Global Central Banks Could Use RBI’s Template On Financial Stability, Says SBI Research

Can the Indian central bank's book on financial stability help guide the world amidst the banking crisis in the United States and Europe? The State Bank of India's economic research division thinks so.

In a report released on Monday, the research house takes its cue from former RBI Governor YV Reddy.

" ... many central banks in the developed world focus only on containing inflation, and not maintaining the stability of the financial system! Balance should tilt towards systemic stability," the report said.

The report suggests that foreign regulators can use the RBI’s template to manage interest rates, taking into account "India's collaborative ecosystem fostered by champion banks and supported by the government's robust deposit insurance."

This view is especially important after the Sillicon Valley Bank crisis put the Federal Reserve to the test once again, and the sudden takeover of Credit Suisse by UBS was brought about as the only solution to restore liquidity outflows and market volatility by Swiss President Alan Berset.

"Central banks can not be alpha-centric but have to consider systemic beta more in their policy experiments or responses," the report said.

When compared with other major countries, India has the least foreign claims, both on a counterparty basis and also on a guarantor basis.

"... our ratio of foreign claims to domestic claims is also the lowest among countries, signifying that our banking and financial system is very disciplined and that no international balance sheet contagion can start from India. Maturity-wise also, international claims on India are the lowest among major countries," the report said.

The top 10 banks' deposits in the U.S. are insured in a range of 38.4% to 66%, according to the report. In the case of Signature Bank and Silicon Valley Bank, deposits are only 10.7% and 13.6% insured, respectively. Therefore, the risk of contagion spreading from these banks to the international economy, even after FDIC insurance protection, is very high, the report said.

When it comes to India, as of Q3 2022, 98% of the deposit accounts are insured, and the insured deposits to total assessable deposits for regional rural banks, co-operative banks, and local area banks are at 82.9%, 66.5%, and 76.4%, respectively.

"We fail to see any long-term market stabilising tactical planning in the move, particularly when juxtaposed against confidence building measures taken at a systemic level by the RBI that have gone a long way in taking the Indian banking system to new and sound highs", said the note.