If bank shares are the proverbial canary in the global economic coal mine, then we should all be very worried. In Japan, banks have dropped by more than 10 per cent since the Bank of Japan (BoJ) decided to implement a negative interest rate policy. In Europe, banks' shares are down by nearly 18 per cent, compared to a decline of seven per cent for the Euro Stoxx index in the year to date. And in the US, bank shares are down 12 per cent compared to a six per cent drop for the S&P500. Emerging market-focused banks like Standard Chartered have been totally decimated, falling by 25 per cent in the last month alone.
There is currently a rush to the bottom, with each analyst trying to outdo the other in scaring investors about asset quality. The RBI must break this chain, and come out with a clear and transparent stress test for the major Indian banks. Most will not need capital. And once investors are convinced, the worst-case scenarios will come off the table and the pressure ease on their share price. The RBI's attempts to clean up the system are to be lauded, but it must help investors by laying out the true extent of the asset deterioration. Only then can the healing begin.
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