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Even as the Silicon Valley Bank collapse and Credit Suisse crisis have sent jitters through global markets, HDFC Bank chief economist Abheek Barua says this is not a Lehman Brothers moment and that Indian banks are relatively insulated and that the degree of sensitivity due to the events is relatively lower for India.
The Silicon Valley Bank collapse and Credit Suisse crisis sent jitters across global markets with the events leading to worries about a banking crisis. However, HDFC Bank chief economist Abheek Barua on Thursday said this is not a Lehman Brothers moment, and that Indian banks are relatively insulated and the degree of sensitivity due to the events is relatively lower for India.
“The Indian system is considerably insulated because the exposure to these banks, the three banks in the US that have failed, and even to the European banking system is limited, all regulations are very tight,” he told CNBC-TV18 in an exclusive interview.
Barua pointed out that in the US, regulation is very “messy” with many entities involved, especially some of the smaller banks. There is a notion of a soft-touch regulation, which often leads to governance problems, and the Indian situation is very different in this case, he said.
He, however, cautioned that if this situation were to sort of blow up into a full-scale financial meltdown across the board and take a toll on the underlying economies, then India is not entirely insulated, but the degree of sensitivity is considerably lower, even among emerging markets.
According Barua, inflation is a much bigger concern than financial stability at this stage. He highlighted that the balance-sheet size of SVB, or Signature, or even some of the banks where there is some anxiety that they will face stress, is small, which is telling about the number of things, including the initial impact, nature of counterparty risk in the second round, and so forth.
“So I think this is not a Lehman moment. The bigger banks like JPMorgan or Citi are much more tightly regulated. While there could be a slow burn, I'm not ruling out the possibility of other small banks going under or facing severe stress. But this will overshadow the Fed’s primary agenda, which is to bring inflation under control,” he said.
He quoted an American economist, and said “it would be dangerous for the Fed to kind of wimp out on their inflation fight at this stage”.
Barua claimed that the Credit Suisse problem has been festering for a very long time, and this is perhaps the tipping point. So, we should read too much into this specific set of events causing the problems at Credit Suisse. “We have been aware of this a long time.”
He added that pre-SVB or pre-Credit Suisse, the expectation was that the European Central Bank would go ahead and hike the rate by 50 basis points — if they bring it down to 25, clearly they are recognising the possibility of financial stability risk. What ECB president Christian Lagarde communicates to the market is also very important, he said.
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