Page 53 - Banking Finance May 2023

FEATURES

Protecting banks against failures

t is some coincidence that a movie titled Everything, Further, the stigma attached to bank failures under any
I everywhere all at once stormed the Oscars the same political regime has propelled the authorities to convince
willing banks to fund a collapsing bank or to invoke fine
weekend a storm hit the US banking and financial
markets affecting everyone, everywhere and all at
once. In a couple of days, the tremors reached Europe and prints, obscured in covenants and agreements, to rescue
such banks. Other pressures, mainly public voice, have also
then left banks around the world looking closely at their brought this compulsion upon the regulator to use this
balance sheets and, in particular, the composition of their option.
uninsured depositor base, their asset-liability mismatches
and the interest rate risk on their sovereign books to see During the last three years, India has witnessed three bank
whether they could also come under fire. failures — PMC Bank, YES Bank and Laxmi Vilas Bank. The
regulator, with some hand-holding by the government, has
Pundits began publishing lists of the next set of banks with not failed the depositors of any of them. In fact, so much is
similar business models or portfolios that could go under, the pressure of public voice that India has not even allowed
contributing to the nervousness in the markets. software companies to fail.

Deposits moved from smaller banks to the big ones on the Deposit insurance, a legitimate instrument to minimise the
assumption that these would not be allowed to fail given their impact of bank failure, has been used sparingly in India. This
systemic importance, and banking stocks reeled in a manner has raised other issues. Deposit insurance in India has long
reminiscent of the Global Financial Crisis (GFC) of 2008. been funded by the banks themselves. Banks’ contributions
are, however, not ‘risk-priced’.
The reaction from the authorities was quick and they
signalled their willingness to stand behind all depositors This means that every bank covered under the Deposit
while the Federal Deposit Insurance Corporation (FDIC) Insurance and Credit Guarantee Corporation of India Act
moved to resolve the failed banks. pays premium to insure its deposits at the same rate
irrespective of its quality of assets and financial health.
In the Indian context, state ownership of the majority of Stronger banks have often resisted this.
bank assets offers implicit assurance of safety for their
depositors. For the remaining, the authorities have Although depositors have so far ultimately been paid back
demonstrated the willingness, at times compulsion, to bail through deposit insurance, the measures taken to suspend
out troubled banks and FIs through either forced mergers, operations for a brief and uncertain period — the
or sometimes through regulatory forbearance and moratorium — scuppers the customers, especially small
unconventional regulatory engineering. This happened in depositors, as their funds are stuck. Meanwhile, formal
the case of the Punjab and Maharashtra Cooperative (PMC) mechanisms for expeditious liquidation of banks like the
Bank bailout. proposed Banking Resolution Corporation have not fructified.

50 | 2023 | MAY | BANKING FINANCE