Indian Banks Reduce Exposure on US Banks

More signs of anxiety in the global financial markets: Indian banks reportedly reduced deposits with US Banks

From Financial Chronicle (mydigitalfc.com)

India banks’ deposits with US banks dipped in June, reflecting heightened risk aversion. This showed up in a fall in custodial liabilities of American banks to counterparties in India, which shrank by over $2 billion in June.

According to the US treasury data released, custodial liabilities of American banks payable in US dollars in June was $13.059 billion. A year ago, the holdings were $15.288 billion.

The custodial liabilities included foreign currency deposits by Indian banks in American banks. Indian banks hold dollar deposits with US counterparts for settlement of international liabilities.

Andhra Bank currency trader Vikas Babu said, “There is some risk aversion on US banks. So, banks have shifted to short-term US treasuries for less than one year for liquidity purposes.”

The shift to US treasuries, however, was not necessarily driven by interest earnings. Short-term holdings in US treasuries earned barely 0.5 per cent. Correspondent account balances, that are technically current accounts, earned zero interest. But the shift was partly on account of the fact that foreign institution balances in US banks are not covered by the US federal deposit insurance company (FDIC). FDIC provides insurance cover for bank deposits only to US entities and residents.

The shift to US treasuries was also apparent from a steep $9.5 billion rise in holdings to $50.8 billion by Indian institutions, including the RBI. The increase in holdings was despite compression in India’s external reserves by $26.5 billion in June from the corresponding period of the previous year.

Aside from possible concerns over the health of the US banking sector, the shift to short term securities could also mean that Indian banks may be expecting a spike in US interest rates, perhaps in anticipation of another round of asset purchases by the US Federal Reserve.

Also Indian banks may be under pressure from the recent economic slowdown. Indian banks have been required to raise 1.75 trillion capital by 2018 in order to comply with Basel III capital adequacy standards (yahoo)