry on Banking

Rajhans highlights the role of the startup lending industry in the banking collapse. The advent of smartphones and apps between 2011 and 2020 fueled an increase in startup funding, attracting banks like SVB, Signature Bank, and Credit Suisse Bank. However, the banks' exposure to lending to startups proved detrimental when the lending partners faced financial turmoil. This factor contributed significantly to the collapse of the banking system, further intensified by the Federal Reserve's interest rate hikes.

Role of the Federal Reserve and Government

The interest rate hikes by the Federal Reserve placed a heavy burden on the banking sector. Rajhans emphasizes that the government could have handled the situation differently, as SVB experienced significant tax losses amounting to $1.8 billion. This highlights the government's responsibility in addressing the banking crisis.

Lessons from the Lehman Brothers' Case

The bankruptcy of Lehman Brothers in 2008 had a substantial impact on the global financial markets. While the news caused panic and market turbulence worldwide, including in India, the long-term effects on the Indian economy were relatively limited. However, it serves as a reminder of the potential repercussions of a major bank's failure.

Potential Effects on the Indian Economy

Financial expert Nitin Bhandari suggests that the impact on the Indian economy depends on the size of the banks that collapse. With the net worth of the banks that failed in 2022 amounting to approximately $1 trillion, while the US economy stands at $26.85 trillion, the overall effect on the American economy is expected to be minimal, let alone India.

Assessing the Magnitude of Bank Failures

While the immediate impact on the American economy may be limited, bank failures affect the creditworthiness of the banking sector, raising concerns among investors. The collapse of banks signals a warning for common investors, leading them to review their investments in the sector. As a result, the Indian stock market tends to experience declines when such crises occur.

Impact on Creditworthiness and Investor Confidence

The collapse of banks instills doubt in the entire banking system and erodes customer confidence. This lack of trust affects the creditworthiness of the banking sector as a whole. Investor confidence also takes a hit, prompting a reevaluation of investments in the banking sector. Consequently, the shares of banking institutions decline.

Safeguarding the Indian Banking Sector

To prevent similar banking crises, experts emphasize the importance of safeguarding the Indian banking sector. Nitin Bhandari highlights the need to learn from past experiences, particularly nationalization, and avoid repeating mistakes. He argues against allowing large companies or industrial houses to enter the banking sector.

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