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International Financial System

Comparision Of Banking System Of US,Europe and India
Submitted To: Mrs. Payal Singh Submitted by: Aakriti Gupta Sukriti Sharma Rashmeet Kaur Shobhana Saxena Rishabh Mehta Rhythm Pangotra

INTRODUCTION:
Recent time has witnessed the world economy develop serious difficulties in terms of lapse of banking & financial institutions and plunging demand. Prospects became very uncertain causing recession in major economies. However, amidst all this chaos India’s banking sector has been amongst the few to maintain resilience. A progressively growing balance sheet, higher pace of credit expansion, expanding profitability and productivity akin to banks in developed markets, lower incidence of nonperforming assets and focus on financial inclusion have contributed to making Indian banking vibrant and strong. Indian banks have begun to revise their growth approach and re-evaluate the prospects on hand to keep the economy rolling. The way forward for the Indian banks is to innovate to take advantage of the new business opportunities and at the same time ensure continuous assessment of risks.

GENERAL BANKING SCENARIO
The predicament of the banks in the developed countries owing to excessive leverage and lax regulatory system has time and again been compared with somewhat unscathed Indian Banking Sector. An attempt has been made to understand the general sentiment with regards to the performance, the challenges and the opportunities ahead for the Indian Banking Sector. A majority of the respondents, almost 69% of them, felt that the Indian banking Industry was in a very good to excellent shape, with a further 25% feeling it was in good shape and only 6% of the respondents feeling that the performance of the industry was just average. In fact, an overwhelming majority (93.33%) of the respondents felt that the banking industry compared with the best of the sectors of the economy, including pharmaceuticals, infrastructure, etc. Most of the respondents were positive with regard to the growth rate attainable by the Indian banking industry for the year 2009-10 and 2014-15, with 53.33% of the view that growth would be between 15-20% for the year 2009-10 and greater than 20% for 2014-15.

Key effects of major International Banking Crisis
The banking crises have bought various losses. Private households that have suffered considerable loss in wealth will raise their saving rates. The many recapitalization of banks implemented by various governments in Euro zone the UK and the USA a will raise medium term debt GDP ratio and hence current and future tax rate. There is also some probability that venture capital financing will become more difficult in many OECD countries in the long run, since the risk premium have increased and since private equity funds will become eager to finance.

US Banking System

With nearly 90,000 branches and 371,000 automated teller machines (ATMs), US banking system is the largest in the world. As of September 30th 2004, US banks had US$9.88 trillion in assets and US$5.98 trillion in total loans. US banking is more diverse than in most Western countries. Despite ongoing consolidation, vigorous competition exists within the vast banking community, which includes financial holding companies that operate nationwide, dominant regional banks and smaller independents. Large foreign banks also continue to expand in the US market. Federal Reserve The Federal Reserve System is the central bank of the United States. It was founded by Congress in 1913 to provide the nation with a safer, more flexible, and more stable monetary and financial system. Over the years, its role in banking and the economy has expanded. Today, the Federal Reserve’s duties fall into four general areas: - conducting the nation’s monetary policy by influencing the monetary and credit conditions in the economy in pursuit of maximum employment, stable prices, and moderate long-term interest rates; supervising and regulating banking institutions to ensure the safety and soundness of the nation’s banking and financial system and to protect the credit rights of consumers; - maintaining the stability of the financial system and containing systemic risk that may arise in financial markets; - providing financial services to depository institutions, the U.S. government, and foreign official institutions, including playing a major role in operating the nation’s payments system. A network of twelve Federal Reserve Banks and their Branches (twenty¬ five as of 2004) carries out a variety of System functions, including operating a nationwide payments system, distributing the nation’s currency and coin, supervising and regulating member banks and bank holding companies, and serving as banker for the U.S. Treasury. The twelve Reserve Banks are each responsible for a particular geographic area or district of the United States. Each Reserve District is identified by a number and a letter. Besides carrying out functions for the System as a whole, such as administering nationwide banking and credit policies, each Reserve Bank acts as a depository for the banks in its own District and fulfills other District responsibilities. Member Banks The nation’s commercial banks can be divided into three types according to which governmental body charters them and whether or not they are members of the Federal Reserve System. Those chartered by the federal government (through the Office of the Controller of the Currency in the Department of the Treasury) are national banks; by law, they are members of the Federal Reserve System. Banks chartered by the states are divided into those that are members of the Federal Reserve System (state member banks) and those that are not (state nonmember banks). State banks are not required to join the Federal Reserve System, but they may elect to become members if they meet the standards set by the Board of Governors. As of

. Supervisory Function of the Federal Reserve The Federal Reserve has responsibility for supervising and regulating the following segments of the banking industry to ensure safe and sound banking practices and compliance with banking laws: . Bretton Woods system The Bretton Woods system of monetary management established the rules for commercial and financial relations among the world's major industrial states in the mid-20th century. .banking activities of foreign banks. Setting up a system of rules. banking organizations may conduct international banking activities. the Federal Reserve may use its supervisory authority to take formal or informal action to have the organization correct the problems. inspecting.bank holding companies. of the nation’s approximately 7. does not carry with it the control and financial interest conveyed to holders of common stock in forprofit organizations.Edge and agreement corporations.S. and vote for the Class A and Class B directors of the Reserve Bank.S. The chief features of the Bretton Woods system were an obligation for each country to adopt a monetary policy that maintained the exchange rate by tying its currency to the U. The Bretton Woods system was the first example of a fully negotiated monetary order intended to govern monetary relations among independent nation-states. When a banking organization within the Federal Reserve’s supervisory jurisdiction is found to be noncompliant or to have other problems. Bank supervision involves the monitoring.approximately 2. but complementary. the planners at Bretton Woods established the International Monetary Fund (IMF) and the International Bank for Reconstruction and Development (IBRD). and procedures to regulate the international monetary system. and the stock may not be sold or pledged as collateral for loans. as specified by law. including diversified financial holding companies formed under the Gramm-Leach-Bliley Act of 1999 and foreign banks with U.000 national banks and 900 state banks. . which today is part of the World Bank Group.700 commercial banks approximately 2.S. through which U. operations.S. and representative offices of foreign banks. Member banks receive a 6 percent dividend annually on their stock. Stock in Federal Reserve Banks is not available for purchase by individuals or entities other than member banks.March 2004. and acquisitions of banking organizations. . Although the terms bank supervision and bank regulation are often used interchangeably. activities. and examining of banking organizations to assess their condition and their compliance with relevant laws and regulations.900 were members of the Federal Reserve System . agencies. .foreign branches of member banks. Bank regulation entails issuing specific regulations and guidelines governing the operations. . state-licensed branches. they actually refer to distinct. activities. The holding of this stock. half of which must be paid in while the other half is subject to call by the Board of Governors. dollar and the ability of the IMF to bridge temporary imbalances of payments.non.state-chartered banks that are members of the Federal Reserve System (state member banks). however. institutions. Member banks must subscribe to stock in their regional Federal Reserve Bank in an amount equal to 6 percent of their capital and surplus. It is merely a legal obligation of Federal Reserve membership.U.

the credit rating agencies. which peaked in 2007. and that governments did not adjust their regulatory practices to address 21st-century financial markets. real estate pricing to plummet. the housing market also suffered. the financial crisis itself ended sometime between late-2008 and mid-2009. the ESCB could not be used as the monetary authority of the euro zone. The 1999 repeal of the Glass–Steagall Act of 1933 effectively removed the separation that previously existed between Wall Street investment banks and depository banks. as credit tightened and international trade declined. also known as the Global Financial Crisis (GFC) or the "Great Recession".S Banking Crises The late-2000s financial crisis.The bursting of the U. Although there have been aftershocks. foreclosures and prolonged unemployment. which found "that the crisis was not a natural disaster. In accordance with the treaty establishing the European Community and the Statute of the European System of Central Banks and of the European Central Bank.S. complex financial products. housing bubble. In many areas. For this reason the Euro system (which excludes all the NCBs which have not adopted the euro) became the institution in charge of those tasks which in principle had to be managed by the ESCB. In response to the financial crisis. is considered by many economists to be the worst financial crisis since the Great Depression of the 1930s. and the failure of regulators. but the result of high risk. European Banking System The European System of Central Banks (ESCB) is composed of the European Central Bank (ECB) and the national central banks (NCBs) of all 27 European Union (EU) Member States.S. It contributed to the failure of key businesses." Critics argued that credit rating agencies and investors failed to accurately price the risk involved with mortgage-related financial products. and the market itself to rein in the excesses of Wall Street. caused the values of securities tied to U. Governments and central banks responded with unprecedented fiscal stimulus. The financial crisis was triggered by a complex interplay of valuation and liquidity problems in the United States banking system in 2008. the bailout of banks by national governments and downturns in stock markets around the world. damaging financial institutions globally.U. Questions regarding bank solvency. and a significant decline in economic activity. with varying weight assigned by experts. leading to a severe global economic recession in 2008. resulting in numerous evictions. the primary objective of the Euro system is to maintain price stability (in other . declines in consumer wealth estimated in the trillions of U. where securities suffered large losses during 2008 and early 2009. Many causes for the financial crisis have been suggested. The United States Senate issued theLevin–Coburn Report. both market-based and regulatory solutions have been implemented or are under consideration. Functions Since not all the EU states have joined the euro. dollars. undisclosed conflicts of interest. It resulted in the collapse of large financial institutions. declines in credit availability and damaged investor confidence had an impact on global stock markets. Economies worldwide slowed during this period.S. monetary policy expansion and institutional bailouts.

the General Council. assisted by the NCBs. to formulate the monetary policy of the euro area. particularly where Community or national legislation is concerned. to conduct foreign exchange operations. all chosen from among persons of recognized standing and professional experience in monetary or banking matters. The Governing Council comprises all the members of the Executive Board and the governors of the NCBs of the Member States without a derogation. Without prejudice to this objective. on a recommendation from the Council of Ministers after it has consulted the European Parliament and the Governing Council of the . the Vice-President and four other members. has the task of collecting the necessary statistical information either from the competent national authorities or directly from economic agents.e. the Euro system shall support the general economic policies in the Community and act in accordance with the principles of an open market economy. and to promote the smooth operation of payment systems. and to establish the necessary guidelines for their implementation. As long as there are Member States which have not adopted the euro. They are appointed by common accord of the governments of the Member States at the level of the Heads of State or Government. In addition. those countries which have adopted the euro. they do not take part in the decision-making with regard to the single monetary policy for the euro area and the implementation of such decisions. The NCBs of the Member States that do not participate in the euro area are members of the ESCB with a special status – while they are allowed to conduct their respective national monetary policies. the ECB. i. Organization The process of decision-making in the Eurosystem is centralized through the decision-making bodies of the ECB. The ECB has an advisory role vis-à-vis the Community and national authorities on matters which fall within its field of competence. Finally. in order to undertake the tasks of the ESCB. to hold and manage the official foreign reserves of the Member States. The Executive Board comprises the President. decisions relating to intermediate monetary objectives. the Euro system contributes to the smooth conduct of policies pursued by the competent authorities relating to the prudential supervision of credit institutions and the stability of the financial system. key interest rates and the supply of reserves in the Eurosystem. including. namely the Governing Council and the Executive Board. The main responsibilities of the Governing Council are: to adopt the guidelines and take the decisions necessary to ensure the performance of the tasks entrusted to the Eurosystem.words control inflation). The basic tasks to be carried out by the Euro system are: to define and implement the monetary policy of the euro zone. shall also exist. a third decision-making body. as appropriate.

in this respect the Court of Justice of the European Communities is competent to settle any disputes. When performing Euro system-related tasks. The main responsibilities of the Executive Board are: to implement monetary policy in accordance with the guidelines and decisions laid down by the Governing Council of the ECB and. neither the ECB. The General Council comprises the President and the Vice-President and the governors of the NCBs of all 27 Member States. a minimum non-renewable term of office for members of the Executive Board of eight years (a system of staggered appointments was used for the first Executive Board for members other than the President in order to ensure continuity). the establishment of the necessary rules for standardizing the accounting and reporting of operations undertaken by the NCBs. The NCBs are the sole subscribers to and holders of the capital of the ECB. and the necessary preparations for irrevocably fixing the exchange rates of the currencies of the Member States with a derogation against the euro. the taking of measures relating to the establishment of the key for the ECB's capital subscription other than those already laid down in the Treaty.ECB (i. The NCBs of the non-participating countries have to pay up 7% of their respective subscriptions to the ECB's capital as a contribution to the . nor any member of their decision-making bodies may seek or take instructions from any external body. The General Council performs the tasks which the ECB took over from the EMI and which. owing to the derogation of one or more Member States. The Statute of the ESCB makes provision for the following measures to ensure security of tenure for NCB governors and members of the Executive Board: a minimum renewable term of office for national central bank governors of five years. The Euro system is independent. still have to be performed in Stage Three of Economic and Monetary Union (EMU). the laying-down of the conditions of employment of the members of staff of the ECB. The General Council also contributes to: the ECB's advisory functions. been paid up to an amount just over €4 billion. and to execute those powers which have been delegated to it by the Governing Council of the ECB. thus far. nor an NCB. the preparation of the ECB's annual reports. the Council of the European Monetary Institute (EMI) for the first appointments). the collection of statistical information. in doing so. The Community institutions and bodies and the governments of the Member States may not seek to influence the members of the decision-making bodies of the ECB or of the NCBs in the performance of their tasks. The ECB's capital amounts to €5 billion. The subscription of capital is based on a key established on the basis of the EU Member States' respective shares in the GDP and population of the Community. to give the necessary instructions to the NCBs. and removal from office is only possible in the event of incapacity or serious misconduct.e. The euro area NCBs have paid up their respective subscriptions to the ECB's capital in full. It has.

tax revenues fall. Markets are concerned that the prospect of very weak growth and high unemployment resulting from fiscal consolidation. the ECB was endowed with an initial capital of just under €4 billion. for the first time.operational costs of the ECB. Euro Debt and Banking Crisis Introduction Europe has been beset by two interrelated crises: (i) a banking crisis. Where the marginal borrowing rate exceeds the average rate on the outstanding stock of debt. Greece and Ireland have faced very significant adverse movements in their yield spreads relative to euroarea benchmark bonds. and whether the euro system in its current form is sustainable. will make the temptation to restructure sovereign debt too great to be ignored. In late 2010. In addition. the debt-service burden will rise. and to a lesser extent this is also the case for Portugal. stemming from losses in capital market securities (including US subprime and other structured products). As a result. the NCBs of the Member States participating in the euro area have provided the ECB with foreign reserve assets of up to an amount equivalent to around €40 billion. making consolidation efforts even more difficult to achieve. and (ii) a sovereign debt crisis exacerbated by recession. transfers to help banks. 15% of the contributions were made in gold. and Spain. as growth weakens. Such concerns add to the crisis countries’ problems. the sovereign debt crisis worsened on market concerns about the difficulty of budget consolidation. while the prevailing high interest rates increase their debt service costs. while in return each NCB was credited by the ECB with a claim in euro equivalent to its contribution. The contributions of each NCB were fixed in proportion to its share in the ECB's subscribed capital. boombust problems in the property markets of some EU countries. and years of painful structural adjustment. Similarly. the European Summit in October 2010 pondered the notion that private creditors might have to bear some of the pain via mechanisms being put together to deal with future sovereign-debt crises. as well as home-grown. . The market has even begun to ponder whether the crisis could spread further. making it difficult for them to borrow. and the remaining 85% in US dollars and Japanese yen. and in some cases very poor fiscal management over a number of years that was inconsistent with the principles laid down in the Stability and Growth Pact and the Maastricht Treaty.

noting that here g refers to the nominal growth of GDP (i. the effective interest rate can be reduced by renegotiating the terms and conditions of the outstanding debt with the holders.Policies to deal with unsustainable debt The debt dynamics equation suggests a number dynamics There are a number of ways to deal of ways to deal with the problem of explosive debt scenarios: with the problem of explosive debt scenarios • Cutting spending and raising taxes to bring the budget balance to the point where it offsets the debt-service burden. Alternatively. thereby making it easier for countries to achieve macro goals. including consistency with currency-union constraints on fiscal policy and debt – such as those embedded in the Maastricht Treaty. which is essential to . the OECD regulatory reforms that will not have an certainly favours: (a) policies to improve the functioning of labour markets. Inflation is not a policy tool for the countries As EU monetary policy is in the hands of the ECB. after allowing for the growth of the economy. • Restructuring the level of outstanding debt (dt1). By applying a haircut to the outstanding stock of debt. (b) the reform of EU pension systems. • Carrying out structural reforms to improve the real component of the rate of nominal growth (g). however. can be to increase the likelihood of future exclusion from global capital markets. Were the ECB to carry out quantitative easing to the point where EU-wide inflation accelerated. Thus setting: • Causing inflation to rise a great deal. pension and competition reforms will improve growth over the longer run. as well as credit rating downgrades that result in the bond issuer having to pay higher spreads. The OECD favours labour market. the sum of real growth and inflation).6The economic costs of doing this.e. the debt service burden is reduced. pension and With respect to structural reform. the possibility of initiating an inflationary concerned policy is not an option for the countries concerned. to ensure they are fully funded. but it is not an immediate option for the crisis countries within Europe now. The main benefit is the ability to cut the debt-service burden to credible levels overnight. Inflation surprises essentially reduces the real burden of the debt. this would benefit all European debt-service burdens. and the immediate effect requirement in a currency union that labour mobility play a key competitiveness adjustment role. Labour market.

as the above marketimplied probability-of-default calculations suggest.7% for the system as a whole. impairments to the banking book and losses to the trading book) were covered by income. for example. which raise risk-weighted assets by EUR 824bn. left out the bulk of holdings in the banking book. European banks are less-well capitalised than US banks. many of the 91 banks included did not generate enough write-offs or other adverse pressures to lead to actual losses. This inability to subject the system to a reasonable amount of stress that would require new capital has already been surpassed by actual events. Hypo Real Estate. Tier 1 capital actually rises in the adverse scenario. the prices of bank-debt certificates in the secondary market have again begun falling. For the system as a whole. entirely due to the rise in risk weights. At the same time. a sensible capital ratio should rise. Only 7 of the 91 banks failed the test (falling below 6% Tier 1 capital). it is unclear what is being tested besides the sensitivity of regulatory constructs. RWA of the 91 stress-tested banks amounts to only 40% of TA (and much less than this in some large systemically important EU financial institutions) More transparency about the real situation at EU banks would help allay concerns in the financial markets.11This is especially the case for the Bank of Ireland and Allied Irish. Most of the losses (i. and individually for most of the banks’. But the Tier 1 ratio actually falls by 0.7 However. which applies capital requirements only to Risk-Weighted Assets (RWA) without any reference to the ratio of RWA to total assets (TA) in banks. In other cases. Since the scenario is designed with a constant balance sheet assumption. and (c) addressing the structure of competition within Europe and the consistency of regulations and governance for improving efficiency.reduce the fiscal burden on future generations. structural reform is likely to be a process the success of which will be measured in decades. net losses were small (the main exceptions being the Spanish cajas.9 BlundellWignall and Atkinson (2010) point out that. since this was not actually tested. ABN/Fortis. and (though to a much lesser extent) for the cajas and small Spanish/Portuguese banks The market has become increasingly concerned that banks in Ireland and Spain may require further injections of capital to offset housing-related losses that were not picked up by the stress test. of which there have been plenty. Dexia and two large Irish banks). This is in part due to the absence of a leverage ratio requirement in Europe. The market tolerance for sovereign debt is unlikely to be improved by promises. Just as the financial markets are factoring in the risk of restructuring for sovereign bonds. where the housing crises may have exacerbated pressures on banks. the exposure of some banks in all four countries to market fears regarding a restructuring of sovereign debt would likewise require an increase in capital to act as a shock absorber. Royal Bank of Scotland.e. small Spanish banks. This largely reflects the procyclical features introduced in Basel II. If capital rises as income exceeds losses. where authorities instead rely on the Basel system. However. Bank vulnerabilities and potential feedback on fiscal deficits The EU stress tests of June 2010 did not fully allay concerns about bank losses and fiscal interplay. while the balance sheet is otherwise unchanged. particularly in Ireland and Spain. The stress-tested sovereign shock. Both sets of fears may have some potential to impact fiscal policy (as has already been the case recently in Ireland) . excluding the sovereign shock. EU banks systematically reduced the share of RWA to TA by a variety of techniques prior to the crisis and raised leverage commensurately to very high levels. the test shed virtually no light on the adequacy of capital to serve as a buffer to absorb losses.

Market arithmetic for Greece The Greek bank sector had required capital of €23bn at the start of 2010 and actual capital of €31bn.Market arithmetic for Spain At the start of 2010. Market arithmetic for Ireland The Irish banking sector had minimum required capital of €51bn and actual capital of €63bn at the start of 2010. too. According to the fifth criterion concerning the likelihood of sovereign-debt haircuts. and actual capital of €195bn. there is a quite substantial exposure to sovereign debt – a 30% haircut on sovereign debt would add another €63bn to banks’ capital needs. and over-capitalisation of at least 12% by the end of February 2011. and the banks’ operating profits aren’t large enough to cover this over any reasonable period. ultimately. according to market reasoning. Moody’s loss estimate (in November 2010) was €176bn. Greek debt is at the highest level of the four countries considered. At the same time. This may be one of the reasons why some banks’ bond prices. and the market gives Greece the highest probability of a restructuring. Estimates of bank losses for 2010 are not taken into account. At the same time.5% core Tier 1 capital. This suggests that Spanish banks would need to raise more capital. discussed above. Allied Irish (AIB). this argues against such a haircut. suggesting a buffer of €12bn. In terms of criterion 5 mentioned earlier. On the fifth criterion. EBS Building Society and Irish Life and Permanent (ILP) to a new minimum of 10. The official estimate for losses (in November 2010) was €85bn. the bank debt instruments will need to bear some of the burden of relieving government budget pressures. have begun to fall. On the other hand. suggesting a buffer for absorbing losses of €8bn. This suggests a capital buffer of €27bn. This may be one of the reasons that the markets give this possibility a relatively low probability at present. the Spanish banking system had minimum required capital of around €168bn. The government has raised the capital requirements of the Bank of Ireland (BOI). with two large Spanish banks having a large share of the profits and less legacy nonperforming loans to deal with. At the same time the situation is very heterogeneous. while some of the smaller players may face greater difficulties. including commercial property – an issue that reduces transparency about the true position of banks. in order to cover further potential losses. but the exposure to sovereign debt of €61bn means that a 30% haircut would be difficult for banks to absorb.12This amount is large relative to GDP. the banks’ exposure to sovereign debt is fairly small. This compares to the 9. The market probably believes that. this would substantially reduce the chance of debt restructuring. . this increases the likelihood of a sovereign-debt restructuring.8% on which the required capital is based in Table 3. of which they suggest that about half has been recognised. This suggests on-going risk to the budget with respect to support for the banking system affecting the market assessments of restructuring via the first and second criteria above (the size of the primary deficit and debt as a share of GDP). Markets are concerned about the possibility that losses could be larger than these estimates due to weakening property prices.

Once existing equity holders are wiped out. According to the fifth market criterion. . pre-tax income and holdings of government debt. inconsistent with principle 2 above (de-leveraging and activity effects). If the issue is to be properly managed by policy makers it is critical to focus on individual banks. It is the outlier cases that are important in assessing the risk of financial crises. The markets and bank solvency and debt options A second major concern in financial markets addressed in this paper is the uncertainty there is about how bank insolvency issues are to be dealt with and the risk that they might pose to fiscal consolidation in some countries. particularly where bank liabilities are subject to government guarantees. A major lesson of the crisis was that failures of systemically important financial institutions led to counterparty and contagion effects that had widespread crossborder implications. But this does not deal with solvency issues resulting from losses on the assets side. the full resolution of a financial institution would involve the unsecured bondholders bearing the losses and the economy experiencing the deadweight losses associated with failures. which has been working well enough via ECB operations. If government guarantees are in place. this should increase the likelihood of restructuring in market calculations. Bank bond prices have been subject to significant moves following official discussion of these issues. but bank exposure to periphery sovereign debt is small in aggregate.Market arithmetic for Portugal Required and actual capital positions suggest Portuguese banks have no buffer to absorb losses. the pain is borne directly by the taxpayer instead. Bank exposure to known holdings of sovereign debt As noted in Blundell-Wignall and Slovik (2010). on fiscal grounds. bank exposures to sovereign debt are not evenly distributed:13Buiter and Rahbari (2010) have recently pointed out that average exposures to sovereign debt don’t matter: Averages give little information about specific banks’ capital needs. which all differ widely. housing related losses. A run on deposits or failure to roll-over debt in the wholesale markets requires emergency liquidity lending in order to keep banks operating.

 Scheduled banks are require to maintain a certain amount of reserves with the RBI. The relationship is established once the name of a bank is included in the Second Schedule to the Reserve Bank of India Act. subject to fulfillment of the following conditions laid down in Section 42(6) of the Act.INDIAN BANKING SYSTEM Financial Structure The Indian financial system comprises the following Institutions: Reserve bank of India at apex 1. having been given suitable opportunity to increase the value of paid-up capital and improve deficiencies. goes into liquidation or ceases to carry on banking activities. Non-scheduled bank  Central co-operative bank and primary credit societies  Commercial banks Reserve bank of India RBI is the banker to banks—whether commercial. is entitled to facilities of refinance from RBI. primary urban cooperative banks. called a scheduled bank. A system of local area banks announced by the . as follows:  It must have paid-up capital and reserve of not less than Rs. They in return. 1934. enjoy the facility of financial accommodation and remittance facility at concessional from the RBI The classification of commercial banks into scheduled and non-scheduled categories that was introduced at the time of establishment of RBI in 1935 has been extended during the last two or three decades to include state cooperative banks. or rural. Such bank. 5 lakhs. RBI is authorized to exclude the name of any bank from the Second Schedule if the bank. and RRBs. cooperative. Scheduled banks  State co-operative banks  Commercial banks Commercial banks further divided into two categories a)Indian(public (state bank and its subsidiaries.  It must satisfy RBI that its affairs are not being conducted in a manner detrimental to the interests of its depositors. other nationalized bank & RRB’s) and private b)foreign 2.

The same year saw the founding of the first mutual fund in the country. creation of a Long-term debt market and best global practices on governance and risk management in infrastructure Projects NBFCs undertake a wide spectrum of activities ranging from hire purchase and leasing to pure investments. 539 billion in 1995/96. Industrial Credit and Investment Corporation of India (ICICI) was set up in the private sector with foreign equity participation. National Housing Bank (NHB). and was followed by SFCs at state level set up under a special statute. (DFHI) in partnership with SBI and other banks to deal with money market instruments and to provide liquidity to money markets by creating a secondary market for each instrument. the Infrastructure Development Finance Company Ltd. In 1955. including Life Insurance Corporation of India (LIC) and General Insurance Corporation (GIC).000 NBFCs operating) had deposits of Rs1. IDFC will work on commercial orientation. and Small Industries Development Bank of India (SIDBI). power generation. while UTI. RBI also set up in April 1988 the Discount and Finance House of India Ltd. etc. Infrastructure is woefully inadequate for the efficient handling of the foreign trade sector. the Unit Trust of India (UTI). Specialized development financial institutions (DFIs) were established to resolve market failures in developing economies and shortage of long-term investments. innovations in financial products. This was followed in 1964 by Industrial Development Bank of India (IDBI) set up as a subsidiary of RBI. For meeting specialized financing needs. RBI has given in principle clearance to five applicants. (IDFC) was set up in 1997. A system of registration was introduced in April 1993 for NBFCs with net owned funds (NOF) of Rs5 million or above. IDFC will seek to unbundle and mitigate the risks that investors face in infrastructure and to create an efficient financial structure at institutional and project levels. Subsidiaries of GIC also provide substantial equity and loan assistance to the industrial sector. RBI initially limited their powers. Liberalization of economic policy since 1991 has highlighted the urgent need to improve infrastructure in order to provide services of international standards. Export Import Bank of India (Exim Bank). rationalizing the legal and regular framework. IFCI. The three institutions that dominate the termlending market in providing Financial assistance to the corporate sector are IDBI. which were confined solely to deposit acceptance activities of NBFCs and did not cover their functional diversity and expanding intermediation. and ICICI. communication. The RBI Working Group on Financial Companies recommended vesting RBI with more powers for more effective regulation of NBFCs. RBI regulations  In India. aiming to moderate deposit mobilization in order to provide depositors with indirect protection. The first DFI to be established was the Industrial Finance Corporation of India (IFCI) in 1948. This rendered the regulatory framework inadequate to control NBFCs. The banks do religiously .000 reporting NBFCs (out of more than 40. which serve as apex banks in their specified areas of responsibility and concern. It regulated the NBFCs under the provisions of Chapter IIIB of the RBI Act of 1963. banks lending to individual is based on their income. Examples include the National Bank for Agriculture and Rural Development (NABARD).Government in power until 1997 has not yet taken root. More than 10. Major shares of DFHI are held by SBI. To nurture growth of private capital flows. conducts similar operations. The Government owns insurance Companies. A wide variety of financial institutions (FIs) has been established. though a mutual fund.

you will get in trouble―. once a month). RBI insists the bank to keep the capital ratios within the range of 11% to 13% (Regulation is 9 %) Indian banks are not focusing on the business structure like securitization and collateralized debt obligation (CDO) – Again thanks to RBI regulations. Another crucial factor RBI had the right person in the right job at right time. ―if you spend more than you earn. The boards of directors and their committees hold monthly meetings while the executive committee of each central board meets every week. the state bank group and nationalized banks were required to sponsor and set up RRBs in partnership with individual states to provide lowcost financing and credit facilities to the rural masses. the Government arranged the nationalization of 14 scheduled commercial banks in order to expand the branch network. In contrast to the state bank group. He made sure that Indian banks did not get too caught up in the bubble mentality. Nationalized banks are wholly owned by the Government. by their respective head offices. He was Y V Reddy. Nationalized banks: In 1969.. i. RBI issued market stabilization schemes and bonds and absorbed dollars. 70% of the banks in India are still nationalized.5 per cent of their deposits in cash. Last but not the least -Culture – Indians are not very comfortable with credit. and. and another 25 per cent of their deposits in government bonds. now if overseas investors suck out dollars after selling shares. although some of them have made public issues. Regional Rural Banks (RRBs): In 1975. RBI has made banks keep 7. the former RBI governor (6th Sept 2003 to 5th Sept 2008).      State bank group: This consists of the State Bank of India (SBI) and Associate Banks of SBI. The state bank group and nationalized banks are together referred to as the public sector banks (PSBs). there will be no domestic liquidity crisis because the RBI can buy back those bonds and pump rupees into the market. Co-operative banks: The cooperative banks also perform basic functions of banking but differ from commercial banks in the following respects: • Commercial banks are joint-stock companies under the Companies Act of 1956. A merger reduced the number from 20 to 19. Indians generally think. or public . there is only one board for each nationalized bank and meetings are less frequent (generally. nationalized banks are centrally governed.verify an individual’s income and expenditure before sanctioning any loans. Thus. In India. followed by six more in 1980. So even if there were to be a run on a bank they still would have the liquidity to tackle the situation.    Mortgage loan still insists on down payment (15% to 30%) and this prevented many who dreamt of having properties completely at bank’s expense. The Reserve Bank of India (RBI) owns the majority share of SBI and some Associate Banks of SBI. there is no shortage of dollars to sell to them.SBI has 13 head offices governed each by a board of directors under the supervision of a central Board.e. joint families still exist and family members help each other in times of economic crisis so they don’t go to banks to borrow money.

and primary cooperative societies at rural level. the US. . Here is a comparison of Indian economy vs. India has particularly strong long-term growth potential. $55000 B. Japan. It has GDP of $1100 B (2007) or RS. Italy. Comparison Of Banking Systems India could become the third largest banking sector by 2050 after China and US. leaving Japan. Japan. Canada.55000 B. GDP India is fourth highest in the world in PPP terms. In PPP method. sell and spend in Indian rupee. Japan and China is needed to study international economy and business. India is a large country having population of more than a billion.12 in nominal term of world GDP after US. Indian GDP ranks to No. Japan. Indian banks have improved their cost to income ratio by 6 per cent on an average. UK and Germany behind. EU. China. EU. • Only some of the sections of the Banking Regulation Act of 1949 (fully applicable to commercial banks). It is approximately two percent of the GDP of the world i. China ($7000B) and Japan ($4300B) in PPP terms . Indian banks have become more efficient due to tighter credit assessment and disbursals. with state cooperative bank at the apex. India is an emerging economy and comparison of Indian economy with other countries such as the US. central/district co-operative banks at district level. consumers. Indians have to buy. Canada. People want to compare economies to make strategies. European Union . It is also the largest democracy in the globe.Indian banking sector in general and the Reserve Bank of India were applauded post financial crisis for fiscal prudence.sector banks under a separate Act of the Parliament Co-operative banks were established under the Co-operative Societies Acts of different states. cost efficient model. France. Spain. China and rest of the world. Germany. he added. UK. Indian GDP is calculated to $3000B that is approximately 4. • co-operative banks have a three-tier setup. Price parity parameter shows comparatively better picture. Canada. Brazil and Russia. second highest in the world. Post downturn. India is a large economy. Canada.e. resulting in only partial control by RBI of cooperative Banks. are applicable to cooperative banks. India ($3000B) comes to No. China and rest of the world. However. It does not tell the real story because world GDP is calculated based on US dollars.7 percent of world GDP of $64000B in PPP.4 after US (America) (($13800B). This article will help you understand better Indian markets. However. weeded out non profitable and highly risky portfolios and increased the CASA substantially resulting in lower cost of funds for the bank. industries and overall growth picture of India in Comparison with US. and • Cooperative banks function on the principle of cooperation and not entirely on commercial parameters.

Picture is little different this year. Most of the developed countries have started showing tendency of negative growth. owing to shift in strategy from aggressive growth to cost rationalization. Indian GDP ranks to No. It is approximately two percent of the GDP of the world i. Japan and China is needed to study international economy and business. Canada. It is expected that China will manage a growth rate of eight to nine percent where as India will anywhere between seven to eight percent. Spain. India is an emerging economy and comparison of Indian economy with other countries such as the US.484 in 2050 from $945. . Canada. India ($3000B) comes to No. India is a large country having population of more than a billion. However.7 percent of world GDP of $64000B in PPP. China could overtake US in 2023 and India could overtake Japan in 2033. ICICI Bank improved its cost to income ratio from 53 per cent in 2007 to 38 per cent in 2010. sell and spend in Indian rupee.India’s largest private sector bank. It is also the largest democracy in the globe. second highest in the world. China ($7000B) and Japan ($4300B) in PPP terms. It has GDP of $1100 B (2007) or RS. China. India has achieved highest growth rate in stock market in the world. European Union. France. More over India is growing at the rate of eight to nine percent per annum whereas most of the developed countries including US. Japan and countries of EU and UK are growing at a very slow speed until last year. Only China has shown greater growth rate than India. Indians have to buy. This will surely affect India and China but they can manage their growth in a positive range. However. Indian GDP is calculated to $3000B that is approximately 4.12 in nominal term of world GDP after US. India’s domestic banking assets are expected to grow to $38.55000 B. Japan. $55000 B. If we compare the stock markets of India and America since 9/11 Highest growth in stock market More over India is growing at the rate of eight to nine percent per annum where as most of the developed countries including US.e. Canada. Italy. It does not tell the real story because world GDP is calculated based on US dollars. In PPP method. Germany. Canada. India is a large economy. Brazil and Russia. GDP India is fourth highest in the world in PPP terms. Price parity parameter shows comparatively better picture. UK. Only China has shown greater growth rate than India.4 after US (America) (($13800B). Japan and countries of EU and UK are growing at a very slow speed until last year.

. Fifth highest foreign currency reserve in the world India has fifth highest foreign currency reserve in the world. $485B. The BSE (India) also fell during those days to reach a low of 2595. $282 B and $247 B respectively in 2007. 9th market closed) 9162 level. Dow Jones fell after 9/11 to 8235 on 21st September 2001. This will surely affect India and China but they can manage their growth in a positive range. Japan. Taiwan and Russia. Foreign currency reserves of China. If we compare the stock markets of India and America since 9/11. It has jumped from 2595 to 9162. Taiwan and India were $ 1905.2008. GDP India represents the fourth largest economy in the world in price parity parameter (PPP). Where as BSE India has traded at (on eighth Dec. that is a gain of 6567 points or approximately 250 percent! Hangseng is 14753 and Shanghai is 2037 today. 09. Dow has increased mere six percent in more than seven years and China and Hong Kong index has raised by thirty to fifty percent (roughly estimated) but Indian stock exchange index BSE has shown an amazing growth of more than two hundred fifty percent.Picture is little different this year. As I do not have actual data of 21st Sept. It is worth mention that so called rich countries likes of the US. Canada. 9 of Japan and below 3 percent of Taiwan on year-to-year basis. Dow Jones is trading at 8787 (While writing this hub Dec. India has the second highest growth rate in the world after China.2001). Composite economic scenario of India: GDP India is twelfth largest economy in the world in nominal parameter but that does not show the real picture. France and the UK are not in this list. It is expected that China will manage a growth rate of eight to nine percent where as India will anywhere between seven to eight percent. we find fascinating facts. of both these indexes it is not justified to calculate the gain but it is some thing around thirty to fifty percent. If we compare it with the previous Dow Jones data (21st sept. 2008). $997B. The most interesting fact is that Indian foreign currency reserve had been increased 64 percent in comparison to 32 percent of China and 57 of Russia. Most of the developed countries have started showing tendency of negative growth. This shows that Foreign currency reserve of India was the fifth highest in the world after that of China. Japan. Russia. please inform me) but those were around 1400 and 11000 respectively. India has achieved highest growth rate in stock market in the world. it has gained mere 550 points over the period of more than seven years. Particular data for Shanghai (China) and Hangseng (Hong Kong) are not available to me (If anyone has the data.

There is good reason to believe that inflation is harmful even at what one Might consider relatively moderate rates—annual rates of perhaps 5 to 10 percent. but next year onwards. while excellent on paper. American banks used to believe that real estate sector never goes down and thus. At the same time. The growth rates of the country will about five percent which is higher than America. But now. China. but they were wrong. Corporate governance norms in India have strengthened rapidly in the past few years. there is some evidence of credit constraints for India’s SME firms that rely heavily on trade credit. Agriculture is one of the factors.1 growth rate among stock markets in the world. India continues to be an attractive place for investment. Hyperinflations—when inflation rates are extremely high—are the horror stories. Naturally the banks liquidity will be affected and they have to make money only with the limited source available with them. everybody knows inflation is bad. there are changes in bank regulations along with restructuring in lending. there by price rice can be controlled. appears to be less effective owing to an overburdened legal system and corruption. The Impact of Inflation on Bank Lending By now. Indian banks are in a strong position as the ratio between lending and deposit is vast in India. The Indian financial system has been witnessing an exciting era of transformation. it will be a good time. Family businesses. Now after this Financial Tsunami RBI has reduced the CRR hike and there by more funds into the market and asked the bankers to . While for American economy. which means withdrawal of more free flow of funds from the banking sector and their lending source of funds come down. but few doubt the harmful effects of inflation rates in the teens either. all stock markets in European Union. RBI has increased the CRR rates. Canada. India has no. Over the past several decades. Can we now stop worrying about inflation? Probably not. Compared to America. which will help survive during slow down. Indian Bank system is in a better position and more stable. till the recession. In the last few years microfinance has contributed in a big way to financial inclusion and is now attracting venture capital and for-profit companies – both domestic and foreign. gave loan to the people even with zero income. central banks around the world have been pretty successful at dramatically lowering inflation rates. however. still dominate the landscape and investor protection.BSE stock index of India has grown at the fastest pace beating all stock indexes in the world including America. lent on it without any hesitation. Effect on Banking sector Because of high inflation. Now banks have understood this and made some changes. On the other hand. American banks. Japan and of course. this year will be quite disturbing. The banking sector has seen major changes with deregulation of interest rates and the emergence of strong domestic private players as well as foreign banks.

That is. the result is lower investment in the economy. .lend more money to mutual funds and there by save the falling share prices because of heavy selling from FIIs ■ Theoretical Insights into Inflation A key insight of the recent theories is that inflation exacerbates so-called frictions in credit markets. At very low rates of inflation. higher inflation might actually lead to increased real economic activity. or they may at least restrict the quantity of loans made. Whatever the cause. Averaging across a long time horizon gives us some notion of the long-run effects of inflation. This implies that beneath some thresh-old. At this point. Obstacles can also arise from the actions of banks themselves. if banks find it difficult to differentiate between good and bad borrowers. Only when inflation rises above some critical level does rationing occur. Banks may react to the combined effects of lower real returns on their loans and the influx of riskier borrowers by rationing credit. when they respond in the best possible way to the incentives and risks that are created by existing laws. One way inflation might affect economic growth through the banking sector is by reducing the overall amount of credit that is available to businesses. Higher inflation can decrease the real rate of return on assets. new borrowers entering the market are likely to be of lesser quality and are more likely to default on their loans. they may refuse to make loans. banks can easily adjust nominal interest rates when they need to. policies. But there is something peculiar about the effect of inflation on the financial sector: It appears to have important thresholds. when financial intermediaries ration credit in this way. With lower investment. Since empirical studies have shown that credit market frictions are more severe in developing countries than developed countries. and economic conditions. Incidentally. but frictions create obstacles that make this adjustment difficult. Government ceilings on interest rates are an example of such an obstacle. For each country. This beneficial outcome can occur only in countries where inflation and nominal real returns on assets. Simply charging a higher nominal interest rate on loans merely makes the problem worse because it causes low-risk borrowers to exit the market. This. we averaged data on a number of economic variables across various time periods in the 1980s and 1990s. lowers real economic activity. In smoothly operating credit markets. The story goes something like this. Lower real rates of return discourage saving but encourage borrowing. these frictions may play an important role in explaining the impact inflation has on economic growth in these countries. in turn. the present and future productivity of the economy tends to suffer. increasing the nominal interest rate may not be possible. regulations. we looked at data for around 100 countries (full details of the study appear in Boyd and Champ 2003). To test these hypotheses empirically. And in those countries with governmentimposed usury laws or interest rate ceilings. inflation does not cause credit rationing.

This finding also holds for the data we examined. with inflation rates ranging from 0. Prior studies looked at episodes in which average inflation was consider-ably higher. The median inflation rate is 8. Moreover. which is consistent with he view that a sufficiently high rate of inflation induces banks to ration credit. the sample period is 1980–95. the range of the inflation rate for each of the quartiles is listed. We break the cross-country data into quartiles. but they yielded similar results to ours.8 percent to 85.5 percent. The Impact of Inflation on Bank Lending Several economists have found that countries with high inflation rates have inefficiently small banking sectors and equity markets. We see that the amount of bank lending declines with inflation. For example. and the highest inflation quartile contains countries with inflation rates in excess of 17. and the median inflation rate in the second quartile is only 6. Many people might be surprised that such a ―small‖ rate of . The first quartile includes those countries with average inflation in the lowest 25 percent of the sample. In figure 1.4 percent. Below each quartile group. This effect suggests that inflation reduces bank lending to the private sector. we present the median and mean values of the banking sector size measure for each of the inflation quartiles.6 percent.4 percent.9 percent. For this analysis. the lowest inflation quartile covers inflation rates less than 5. The fourth quartile includes those countries with the highest inflation averages.the time period we looked at is not one of particularly high world-wide inflation: The median inflation rate was around 8 percent across all our sam-ples. inflation affects bank lending even at relatively low inflation rates—the median ratio of bank lending to GDP in the second quartile is 10 percent smaller than in the first quartile. Figure 1 shows one measure of bank lending in an economy—total bank lending to the private sector as a ratio to GDP.

Such low real rates of return suggest that the incentives to expand bank operations simply are not as strong as inflation rises. the real rate of return on these instruments falls. (The real net interest margin is a measure of the inflation-adjusted spread between a bank’s lending rate and its cost of obtaining funds. We would expect banks to adjust their nominal rates to account for inflation. with the ratio of bank lending to GDP only 15 percent Although suggestive. but over longer periods. net profits. as savers actually lose purchasing power. but not complete support. the real net interest margin turns negative. it should be evident. We uncover substantial evidence for this effect in the data. However. The chain begins when high inflation lowers the real return on assets. The impact of inflation on real rates is most evident at the extreme. since banks might not be immediately aware that inflation has stepped up. . Figure 2 plots banks’ real net interest margins against the inflation quartiles to give one example. At the highest inflation quartile. The economies in our highest-inflation quartile experienced real money market rates and real treasury bill rates of around zero percent on average during the time period studied. a one percentage point increase in inflation is associated with a one percentage point decline in the ratio of bank lending to GDP.) We find no significant statistical relationship between inflation and the real bank loan rate. rate of return on equity. Negative real interest rates provide little incentive for saving. inflation does appear to have a negative impact on bank profitability measures. such as the ratio of total bank assets to GDP or the ratio of the liquid liabilities of the financial sector to GDP. The one example where we don’t find what we might expect is with nominal interest rates on bank loans. We find that inflation is negatively associated with real money market rates. real treasury bill rates. as we detail later. at the median inflation rate.inflation could cause such a fall in credit.1 percent and 9. and real time-deposit rates. (One might not expect nominal rates to rise one for one with inflation over a short period of time. we still find a statistically significant negative relationship between inflation and banking sector size. as inflation increases. after controlling for other variables (in a multivariate statistical analysis). we find that inflation has a dramatic negative impact on the profitability of banks. In fact. Various measures of bank profitability—net interest margins. Other studies have found similar effects of inflation on alternative measures of banking sector size. However. the effect is dramatic. such a simple graph does not take into account other factors that can affect the size of the banking sector. that is. Perhaps most importantly.) We see that even at fairly modest inflation rates of between 5. after controlling for other variables.1 percent. The Impact of Inflation on Asset Returns and Bank Profitability inflation in sufficiently high doses kicks off a chain of events that ultimately leads to stunted economic growth. The real time deposit rate for the high-inflation countries was approximately –3 percent. and value added by the banking sector—all decline in real terms as inflation rises.

In Europe. The required reserve ratio in the United States is set by federal law. This is a requirement determined by the country's central bank.RESERVE RATIO The portion (expressed as a percent) of depositors' balances banks must have on hand as cash. in India by Central Bank. the reserve requirement of an institution is calculated by multiplying the reserve ratio for each category of items in the reserve base. with the amount of those items in the institution's balance sheets. although banks will have their own internal measures and targets to be able to repay customer deposits as they forecast they will be required. The reserve ratio affects the money supply in a country. is the Federal Reserve. In the United Kingdom and in certain European countries. there is no compulsory ratio. which in the U. These figures vary according to the institution. In the United States. specified percentages of deposits—established by the Federal Reserve Board—must be kept by banks in a non-interest-bearing account at one of the twelve Federal Reserve Banks located throughout the country. Reserve Requirements . set by the European Central Bank.S. and depends on the amount of checkable deposits a bank holds.

The reserves can be held in any combination of till money and deposit at a Federal Reserve Bank. In india.00% to 5.Requirement Liability Type % of liabilities Net transaction accounts 1 $0 to $11. No reserves are required against certificates of deposit or savings accounts. Cash Reserve Ratio (CRR 5. The current rule allows a bank to issue loans in an amount equal to 90% of such deposits.50% which was continuing since 24/04/2010 Statutory Liquidity Ratio (SLR) 24%(w.0 million Nonpersonal time deposits Eurocurrency liabilities 0 3 10 0 0 12-29-11 12-29-11 12-29-11 12-27-90 12-27-90 Effective date These breakpoints are reviewed annually in accordance with money supply growth. 18/12/2010) continuing since 07/11/2009 Decreased Decreased from 25% which was Challenges and Opportunities for Indian Banking Industry . holding 10% in reserve.0 million3 More than $71.5 million2 More than $11.5 million to $71.50% (wef 28/01/2012) -announced on 24/01/2012 from 6. Reserve ratio is decided by RBI and revised gradually.f.e. The reserve ratio requirement limits a bank's lending to a certain fraction of its demand deposits.

The structure of Indian Banking industry is different than USA. The banking sector is seeing constant growth driven by new products and services that include opportunities in credit cards. and in fee-based income and investment banking on the wholesale banking side. Washington Mutual etc collapsed. increased standard of living. given the demographic shifts resulting from changes in age profile and household income. The Indian Banking system has successfully managed the financial tornado due to sound policies of our central bank and fiscal stimulus packages implemented by the Government. Banks are now offering new technologically sophisticated products like Mobile Banking. internet banking. we follow Bessel 2 norms and all the Indian banks maintain all the CAMELS ratios better than the benchmark Bessel 2 norms. This segment of customers prefer to do banking from their workplace or home only. . In correlation with the growth of the economy. and affordability of banking products are promising factors for continued expansion. We are having instrument like SLR which is not being used in USA. middle class. Second. Since 1994 world has seen two major financial crises including the subprime crisis due to which giant like Lehman Brothers. The manpower shortage is really a big worry for the banking industry and to retain existing employees is also a big challenge. Due to strict regulations. consumers will increasingly demand enhanced institutional capabilities and service levels from banks. the RBI reduced the policy rates. Rural market comprises 74% of the population. Now the point of contact is reducing and Banks are taking this challenge as an opportunity. private players were allowed to enter and this step transformed the structure of Indian banking system. An expanding economy. These require new skills in sales & marketing. 41% of Middle class and 58% of disposable income. he Indian banking market is growing at an astonishing rate. The banking system is reorienting its approach to rural lending. Perhaps this extra security feature makes our system strong. Specialised branches are being opened to target the niche like overseas branches or Corporate branches.Indian Banking industry was deregulated since 1994. both repo and reverse repo and provide liquidity to the economy by reducing the reserve ratios and offering adequate support to the banking system. credit and operations. to attract technically sophisticated customer segment. through its innovative products. Banks are targeting to open new branches in Tier 2 & 3 cities along with opening new branches in rural areas to penetrate this market. During the recessionary phase between October 2008 to March 2009. ―Going Rural‖ could be the new market mantra. But better HR policies and chances of better growth in Banking industry are attracting the youths. as a bank’s point of view it is good because the operational costs is going down. tighter norms on capital adequacy and close watch by the Reserve Bank of India (RBI) prevented the severe impact of the global financial crisis to the Indian banking system. rising income levels. The country’s middle class accounts for over 32 crore people. with Assets expected to reach US$1 trillion by 2010. consumer finance and wealth management on the retail side. Their aim is to offer products to each and every segment of customers. E-Remit. and technological innovations are all contributing to this growth.

S.Although due to competition created by Private and Foreign banks government banks initially faced tough competition but their core competency is trust of our customers which make us different than others . ―Unless the euro zone debt crisis is resolved in a timely and orderly manner. The six biggest U. The ―exposures‖ of U. NEWS ARTICLES 1 ) U.S.S. banks have ―manageable‖ exposure to stressed European markets. banking industry could worsen.S. Bank of America Corp. the broad credit outlook for the U. and Morgan Stanley . are smaller than those to some of the continent’s larger countries. Wells Fargo & Co. banks -. Italy. Goldman Sachs Group Inc.S. Ireland. (C). Banks Face Contagion Risk From Europe Debt U.‖ Fitch said. Fitch Ratings said.JPMorgan Chase & Co. Fitch said. (JPM). known as the GIIPS. banks face a ―serious risk‖ that their creditworthiness will deteriorate if Europe’s debt crisis deepens and spreads beyond the five most-troubled nations.‖ the New York-based rating company said yesterday in a statement.S. After the deregulation in banking industry the level of service has been improved and in long run the future of Indian banking industry is good. Even as U. (BAC). So their brand equity is RELATIONSHIP with their customers and now with prompt and efficient services these government banks are making long lasting relationship with their customers. Citigroup Inc.as a government banks they have some corporate social responsibility so unlike private players they not only think about the profitability but also our responsibility. Portugal and Spain. lenders to major European banks and the stressed nations of Greece. without explaining what it meant by contagion. (WFC). ―further contagion poses a serious risk.

The spread.S. in Greece and Italy. Ratings on the U.9 percent. Europe’s debt crisis has toppled four elected governments. the most since August 2009. TED Spread The TED spread.S. according to the report. banks may even benefit as investors shift money from Europe. the gap between the fixed component and the yield on similar-maturity Treasuries. dropped amid concern they’ll need more capital.7 percent and the 24-company KBW Bank Index fell 1. or what traders expect the Federal Reserve’s benchmark to be over the term of the contract. Investors use swaps to exchange fixed and floating interest rates. Fitch said.S. The rating company’s assumption is that ―euro zone sovereign debt concerns will be dealt with in an orderly fashion‖ and that a disorderly restructuring of sovereign debt or the ―forced exit‖ of a nation from the euro will not occur. U. U.m.S. HSBC said. including BNP Paribas (BNP) SA and Societe Generale (GLE) SA.S. The Standard & Poor’s 500 Index slid 1. stocks slumped yesterday after the Fitch report was released. banking industry are stable and take into account lenders’ improved capital and liquidity position. the most since June . Relative Safety Investor demand for the relative safety of Treasuries during the European debt crisis has sent the difference between U. in New York.47 percentage point. Portugal and Ireland to seek bailouts -. government pay to borrow for three months. widened to 38 basis points today. Fitch said. analysts at HSBC Holdings Plc said today. or 0.and shares of French banks. U. Italian bond yields remained at about 7 percent -. falling last week. So-called cross-border outstandings to France for all except Wells Fargo were $188 billion.(MS) -. short-term yields and bank rates surging to levels not seen in more than two years. The gap between the London interbank offered rate and the overnight index swap. widened to 47 basis points today.the threshold that led Greece.S. 30. The Fitch report is a worst-case scenario and is ―oddly out of step‖ with the rating firm’s previous reports. respectively.8 percent at 12:41 p. the highest level since June 2009. including $114 billion to French banks.S. five-year swap spreads climbed to 45 basis points. Risk to Britain and its banks was $225 billion and $51 billion. stock declines continued today.had $50 billion in risk tied to the GIIPS on Sept. is a measure of bank creditworthiness. the difference between what lenders and the U. Stocks Slump U. with the S&P benchmark dropping 1. with the last two.

" This is as close as Draghi could get to stating the obvious. Or maybe they don't. and ensure that the latter become fully credible. giving only net numbers or excluding some derivatives altogether. if the euro is to survive. " What are those other elements? Euro zone wide political institutions that have the ability to set fiscal policy. Fitch said. new head of the European Central Bank.S. Mario Draghi. economy was in a recession. lenders on government. 2) The euro zone: the central bankers' latest view on the crisis When Central Bankers talk. Moody’s Investors Service downgraded the senior debt and deposit ratings of 10 German public-sector banks. Fitch said. The TED spread was as wide as 4. banks that run money-market funds may face additional risk if the funds suffer losses on European debt and the lenders are forced to offer support. those may not be effective if voluntary debt forgiveness becomes ―more prevalent‖ and the insurance provisions of the instruments aren’t triggered.. according to the Bank for International Settlements. Disclosure practices also make it difficult to gauge U. banks’ risk. Firms including Goldman Sachs and JPMorgan don’t provide a full picture of potential losses and gains in the event of a European default. The top five U. That much was clear by a point the ECB chief added a minute later... U. people listen. Italy. tax policies will have to be set at euro zone level. Also yesterday.64 percentage points in October 2008 when credit markets froze and the U. .S.. Forgive me for quoting at length: "What I believe our economic and monetary union needs is a new fiscal compact .S. according to Fitch.7 billion to $518 billion in the first half of 2011. Fitch said in the report. citing its assumption that ―there is now a lower likelihood‖ that the lenders would get external support.S. banks have hedged some of their risk with credit-default swaps. Just as we effectively have a compact that describes the essence of monetary policy – an independent central bank with a single objective of maintaining price stability – so a fiscal compact would enshrine the essence of fiscal rules and the government commitments taken so far. First. Portugal and Spain rose by $80. banks had $22 billion in hedges tied to stressed markets.S.S. not at national level. "Other elements might follow .2010. two of Europe's most important central bankers spoke to the press today and they had some very interesting things to say. bank and corporate debt in Greece. While U. individually and collectively. making his maiden speech before the European Parliament. Guarantees provided by U. In any case. Ireland.

Simply put." or any of Alexander Hamilton's more forceful contributions to the Federalist Papers. (pop.Draghi concluded. as they say. Calif.. Where is it leading? Global financial stability has been shaken and America is facing a growing economic crisis that could make the 1930s look like ―good times. America’s banks are staring into a financial abyss. it's not up there with." He also urged the country's private banks to begin making contingency plans to build up cash reserves . Stockton. had 4. It would also present a clear trajectory for the future evolution of the euro area. These institutions are holding an awful lot of iffy sovereign national debt. Money talks. "Maybe it (the euro zone) won't breakup. King came up with the sound bite of the week: "It is not a liquidity crisis. "A new fiscal compact would be the most important signal from euro area governments for embarking on a path of comprehensive deepening of economic integration. Consider just one example. According to Sir Mervyn King.200 . with hundreds of billions more forecasted. the answer to that question is.. 280. banking system is on the verge of disaster. None of us really know. maybe it will continue in various forms but maybe there will still be questions of default.S. King acknowledged that the bank was making contingency plans for the breakup of the euro zone. and something else walks. But clearly Draghi sees where the solution to the euro zone crisis lies. Describing the situation." Okay. Governor of the Bank of England. nobody knows." He was referring to yesterday's coordinated intervention by central banks around the world to prop up Europe's beleaguered retail banks. it is a solvency crisis. as banks have recorded over $100 billion in losses.‖ The U. in order to form a more perfect union. King was speaking at a press conference to present the latest analysis of the bank's Financial Stability Board.000). "We the People of the United States.showed yesterday they were willing to provide a backstop for the banking system. As of January 2008. What started with subprime mortgage losses in 2007 is now growing into a full-blown financial crisis. but that is probably because the central banks .including the Federal Reserve . The question is whether the currency can survive the short term assault by the bond markets on its individual members sovereign debt. CASE STUDY The intensifying American banking crisis threatens the stability of its economy and the world’s. thus framing expectations.including not paying out massive bonuses to its top executives! Who is listening to all this? As I write markets seem to be doing better .

including stimulus plans. Treasury Secretary Hank Paulson described it as ―challenging and uncertain. and was required to make a sizable down-payment. while staying financially sound. French and British banks have suffered billions of dollars in losses. Highlighting the gravity of the economic situation. towns and smaller communities. mutual funds and insurance companies. One of the world’s largest insurance companies. At a meeting of the G7 finance leaders. U. banks were liable to depositors for payment—the banks held the risk ―on the books. Stockton-like scenarios are playing out. adequate assets.S. According to CBS News. in an effort to prevent total collapse. The crisis threatens to engulf banks and other financial institutions. If customers defaulted on their loans. the 1990s saw banks .5 billion. In many of the nation’s cities. And the news keeps growing worse. American International Group. German Finance Minister Peer Steinbrueck stated that the G7 feared losses from the subprime mortgages could reach as high as $400 billion (nearly as large as the entire economy of Holland. Prices of homes in the city have dropped as much as 70%. The customer needed to have a good job. ranked 16th worldwide). as Swiss. respectively. tax rebates and interest rate freezes. affecting pension funds. Stockton has gone from being one of the hottest real estate markets to the foreclosure capital of America.‖ 100% their responsibility. recently reported losses from the mortgage crisis of up to $5 billion—up from a previous estimate of $2 billion. increasing energy prices. Modern Banking Banks traditionally operated by taking deposits from their customers and lending money to those seeking loans. Banks are busy auctioning off houses at ―fire sale‖ prices.4 billion. They were rescued by life-saving injections of $6. However. The losses are not confined to banks alone.‖ A deadly combination of the credit crunch. This conservative approach to lending enabled banks to make tidy profits for decades. and the threat of rising inflation are rapidly weakening America’s economy. German. It was therefore in a bank’s best interest to carefully screen customers’ ability to repay before providing loans. the collapsing housing market.homes in default or foreclosure. The difference between the interest rate paid on deposits and the higher one charged on loans (the ―spread‖) was their profit. with bad loans totaling a staggering $1. Traditional vs. European banks have also been affected. The stability of the global economy is at stake. Once proud banking titans Merrill Lynch and Citigroup had to look to investments from Asian and Middle Eastern governments (through ―Sovereign-Wealth Funds‖) to shore up their balance sheets.6 billion and $14. The situation is so grave that President George W. This may be a sign of coming reassessments by others as the crisis intensifies. Bush and the Federal Reserve (the Fed) have implemented unprecedented emergency measures.

warning that failure to do so soon could lead to dire economic consequences for future generations. 4. Bernanke called for an urgent reform of Social Security and Medicare. of mortgages into bonds and then sell the bonds to investors. Those who initiated the loans and approved them were no longer attached to the risk. Further. To do this. banks decided they could make even higher profits if they loaned out more money. Glass-Steagall prevented retail banks. even thousands. Customers who did not qualify for loans under the banks’ standard lending procedures (i. mutual funds. banks no longer felt the need to carefully screen loan applicants.e.‖ a process that allows banks to convert hundreds. massive financial services conglomerates were suddenly formed. after years of lobbying by the banks.The subprime mortgage market became a ticking bomb.Additional ―sweetener‖ incentives were also provided. and were rated as safe investments by the rating agencies (i. Through their new fee-based income. no job and no assets (so-called NINJA loans). Since the loans were now ―off the books‖ and insured. Reckless Lending In their quest for higher profits. Seeking higher and higher profits to satisfy shareholders and to secure executive performance-pay bonuses. and Fitch). Banks did not make a profit through the ―spread‖ anymore.change their traditional way of operating. Two developments have played a significant role in the development of modern banking and the current crisis. now owned by other investors. Enter the Fed: Expand Image Thinking ahead: Federal Reserve Chairman Ben Bernanke discusses ―Savings‖ during an Economics Club of Washington luncheon (Oct. the bonds were insured by specialized insurance companies (so-called ―monoline‖ insurers).S. insurance companies and investment banks from owning each other. but instead made a fee for having put together (―originated‖) the loan. ―subprime‖ customers) were now targeted as a lucrative source of income. the banks felt comfortable about ―originating‖ even more loans.. The first was deregulation of the U. Carefully crafted during the Great Depression to control speculation in the stock market. financial services industry with the 1999 repeal of the Glass-Steagall Act. such as no down payment required and interest-only payments. Mr. insurance companies and other banks. and marketed aggressively to. banks made much higher profits than ever before. ready to explode at any time. With the repeal of GlassSteagall. Loans were provided to people with no income. Moody’s. and were paid handsomely for their efforts. such as pension funds. Standard & Poor’s.e. 2006). they used other people’s money through ―securitization.. combining these three . as they once did.

Confronted with higher monthly payments on mortgages that are greater than the value of their homes. ―It’s sort of a little poetic justice. ―Predatory lending‖ was compounded by ―predatory borrowing‖! Banks sold risky bonds as safe investments to unsuspecting investors. Low interest rates encouraged banks to target subprime customers with variable rate mortgages. Sometimes banks did not even bother to check the information provided. homeowners are abandoning their mortgages. falling house prices. Also around this time. customers took the bait believing they could refinance their homes at an affordable rate when the time for the reset arrived. The second was the low interest rate policy pursued by the Federal Reserve. Because of rising house prices. Industry behemoths such as Citigroup and JP Morgan quickly came into being. .types of financial institutions. mortgage brokers misrepresented terms and conditions to eager customers who provided them with fraudulent information. to be increased two or three years later. in that the people that brewed this toxic Kool-Aid found themselves drinking a lot of it in the end‖ (Reuters). Lenders call it ―jingle mail. housing prices fell moderately—tipping the scales. This meant that retail banks seeking higher and higher profits could now dive headlong into high-risk speculative ventures through ownership of (or being owned by) investment banks. paid by the banks. A Culture of Greed In many cases. rated risky bonds (those with subprime components) as safe—even giving them the highest rating. Crisis Strikes The crisis started in the summer of 2007.‖ In their greed. This created a sense of ―easy money‖—―something for nothing. which led to disastrous consequences during the Stock Market Crash of 1929. Many feel no moral obligation to fulfill what they promised to repay.‖ At a meeting in Toronto. many customers defaulted on their loans. Canada.‖ as so many homeowners are just turning in their keys. Due to the surplus of homes on the market. With substantial increases in real estate prices occurring every year. They feel that while this hurts their credit rating. billionaire investor Warren Buffet commented. builders went on a building spree around the nation. the first batch of interest rate resets came due. and an inability to refinance their mortgages. Faced with exploding monthly payments. many were ―scamming the system. believing it is better to walk away from their homes. Banks offered initially low interest rates (―teaser‖ rates). Rating agencies. in the short-term it hurts less than the downward spiral toward bankruptcy.

meaning Vallejo must spend an additional $4 million in buyout costs. Crisis Spreads As the crisis intensifies. upon hearing the city was in dire financial straits. Being the first city in California to declare Chapter 9 bankruptcy means there is no template or previous case to predict what this would do to the city. Vallejo’s current liability for already earned retiree benefits of retired and active city employees is $135 million. forcing many firefighters to work overtime. a year. This is totally a question of survival of the city. The city.This change in attitude is in stark contrast to years ago when borrowers felt a moral duty to pay off their loans. Calif. However. Current labor pacts are in force until 2010.000. reducing firefighter and police officer salaries by 15%. many lack the character and fiscal responsibility of previous generations.000. Years of overspending have left the city. With the morals and values of the nation disintegrating. Thus. Banks are finding it difficult to sell additional bonds as investors have backed out of the market.. the fire department has suffered from staff shortages. And everyone is on the hook. Vallejo may soon run out of funds. The emergency plan includes cutting city salaries 5% by June 30. mortgage defaults are multiplying. meaning the unions are not legally required to negotiate. with another $6 million being accrued per year. ―It’s not a question of whether it is right or wrong for employees to give up anything. 17% of general funds positions would be cut. requiring layoffs. Similar cuts have been proposed before to ebb Vallejo’s overspending but have always been voted against by the unions. the spending cuts must be approved by unions of these groups. Though there are many causes of the city’s financial problems. . population 126. leery of poor investments. ―teetering on the edge of bankruptcy‖ (Associated Press). with some making $100.000. as City Councilwoman Stephanie Gomes called it. The City Council has drawn up an emergency plan that would cut $20 million from the current budget. An American City at the Edge of Bankruptcy Vallejo. and electrical worker funding by 8%. During the past years. or even $200. Further. the banks’ fee income has dried up—leaving them with massive deficiencies in capital. 2008. is deep in a financial crisis. Contracts for public safety jobs such as police officers and firefighters make up 80% of the city’s general fund budget. faces an immediate $10 million general fund cash shortage and almost a $13.8 million deficit for the next fiscal year. Investors have been left holding bonds that may never be repaid. ―Monoline‖ insurance companies have suddenly become liable for multiple billions of dollars of debt. City Manager Joseph Tanner said in a report to the City Council that without a compromise with the unions. more than 14 fire employees retired. Overall.‖ said Councilwoman Joanne Shivley (Times-Herald). his estimate for insolvency was late April 2008. with most cuts coming from city-funded jobs. the fire department proves to be a prime example of the budgeting troubles.

During the G7 meeting mentioned earlier. And municipal bonds (used to fund cities. The change may have occurred already. Evidence of this is clear. The credit crunch has pushed beyond retail banking. looks poised to lose its mantle as the world’s dominant financial market because of a rapid rise in the depth and maturity of markets in Europe. As more and more loans arrive at interest rate resets. for security and investment. Deutsche Bank had to repossess some Manhattan buildings because a well-known developer was unable to refinance $7 billion of debt. colleges and hospitals). fearful the loans will not be repaid (the ―credit crunch‖). economy. The world is looking for an alternate. banks have sharply reduced lending to each other and the public. Toshihiko Fukui. accepting it in the financial capital of the world is a sign of a weakening U. 15 issue. as liquidity dries up and less money is available to finance commercial loans. a study suggests.S. While accepting foreign currency has been the norm along the Canadian and Mexican border. as the banking crisis further deteriorates: ―If everyone does the same thing it won’t be any more effective.S. more defaults will occur. Recently. Shockwaves from the crisis are also being felt in other sectors of the economy. will countries that have so often supported America financially stop doing so.‖ In the near future. made a statement that could have serious ramifications.S. governor of the Bank of Japan. Time will tell if the ongoing financial irresponsibility of America will cause the world ―to do what is best for its own particular situation. can no longer readily find buyers.S. banks received massive infusions of capital from Asian and Middle Eastern sources that are purchasing larger stakes in America’s largest bank institutions.As credit problems mount.S. ―The U. U. A financial tsunami is rapidly approaching America’s shores! Kings Become Beggars Increasingly. Each country needs to do what is best for its own particular situation. a group of bankers were unable to back $14 billion of debt to finance an entertainment company.‖ If this happens. not least because the U. Other major deals in the tens of billions are now in jeopardy. Recently. which were once considered safe investments. according to research by McKinsey Global Institute.S. as people and nations are learning there are alternatives to the U. There are indications that this has already begun. markets are beset by credit woes. it is now affecting major business deals and even commercial real estate. This distrust of American capital is just the tip of the iceberg. causing the crisis to spiral out of control? Recent news spotlighted a trend in New York that was unimaginable just a few years ago: Some shops are now accepting Euros for payment of merchandise. theFinancial Times noted. deepening the crisis.‖ The American banking crisis shows the vulnerability of the global economic system. as the world’s financial leader. America’s banks have been forced to look to other nations for capital. In its Jan. it will hasten the demise of the U. and America will be replaced as the financial engine of the world by a .

meaning Vallejo must spend an additional $4 million in buyout costs. with some making $100. the fire department has suffered from staff shortages.superpower soon to arise in Europe. During the past years.8 million deficit for the next fiscal year. requiring layoffs. the spending cuts must be approved by unions of these groups. ―I’m confident we’re going to be able to work this out without having to file bankruptcy. 17% of general funds positions would be cut. or even $200. Davis told local television station NBC11. However.‖ The City Council has drawn up an emergency plan that would cut $20 million from the current budget. forcing many firefighters to work overtime. as City Councilwoman Stephanie Gomes called it. Further. It’s not an alternative we want the public to believe we’re moving toward with any intention. a year. Contracts for public safety jobs such as police officers and firefighters make up 80% of the city’s general fund budget. small and great—will be based on outgoing concern for others. this future worldwide financial system—which will benefit every nation. Vallejo may soon run out of funds. Though there are many causes of the city’s financial problems. reducing firefighter and police officer salaries by 15%. Current labor pacts are in force until 2010. The city.The good news is that a new—and far superior!—global economy will one day be established. with another $6 million being accrued per year. all will practice fiscal responsibility during the soon-coming age the Bible refers to as ―the world to come‖ An American City at the Edge of Bankruptcy Vallejo. 2008. . faces an immediate $10 million general fund cash shortage and almost a $13. with most cuts coming from city-funded jobs. Vallejo’s current liability for already earned retiree benefits of retired and active city employees is $135 million. ―teetering on the edge of bankruptcy‖ (Associated Press).000. From individuals to businesses to government bodies. Mayor Osby Davis downplayed the option of bankruptcy. population 126.000.000. Calif. refusing to call it the only possibility and promising to look to other solutions. upon hearing the city was in dire financial straits.‖ Mr. more than 14 fire employees retired. is deep in a financial crisis. ―I like to look on the positive side. The emergency plan includes cutting city salaries 5% by June 30.. Years of overspending have left the city. the fire department proves to be a prime example of the budgeting troubles. meaning the unions are not legally required to negotiate. Overall. and electrical worker funding by 8%. Instead of being rooted in greed and corruption. Similar cuts have been proposed before to ebb Vallejo’s overspending but have always been voted against by the unions.

‖ said Councilwoman Joanne Shivley (Times-Herald).‖ She continued. Councilwoman Shivley told NBC11 that the cuts being ―purposed in order to remain solvent will decimate city services. ―Anything other than totally new contracts is a BandAid.―It’s not a question of whether it is right or wrong for employees to give up anything. The city now waits for the decision of four main unions or it will quickly run out of options. City Manager Joseph Tanner said in a report to the City Council that without a compromise with the unions. Being the first city in California to declare Chapter 9 bankruptcy means there is no template or previous case to predict what this would do to the city. his estimate for insolvency was late April 2008.‖ . This is totally a question of survival of the city.