Credit Suisse collapse: The collapse of two mid-sized banks in the US does not portend a hard landing or a tipping point

Source: The post is based on the article “Credit Suisse collapse: The collapse of two mid-sized banks in the US does not portend a hard landing or a tipping point” published in the Indian Express on 22nd March 2023.

Syllabus: GS – 3: Effects of liberalization on the economy.

Relevance: About recent bank failures and their impact on India.

News: The banking stress in Europe and the US has caused a hike in global interest rates and surged credit spreads. This caused fears that the global economy is tipping into a recession.

About SVB Crisis

Read here: Silicon Valley Bank crisis: Reasons and Impacts - Explained, pointwise

Why does the fall of banks not detected earlier?

Market’s focus was elsewhere: The market’s focus was on the quality of loans and not on the valuation of bond holdings.

US legislative changes in 2018: Due to these changes, smaller banks (those with less than $250 billion in assets) were more loosely regulated and bigger banks where closely monitored.

Why Emerging Markets are not vulnerable?

Emerging Markets (EMs) have a history of frequent financial crises. So, banks in EM are supervised more closely with stricter regulations and regulators typically have ready facilities to provide liquidity to banks. These facilities as well as regulatory forbearance were vastly expanded during the pandemic.

What will be US Fed decisions and How it will impact India?

Read here: Central banks step in as Credit Suisse collapses. India must monitor channels through which crisis can permeate into domestic economy

How India can act as a role model to prevent a bank crisis? 

Read here: SVB, Signature Bank collapse: What are ‘Too-Big-To-Fail’ banks, and what makes Indian banks safe and Why local banks are insulated from SVB ripples

What should be done to prevent a bank crisis?

Central banks will have to be more cautious. They will continue to tighten monetary policy and should provide enough liquidity to safeguard financial stability. This separation principle on which central banks operates is unlikely to change.

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