'Can get into death spiral': Aswath Damodaran cites SVB, Credit Suisse to highlight 'trust deficit' in banking

Valuation guru Aswath Damodaran told Business Today recently that public's "trust deficit" against banks is high amid the collapse of hitherto much-vaunted lenders like Silicon Valley Bank, Credit Suisse among others.

Trust deficit, fueled by the fallout from the 2008 financial crisis, has emerged as a major factor contributing to the current crisis, said Damodaran, who teaches finance at the Stern School of Business at New York University. 

In an interview with India Today Group's Global Business Editor Udayan Mukherjee, Damodaran described the situation as unpredictable, noting that the crisis would end, but the exact timing was uncertain. "Banks are built on trust...it's very difficult to figure out where the trust comes back," he said.

In terms of potential damage, Damodaran acknowledged the risk of a death spiral, where perception of trouble could create actual trouble for banks. He also pointed out that the current banking crisis has exposed weaknesses in the US economy, which has been resilient despite talks of impending recession in recent years.

The crisis has also revealed the precarious nature of America's smaller regional banks, which are more vulnerable to market fluctuations and might not be able to stand on their own. Damodaran predicted that the crisis would lead to a consolidation in the banking industry, with only a few big players dominating the market.

Damodaran recalled the time during the Great Financial Crisis in 2008 when people thought Morgan Stanley will face the same fate as Lehman Brothers.

"I remember November of 2008 when there was a very real chance that nothing would be left standing when a rumour started that Morgan Stanley would not be around in a couple of weeks. And the rumour itself created enough trouble that Morgan Stanley actually was in trouble. So the perception that you're in trouble can actually create trouble," he said.

Damodaran also weighed on reasons for collapse of Silicon Valley Bank, which was a startup-focused lender.

"If nobody had withdrawn money from Silicon Valley Bank, we wouldn't be talking about SVB right now, as a bank that shut down. So I think that the fact that there's $620 billion in potential loss is waiting on the bank system is neither here nor there. I mean, what made Silicon Valley Bank so unusual was that 60% of its assets were in Treasury bonds and mortgage backed securities, it was more like hedge fund than bank," Damodaran said.

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