How safe is your money amid global bank crises

The impact on countries like India is indirect and multi-pronged, with nervousness visible in stock markets, currencies and bonds. While investors fretted over the fall in bank stocks, the drop in bond yields caused losses for bond investors, mainly banks. How safe is your money in banks, stocks and bonds in an interconnected financial world?

What is the crisis?

The genesis of the trouble is the bond market turmoil after interest rates in the US rose by 450 basis points. Silicon Valley Bank (SVB), a big lender to startups, fell victim to this. Companies raised very large rounds of funding, and all this money was deposited with SVB. In 2020 and 2021, the bank’s deposit base rose by $90 billion. “But a bank has to make money by lending. SVB’s customer base is concentrated among California tech startups who are already flush with cash and do not need loans. Because of this, SVB invested some $88 billion in mortgage-backed bonds in 2021. As the Fed increased interest rates, the value of these bonds collapsed, eroding SVB’s capital base,” said Suman Bannerjee, CIO, Hedonova, a US-based Hedge Fund.

SVB’s collapse led to the failure of Signature Bank, worsening the banking turmoil. Then on Wednesday (March 15), Credit Suisse’s share price crashed 24% overnight before making a recovery on Thursday, following the intervention of the Swiss central bank.

What’s the impact on India?

Startups: Many Bengaluru-based startups had their overseas bank accounts with SVB. On March 10, many realised they could not access their bank deposits as SVB was put under federal regulation.

“More than 96% of the $170 billion in deposits had no Federal Deposit Insurance Cover as it is limited to deposits up to $250,000. Founders, CFOs and VC partners spent the weekend in anxiety. The US government and the Federal Reserve had to intervene to safeguard depositors and prevent a financial system collapse. Clearly, not all banks are as safe as perceived. Putting all the cash in the bank carries a risk,” said Quantum Mutual Fund Fund Manager (fixed income) Pankaj Pathak.

Markets hit: The crisis impacted bank shares in India, though the collapse of the two banks has not had a systemic impact on Indian banks. Depositors and investors fear that the failure of a large bank anywhere can have a contagion effect across the world. “The collapse of the SVB Bank in the US impacted sentiments in the (Indian) market,” said VK Vijayakumar, Chief Investment strategist, Geojit Financial Services. Sensex fell 3.63% in a week to 57,634.84 by Thursday.

Bond yields fall: The rise in interest rates led to problems in the bond market. On March 13, the yield on India’s benchmark 10-year government bonds declined by six basis points to 7.35%, registering a fall of 11 basis points in less than a week. The yield on 5-year bonds fell to 7.30% before closing at 7.33%. The benchmark 10-year US bond plunged 25 basis points to 3.45% on March 13 amid speculation that the US Federal Reserve may not hike interest rates after the SVB crisis.

If the interest rates in the market rise, investors will not buy old bonds, but go for new ones that come with a higher interest rate. As a result, the price of your bond will have to be lowered to increase its yield. When the price is lowered, the coupon rate increases because of the lower face value, thus increasing the bond’s yield.

As yields on a security go up, its price goes down. And such a rapid rise in rates in such a short time caused the market value of previously issued bonds — corporate bonds or government Treasury bills — to fall.

Is depositors’ money safe?

Unlike in the US where a large portion of bank deposits are from corporates, household and retail savings make up a bulk of bank deposits in India. Today, a large part of deposits is with public sector banks, and the rest with very strong private sector lenders like HDFC Bank, ICICI Bank and Axis Bank. “There is no need for customers to worry about their savings… whenever banks have faced any issue, the government has saved them,” said a banking source.

With interest rates now going up, savers have started focusing on bank deposits. During the reporting quarter ending December 2022, aggregate deposits increased by 10.3% (y-o-y). Many banks offer over 7 % interest on deposits for 15 months. State Bank of India, which was offering just 4.4% last year for a 1-year tenure, is now giving 6.98%

In India, deposits up to Rs 5 lakh are insured with Deposit Insurance and Credit Guarantee Corporation. This means a depositor with Rs 50 lakh in a fixed deposit will get only Rs 5 lakh if a bank fails. However, the government and the RBI had stepped in when some private banks, like Lakshmi Vilas Bank, PMC Bank and Yes Bank, faced problems in the past few years.

The RBI’s Financial Stability Report released on December 29, 2022 warned that risks from global spillovers and financial market volatility remained in the ‘high’ risk category. However, it also said that stress test results reveal commercial banks are well-capitalised and capable of absorbing macroeconomic shocks even in the absence of any further capital infusion by stakeholders.

Will rates go up?

There is widespread expectation that the US Fed will pause the rate hike or raise the federal funds rate by a smaller 25 basis points at its March 22 meeting. “Broader tightening of bank lending conditions will factor into decisions as to how high the rate should go to bring down inflation,” said Madhavi Bokil, Senior Vice President CSR, Moody’s.

The recent stress in the banking sector has highlighted financial stability risks in an environment of higher rates and slowing economic growth. However, the sticky inflation momentum, revealed in the most recent price and labour market data, suggests curbing inflation will remain the focus for US monetary policy, Bokil said. “But if banking stress intensifies, the Fed may well pause rate hikes to assess the situation, and the Fed and other central banks could convene emergency meetings to provide guidance and stem potential panic,” she said.

Analysts said the RBI is likely to keep the repo rate unchanged at 6.5% in its April monetary policy, on expectations of inflation moderation, worsening global outlook, and weaker domestic demand in the next financial year. By October, the central bank may start reducing the repo rate, they said.