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India Insider: U.S Credit Crunch vs. Indian Banking Paralysis

by with No Comment Featured HighlightsFinancial InstitutionsIndia

India Insider: U.S Credit Crunch vs. Indian Banking Paralysis

When the U.S suffered a severe credit crunch in the early 1990s, the triggers were clear: the collapse of the leveraged buyout (LBO) boom, commercial real estate price corrections, and the failure of Savings and Loans (S&L) Associations, created the need for a $160 billion taxpayer bailout. Regulators, determined to act tough, declared many banks undercapitalized. The result was a nationwide squeeze from 1991 to 1993, where capital shortages – not liquidity, froze credit markets.

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Reserve Bank of India Borrowing Rates 1935 to 2025

Fed Chairman Alan Greenspan slashed the Federal Funds rate to 3%, but banks couldn’t lend without capital. The unique twist was that, even as lending slowed, competition among borrowers pushed prime lending rates to 6%. This gave banks a fat 3–4% spread. Greenspan let this persist for nearly three years, enabling banks to earn profits equal to more than 10% of assets. With capital requirements at 8%, the windfall repaired balance sheets. By 1994, the U.S had exited the crisis and returned to strong growth.

India’s trajectory was very different. For decades, the country ran structurally high interest rates, which in theory should have allowed banks to recapitalize through spreads, just like the U.S. However, the reality was distorted by governance failures. Public sector banks (PSBs) , which dominate the system did not use their spreads to strengthen capital. Instead, politically connected lending to oligarchs and large industrial houses left the banks saddled with non-performing assets (NPAs).

I witnessed the aftermath up close in 2019 while working at Edelweiss Brokerage. Shadow banks were stressed, some private banks were crumbling, and PSBs were finally forced to acknowledge their bad loans. The selloff in the banking stocks were brutal that year, Catholic Syrian Bank’s IPO, one of the prominent South Indian banks went undersubscribed. To counter the slowdown, the government slashed corporate taxes from 30% to 22% to stimulate capital expenditure.

Unlike the U.S, India’s stress was on the asset side. Corporates were dragged into Insolvency and Bankruptcy Code (IBC) proceedings, where assets were monetized through painful restructurings. Piramal Finance bought DHFL at 30 cents on the dollar, and ArcelorMittal acquired Essar Steel at 90 cents. This was the hard clean up the system had avoided for years.

The NDA (National Democratic Alliance) government made the right call in restructuring the banking sector. Weak public sector banks were merged with stronger ones. Yes, it was costly. Households bore the burden via higher taxes, hidden charges, and high borrowing rates. But at least the problem was confronted.

The contrast is striking. The U.S endured a sharp three-year crunch, recapitalized its banks through spreads and market discipline, and bounced back quickly. India endured nearly a decade of paralysis, requiring taxpayer recapitalizations, corporate asset fire-sales, and systemic restructuring. The eventual stability allowed private sector banks to quietly capture market share from their weaker state-owned peers.

The lesson is simple: interest rate spreads can heal banks only if governance is strong. Without accountability, as India’s PSB saga shows, high rates merely tax households and businesses without fixing the system.

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Wednesday Federal Reserve Prediction and Central Bank Unity

by with No Comment AMT MarketsBehavioral SentimentFeatured Highlights

Wednesday Federal Reserve Prediction and Central Bank Unity

Later today the Federal Reserve will release its Federal Funds Rate and FOMC Statement. Jerome Powell will also field questions. My prediction regarding the Fed today is that the Federal Reserve will hold (pause). It will say inflation remains problematic and stubborn, and the Fed continues to monitor economic conditions it finds complex. The high costs of energy (Crude Oil) will be presented as part of the problem.

The Fed will say they will strongly consider an interest rate hike next month, thus bracing the markets for what financial institutions have already traded into the system. This because trading houses have listened to the Fed already and believed that a pause would be seen for a few months, but cracks in sentiment quickly appeared in mid-July because of the Fed’s cloudy rhetoric as it spoke out of both sides of its mouth. Ratings downgrades and worries began, the USD sprung to significant values, higher U.S Treasury yields have flourished and increased fears for the long-term investment world. All the noise has certainly helped doomsayers.

The problem for the Fed and they should be aware of this, is that their interest rate hike threats have little direct affect on the price of Crude Oil. The rise in oil prices is directly due to Saudi Arabia cutting back on production. The U.S has much less influence on Saudi Arabia then it would like to believe it does. The Saudi Arabia government is interested in sustaining a profitable price for the commodity. At 90.00 USD per barrel, Saudi Arabia is making significant profit, but under 80.00 USD per barrel they grow concerned. After all someone has to pay for the ‘Line’ project of Neom.

Getting back on point, if the Fed is so intent on raising rates they should do so now. Not next month. But as the Federal Reserve and other major central banks often demonstrate, they are reactive – not proactive. Meaning if the Fed has no direct influence on the high price of energy that they should go ahead now and influence the marketplace instead of rattling a sword which only creates nervous global behavioral sentiment.

And yes, a hike of the Federal Funds Rate would be problematic for credit and cash reserves of consumers and businesses, which face more expensive obligations regarding loans and bonds. However, if you are merely going to threaten to do something, why not do it now and say without a doubt – like the ECB did last week – this will be our last hike for the foreseeable future. But the Fed is likely to prove they have limited desire to act swiftly and try to remain painfully polite, very much like when they refused to acknowledge inflation was a real threat when it started in earnest over two years ago.

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GBP/USD One Month Chart as of 20th Sept. 2023

Lastly, the Bank of England will make their pronouncements tomorrow, and some are suggesting the BoE because of today’s ‘weaker’ inflation results will not raise the Official Bank Rate. However, I disagree, inflation is still high in the U.K and the Bank of England may also feel it has to protect GBP value.

Last week’s interest rate hike from the European Central Bank, which I didn’t believe would happen and was wrong about, suggests the BoE and ECB may have privy knowledge regarding the Fed’s inner thinking. It is quite possible the European’s raised rates last week not only to fight inflation, but because they had been warned by the Federal Reserve that the U.S central bank wants to ‘sound’ aggressive. There is reason to believe if the Fed doesn’t raise tonight, but groans on about a complex economy and stubborn inflation and the need to consider raising rates next month, the BoE will feel very compelled to still hike the Official Bank Rate by a quarter of a point tomorrow.

Nothing quite like coordinated banter between the major central banks which have already demonstrated a rather stark level of mistakes over the past two years. Why not add onto the shenanigans today and tomorrow? Good luck to us all.

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Absurd Friday Forex Results? Suspicions as the Week Begins

by with No Comment AMT MarketsAssetsFeatured Highlights

Absurd Friday Forex Results? Suspicions as the Week Begins

This coming week may be an opportunity where speculators can test their conspiracy thinking, perceptions of technical and fundamentals in unison. Experienced traders who typically have a high degree of skepticism about markets (particularly when results don’t go in the direction they expected) may question late last week’s results.

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EUR/USD 5 Day Chart as of 3rd of Sept. 2023

Without trumpets or too much hyperbole, was Friday before going into the weekend a ‘false flag’, this as the USD gained strength against many other major currencies. A lack of volume because of the Labor Day holiday coming in the U.S and Canada tomorrow may have affected the Forex landscape. While trading is largely done by computer programs in financial institutions, day traders should understand last Friday worked as a get away day to enjoy a long holiday weekend in North America.

Meaning financial executives largely escaped their offices because they have seniority and the ability to disappear while their ‘underlings mind the store’. Essentially senior management often tells the staff that has to stay behind, “monitor and not touch the system”. This could have left the door open for what appears to be a strange reaction in Forex upon what was in fact weaker data on Friday from the U.S via the Average Hourly Earnings which came in slightly below expectations, and less than stellar U.S GDP results on Wednesday the 30th of August.

Yes, also this past Friday the Non-Farm Employment Change numbers were fractionally better this month than anticipated, but the prior month’s results were actually revised downward. And yet the USD remained strong. Is this because senior analysts, chief traders and risk management officers were absent on Friday?

Tomorrow the same folks will remain largely away from the markets too, meaning results should also be viewed with suspicion. Which sets the table for an intriguing Tuesday and Wednesday for all the major and minor currency pairs teamed against the USD. Gold and equity markets will need to be monitored closely too.

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Gold Cash Price Five Day Chart as of 3rd Sept. 2023

Some potential clues are that the price of gold stumbled slightly on Friday as the weekend approached, but this happened as the EUR/USD sank to a low for the week, and the GBP/USD came under renewed pressure. But again this happened in rather questionable circumstances. Important support levels technically may get tested tomorrow, but trading volumes should be examined. Gold in many respects held onto gains made earlier in the week.

Yes, there are reasons to be nervous in financial institutions, due to higher short-term U.S Treasury yields, concerns about the China economy, mortgage rate worries in the U.S and elsewhere, fears about credit availability for small U.S businesses. However, these troubles have not caused a massive meltdown in the most primal of trading venues yet – major stock indices.

September is a notoriously volatile month for equities and speculators who use CFDs to participate in the stock markets globally need to be careful. Correct, some well known ‘traders’ are talking about a coming selloff in the markets, but so far we have not seen a major decline in the NASDAQ, S&P 500 or Dow Jones 30 indices. Day traders should not and cannot underestimate the potential for volatility to occur suddenly. Successful speculative bets via limited funds often means having to practice patience and risk management.

Thus, as the week begins early this Monday, day traders should be careful. Please note that a lack of big trading volumes because of the absence of U.S and Canadian financial institutions will make tomorrow’s results questionable. Opening the door for the potential of reversals on Tuesday, which might be abrupt as a ‘re-balancing’ of sorts takes place as folks returning to their offices seek equilibrium perhaps with their adjusted outlooks.

Simply put the U.S Federal Reserve the past two weeks has seen the same lackluster U.S data as all global traders, and the U.S central bank is in no position to raise interest rates over the mid-term. It would be useful if the Fed voiced their insights regarding the weaker than expected U.S Gross Domestic Product results last week, and the lower than expected Average Hourly Earnings report seen before the weekend. However, do not count on the Federal Reserve to do the right thing.