From the very outset,the American Banking system has displayed its vulnerabilities to the minor setbacks in the financial ecosystem of the US.
The American Banking system grants instant credit but with high risk weightage where-as the Indian banking system grants credit after assessing and evaluating the risk.Consequently the likelihood of the American debtors to default on their scheduled payment rise profusely but in the latter’s case the bank deals with a very small deal of risk in it.
In America for seeking and procuring funds the individual must justify the reason and adequately elucidate his business model to seek credit.Such phenomena has resulted in a large number of subprime borrowers who have substandard credit score but are still given fund by the banks with a hope of financial optimism.If the business model exhibits potential and calculations prove high likelihood of efficacy in the business, loan is granted.But in India for seeking credit of a certain amount,the individual must collateralize atleast 35-40% of the sought amount to actually get the disbursal of their loan approved.
The uncertainty of the market’s situation eventually compels the investors of the American banks to quickly withdraw their money from the institution that propels those banks to the abyss of imploding where they get adversely affected by the liquidity-jam and ergo implode.Such unforeseen implosion disrupts the federal economic system precipitating an unintended cascading effect in the market place and subsequently disturbs all the economies in terms of a resultant decline in the dollar price.
Since 2008,unexpected events in the global financial landscape have happened in rapid succession.Be it the implosion of Silicon Valley Bank,be it the abrupt collapse of Signature Bank and the Great Recession of 2008-09 the subprime mortgage crisis, the liquidation of Leyhman Brothers.All these financial institutions once had a great standing in the American financial landscape but the reluctant administrative and regulatory oversight were an upshot of the disintegration of the aforesaid big players.The main problem with all these banks were they laid enough stress on one industry and granted credit recklessly expecting substantial returns .The Silicon Valley Bank(SVB) that was an undisputed messiah for the tech startups imploded due to mis-administration and an unforeseen downturn in the tech-Market.
The same goes for Signature bank and Leyhman Brothers as they also focused on the tier-markets considering to grant loans for matters pertaining to housing finance and multifamily loans.Consequently a downturn in the housing finance disrupted their flow and propelled the institution to the brink of financial collapse and they ergo liquidated.The American banking system has been very prone to perilous setbacks and does not have an unblemished record of strikingly rebounding from the financial bumps.Yet the federal regulatory must consider bolstering the banking reforms that can augur well for the American landscape’s pecuniary stability.
Authored by: Rishav Roy (Student Class 12 La Martiniere For Boys, Calcutta).
Disclaimer: The above is a contributor post, the views expressed are those of the contributor and do not represent the stand and views of Outlook Editorial.