Financial markets seen more resilient after Lehman crisis

Risk of a blow-up has somewhat eased after the European Central Bank's response to the sovereign crisis

One of the most dramatic days for the world’s financial markets would have to be September 15, 2008, the day Lehman Brothers filed for bankruptcy. The demise of two of Wall Street’s leading investment banks, Lehman Brothers and Merrill Lynch, changed the landscape of financial markets.

As the world’s financial system contracted, capital flows came to a standstill and asset prices across the globe collapsed. The Sensex fell by 43 per cent to hit an all-time low of 8,160 on March 9, 2009. The world’s financial markets froze for several months, till the G-20 nations came up with a coordinated plan to combat the crisis. Central banks of the member-states agreed to release liberal amounts of liquidity into the system. The easy liquidity helped push up asset prices across the globe, but also increased fiscal deficits. The sharp increase in the expenditure by governments helped emerging economies, like India and China, rebound much faster, says Dhananjay Sinha of Emkay Global.

The Sensex is up 30 per cent from March 2009 lows.

Nomura says there is evidence to suggest global markets are becoming more resilient to Euro zone shocks. The risk of a blow-up has somewhat eased given ECB’s response, it said.

A major fallout of the Lehman crisis is the third Basel Accord, which seeks to strengthen capital requirement norms. The Reserve Bank of India (RBI) has put in place stringent norms under the Basel-III norms. Motilal Oswal Securities says: “RBI’s decision to adopt Basel-III guidelines with more conservative requirements indicates its willingness to impose higher cost in the near term to achieve long-term financial stability of the banking system.”

Though prudential norms have been tightened for banks, and Indian banks are well capitalised, global investors are more willing to bet on asset-backed securities than bank bonds. Pratip Chaudhuri, chairman of State Bank of India, explains, “After the global financial crisis, international investors in bonds want to know about underlying assets. There is a shift in focus towards bonds issued by manufacturing companies while financial sector entities’ offerings carry a discount. Industrial companies are able to raise money at cheaper rates than banks. In the case of industry, there could be plant, unit and other assets. For banks, they only have financial assets on books.”

Come January 2013, banks will come under much tougher norms.

Banks’ hunger for equity capital is going to be high. “Indian banks are ahead of requirements. But it (equity raising) is going to be a very tough task, as we are funding economic growth through predominantly bank money. Policy makers can take cricial decisions to rely on other methods of rasing capital,” says Ashvin Parekh, partner (financial services), Ernst & Young.

Going by RBI’s estimates, banks will need additional capital of Rs 5,00,000 crore.

Indian markets lack depth to meet the challenge, said a senior executive with Indian Bank’s Association.

Much of the money will have to come from the government, owner of public sector banks, with control of 70 per cent of banking assets.