CDS spread on bank up by 130 bps to 900 bps The need for a financial institution like ICICI Bank to raise high-cost funds has put the spotlight on whether the asset-liability committee of the Reserve Bank of India had informed the bank about an impending mismatch.
Speaking to the media on Friday, Joint MD and CFO of ICICI Bank Chanda Kochhar said "Call money rates (inter-bank borrowing rates) are close to 24%. I think everybody (banks) is borrowing at such rate." According to an analysis done by Ajay Shah and Ila Patnaik, monetary economist at NIPFP, on the competitive asset-liability match of Indian banks based on 2004 data, the country's largest private sector lender had much better standards than most public sector banks. Since the current financial pressure only relates to ICICI Bank's operation in the US, whose balance sheet comes under the consolidated balance sheet of the ICICI India operations, the central bank cannot take the plea that it did not have jurisdiction over foreign entities of the Indian banks. The RBI's asset-liability committee periodically assesses the riskiness of financial institutions based on various parameters. The committee especially monitors 24 systemically important financial institutions of the country including SBI and ICICI. Incidentally, the cost of default protection on ICICI Bank, as also of many other blue chip companies, have risen sharply in the last few weeks. The spread on credit default swaps (CDS) on ICICI Bank rose by as much as almost 130 basis points to 900 bps on Friday, according to Bloomberg data. The Friday data for other companies was not immediately available. This would mean adding the Libor rate of 4.5% and a cover for forward swap and hedging costs of another 3%, the effective borrowing cost for ICICI and other banks would be in the range of 18-20%. At 900 basis points, ICICI swaps are equivalent to $900,000 a year to protect a $10 million investment in the bank's loans. CDS is a product designed to transfer the credit exposure of fixed income products between parties. The buyer of the swap gets credit protection, whereas the seller guarantees the credit worthiness. The rising increasing spreads indicates the increase in the perceived riskiness. "The way CDS have moved are reflecting on the stock price. As the riskiness increase, stock prices tank," says Axis Bank economist Saugata Bhattacharya. ICICI has slumped 47% from the beginning of September as the global credit crisis let to the seizure of credit markets overseas. The bank has a capital-adequacy ratio of 13.4% as on June 30, against the regulatory stipulation of 9% http://www.financialexpress.com/news/was-icici-informed-of-any-asset-liability-mismatch/371789/ He who puts up with insult invites injury --~--~---------~--~----~------------~-------~--~----~ You received this message because you are subscribed to the Google Groups "Kences1" group. To post to this group, send email to [email protected] To unsubscribe from this group, send email to [EMAIL PROTECTED] For more options, visit this group at http://groups.google.com/group/kences1?hl=en -~----------~----~----~----~------~----~------~--~---
