U.S. Banking Crisis To Have Limited Impact On Financial Institutions In India, Asia: Moody’s
However, it added that the second-order impact of the U.S. bank failures is still developing and bears close watching.
The failures of Signature Bank and Silicon Valley Bank in the U.S. are likely to have a limited impact on most rated financial institutions in India and Asia-Pacific because of structural factors, according to Moody's Investor Service.
The ratings agency, in a note dated March 14, said most APAC institutions are not exposed to the failed U.S. banks and only a handful of institutions have immaterial exposures.
Also, most institutions are not as susceptible to large losses from debt security holdings as Silicon Valley Bank was. However, it said that the second-order impact of the U.S. bank failures is still developing and bears close watching.
Moody's said banks in APAC have structurally stable funding and ample liquidity. "They are mostly funded with customer deposits, while their market borrowings are modest at about 16% of their total assets on average."
Also due to liquidity coverage ratio (LCR) requirements, banks hold ample, high-quality liquid assets to get through stressed funding conditions, such as deposit runs.
Most APAC banks' investments in held-to-maturity instruments are generally not substantial relative to tangible common equity, unlike the case of Silicon Valley Bank, it said.
"If Indian banks mark their HTM investments to market...we estimate they would incur losses that amount to 5%–10% of the par values of the bonds or 12%–25% of their CET1 capital. That said, banks are unlikely to realise such losses because their funding and liquidity are strong enough to allow them to hold onto their HTM securities."
The ratings agency also said Indian banks have faced strenuous solvency challenges in the past decade, but their funding and liquidity have held up strongly and have been a key factor supporting their overall credit strength.
"Indian banks' average LCR stood at a healthy 133% at the end of March 2022, which is understated because it does not include the bulk of their cash reserves at the central bank, as well as parts of their holdings of government securities."