Silicon, Signature, Bust, Six More US Banks Downgraded, Is It Building Towards A Global Banking Crisis?

Starting off tough as Silicon Valley Bank failed over the last weekend, the erstwhile 16^th largest bank in America, feted a few days ago by Forbes Magazine as one of the best banks in America, Treasury Secretary Janet Yellen rapidly caved in. She soon announced a federal fund to prop up bank liquidity across the board.

At first the Silicon collapse was sought to be portrayed as an IT bank that took some bad decisions. But this soon became unsustainable as a position, even as IT stocks, start-ups, unicorns, including some 40 from India were hit hard by the collapse of the $209 billion bank that dealt mainly with Silicon Valley clients and IT professionals.

The Chinese bank HSBC bought the Silicon Valley Bank (SVB) UK business for a symbolic one-pound sterling. SVB in UK is closely linked to the British Biotech industry

Is this latest US financial crisis, because it is not an isolated blip, due once again to banks holding illiquid sub-prime assets, based on housing mortgages  acquired during a much lower interest rate regime?

Or, is it just due to a hawkish Federal Reserve Bank policy that has been raising interest rates at each review? Can this crisis be sorted by holding further Federal Bank interest rate increases or even lowering them? The effort to calm inflation, the highest in the US in more than four decades, has not responded particularly well to the higher interest rates. However, US business and industry, and now banks, have been hit. The Federal Reserve Bank Chairman, Jerome Powell, may have to look at other ways to bring down US inflation.

Concern has already spread to Europe and Japan where stocks and government bonds such as JGB, fell sharply, particularly for those banks, pension funds, sovereign funds, high street businesses like Mitsubishi, Nissan, and Mazda, other investment vehicles allied closely to US trade, industry, construction, projects, stocks, bonds - including IT and Crypto assets.

International ratings agency Moody has downgraded the American banking sector from stable to negative for the systemic risks it poses.

Come last Monday after the crash of Silicon Valley Bank over the weekend, it has certainly hit banking stocks hard in the world’s stock markets and dampened sentiment on all stock market business, other scrips, including those in India. The Swedish Pension Fund is concerned.

The Indian stock market has long been dominated by Foreign Institutional Investors (FIIs) responsible, possibly through the anonymous Participatory Notes (P-Notes or PNs) for investors not registered with Securities and Exchange Board of India (SEBI). They are classified as offshore derivative instruments (ODIs).Any profits collected from these PNs go back to the original investors including the proceeds of ‘short-selling’ or shorting any stock, that is betting on a lower value of the stock than its prevailing price at any given time while the stock market is trading. This is most likely the method used by Hindenberg and friends to cause the bloodbath in Adani Group stocks post the ‘fraud’ and ‘over valuation’ accusations amongst others.

It is therefore rather ironic that Hindenberg banks its money with First Republic Bank that saw a sharp fall in its stock prices since the beginning of this trading week causing a run on its deposits. Likewise other related banking stocks like PacWest and Western Alliance.

Now, as the Western markets take a tumble and higher interest rates have largely closed the window for the arbitrage and foreign currency gains of the FIIs, it may be time for the large domestic institutional investors and the retail Indian investors to take over.

This more so because the FIIs still do not really trust the Indian stock markets or indeed the Indian economy as a sure-fire bet. America has very little investment in India compared to China as yet. They cling therefore, with notable exceptions, to the outdated notions of Western economic superiority, running mostly to US stocks at the first opportunity.

They have, it is seen, made a foolish exception for Red China, also drowing in debt, inflation and slow growth, possibly because of huge Western investments there, and the size of its economy, second only to that of the US.

As in 2008, a financial crash in America that spreads from financial institutions to main street businesses affects the economies of the whole world. However most Western countries in particular stubbornly believe all will be well, if expert analysis is to be believed.

America is the most indebted country in the world with nearly $ 32 trillion in direct ‘national’ debts, amounting to 96% of current GDP. In addition, there are other US liabilities under different classifications that take this figure much higher. And yet, the bank bailout is contingent on ‘credible collateral’ like US Treasury Bonds!

Banks are naturally vulnerable to runs on their liquid assets whenever there is an upset anywhere in the system. People with US bank deposits are nervous in this instance too, and are withdrawing their money, despite assurances designed to calm panic from President Joe Biden himself and other treasury and financial officials.

Gold prices, which reflect financial instability, are seen to be instantly rising.

A global recession is gaining momentum according to the World Bank because of this raising of interest rates, tighter monetary and fiscal policies, in many countries.

Though India, dependent to a large extent on its domestic market, is continuing to grow at about 7% in GDP year on year, it is only a $3.5 trillion economy. Yet, it provides an exception to the gloom of the global scenario. This, post Covid and Ukraine and before this latest black swan event.  India is expected to become a $5 trillion economy by 2028 quite independent of this global volatility.

 That may be why the World Bank has recently sanctioned a billion dollar soft loan to improve India’s health infrastructure. India, in turn, has extended soft loans to friendly countries in its immediate neighbourhood amounting to $ 15 billion since 2014, when it was just at $ 3 billion before that.

Trade with these same friendly neighbours like Bangladesh and Sri Lanka has increased 50%. Sri Lanka is trading with India in rupees to conserve its hard currency.

In Europe, Germany’s Commerzbank and the already weak Swiss bank Credit Suisse took big hits on their valuations.

Commodities too are affected.  Copper and other base metals plus Gold went up in price in London. Gold is above the key $1,900 level.

Meanwhile, India has chosen this moment to request a sovereign ratings upgrade. This, without cracking a smile.

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March 15^th 2023

For: Firstpost/News18.com

Gautam Mukherjee