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Showing posts with label Credit Suisse. Show all posts
Showing posts with label Credit Suisse. Show all posts

Monday, April 10, 2023

Any contagion from US banking crisis?

 


THE collapse of four banks in the United States and Europe has sent fears of systemic risks throughout the global banking system.

Currently, the risk of contagion in Malaysia is low, given the limited direct and indirect exposure of the domestic banking system as well as the swift action taken by United States and Swiss regulators to contain their respective banking crises.

Banks in Malaysia are also generally well-capitalised with healthy liquidity positions, underpinned by a stable and diversified funding base.

Moreover, Bank Negara keeps a close watch on all banks operating locally as compared to the two-tier system in the United States, said RHB Banking Group regional sector head, group wholesale banking David Chong Voon Chee.

The United States has a dual banking system, with national banks regulated on the federal level and state banks regulated by each state.

Still, we should monitor for second and third order effects from these events, where possible cause-and-effects could lead to market volatility, tighter access to credit and ultimately, slower global growth.

In the United States, Californiabased Silicon Valley Bank (SVB) and New York’s Signature Bank, collapsed due to heavy losses on their bond portfolios and a huge run on deposits.

San Diego-based Silvergate Bank, which catered largely to cryptocurrency companies, had voluntarily wound down its operations.

As investors began ditching out anything related to banking risks, Switzerland’s scandal-ridden Credit Suisse also collapsed as its largest shareholder, Saudi National Bank, stopped investing in it.

As a result of the banking crisis in March, 2023, the jump in risk indicators – credit default swaps of major US and European banking names as well as US sovereign credit default swaps – has become worrying.

However, their levels are still far from the highs of the global financial crisis of 2008.

A credit default swap is a financial derivative that allows investors to offset their credit risks with that of another investor.

But volatility outside of rates – in other asset classes like foreign exchange, equities and commodities – remain relatively modest by historical standards, implying that the crisis is not systemic, said United Overseas Bank in a report.

In the case of Malaysian banks, beyond the minimum level of 8% for total capital ratio (TCR), excess capital stands at about Rm196bil, as of January.

Meanwhile, TCR (the ratio of total capital to total risk-weighted assets) at 18.9% in January is way above the prescribed level of 8%.

This means that banks have substantial buffer in their capital levels where they are able to absorb a significant amount of loans impairment and market volatility, said Bank Muamalat chief economist and social finance, Mohamed Afzanisam Abdul Rashid.

Despite external uncertainties, this indicates that borrowing and lending activities can be conducted seamlessly, while households and businesses are able to access credit from the banking sector without hassle.

Nevertheless, every financing application will be subjected to their eligible criteria including repayment history and the level of indebtedness.

Malaysian banks also usually have a relatively smaller portion of assets in investments while interest rate increase is less drastic, and hence, the mark-to-market losses would be comparatively smaller, said Fortress Capital Asset Management Sdn Bhd CEO Thomas Yong.

If a security was bought at a certain price and the market price dropped later, it would result in an unrealised loss, marking the security down to the new market price would lead to mark-to-market losses.

Malaysian banks also have a large portion of household depositors, while business depositors are diversified across different industries.

Hence, the need for a large amount of liquidity to fund withdrawals is less urgent.

While there will be jitters, banks in Malaysia are well-regulated besides having a diversified depositor base, they also have retailers who are more loyal, said Etiqa Insurance and Takaful chief strategy officer Chris Eng.

The funding base of the Malaysian banking system remained strong, with an aggregate liquidity coverage ratio (LCR) and net stable funding ratio of 154% and 118.2% respectively, at the end of 2022.

The LCR seeks to ensure that banks hold sufficient high-quality assets, while the net stable funding ratio calculates the proportion of available over required stable funding.

More than 80% of banks’ high quality liquid assets are in the form of placements with Bank Negara and government bonds, which banks can access and pledge in the interbank market or with Bank Negara for additional liquidity, according to Maybank Investment Bank in a report.

Foreign currency external debt-at-risk was manageable, at Rm80.4bil or 20.3% of total banking system external debt.

Loans under repayment assistance programmes declined to 4.2% of total banking system loans at the end of 2022, from 5.7% at the end of June, 2022.

Loan loss coverage ratio (which indicates how protected a bank is against future losses), including regulatory reserves, remained high at 118.2% at the end of 2022.

Since the Asian Financial Crisis in 1997, Malaysia’s banking industry has gone through a significant consolidation which brought down the number of banks from more than 60 to about 10 banks by early 2020.

Non-performing loans had led to the creation of Danaharta Nasional to address non-performing accounts while banks concentrated on running their businesses.

Risk management oversight was implemented at a robust pace and Malaysian banks were required to run multiple scenarios for the stress testing of their balance sheets.

This resulted in well-capitalised and highly liquid banks as well as sound credit underwriting standards.

Following the recent banking crisis, banks especially those in the United States and Europe, now need to defend and fight for their credit worthiness.

While fears of contagion are being allayed for now, caution and constant monitoring will prevail. 

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Saturday, March 18, 2023

SVB meltdown exposes risks of fragile US bank system, highlights need to strictly maintain the bottom line of low risks

It is crucial to improve the financial regulatory system and strictly maintain the bottom line of low risks, China’s former finance minister said at a forum on Saturday in commenting on the recent collapse of the US Silicon Valley Bank (SVB) that sent shockwaves across the US banking system.

The SVB bankruptcy suggests that financial markets have been hit by monetary policy changes, Lou Jiwei, director general of the Global Asset Management Forum and China’s former finance minister, said at the ongoing annual session of the forum, according to media reports.

The unconventional monetary and fiscal policies adopted by some countries during the COVID-19 pandemic have led to high leverage ratios across governments, households, enterprises, and financial institutions. These ratios rose quickly but would not fall easily, Lou said.

It has exacerbated the hikes of the inflation and its impact has been extended to the global financial market, with soaring volatility in stocks, bonds, foreign exchange markets, Lou said, noting that from a historical perspective, it may lead to a new round of crisis spilling over into emerging markets.

As the US 16th largest lender, SVB faced meltdown on March 10 after a 48-hour run on deposits. It marked the largest bank crash since the 2008 financial crisis. When many were still pondering whether it was another Lehman Moment that started the global financial crisis over a decade ago, the US 29th biggest lender Signature Bank closed by regulator just two days after the SVB collapse.

The unexpected bank failure has soon sent shockwaves across the US banking system, with jitters spreading across the global market.

NASDAQ Bank index, which contains securities of NASDAQ-listed banks, dropped 22 percent from 3981.59 on March 8 to 3100.16 on March 17. The First Republic Bank saw its share price plummeted from $115 to $23.03 during the period, down nearly 80 percent.

In Europe, alarms sounded at Credit Suisse, a 167-year-old Swiss bank which is also the 17th largest lender across Europe. Its share price has lost 30 percent since March 8. Although the bank secured a $54 billion loan from Swiss central bank to shore up its liquidity, its investor sentiment remains fragile.

The bank failure and emergency showed that the long-simmering profound financial risks in Europe and the US have reached a critical point of periodic outbreak, Dong Shaopeng, a senior research fellow at the Chongyang Institute for Financial Studies at Renmin University of China, told the Global Times on Saturday.

Banks are professional risk managers, and if they cannot manage risk effectively, then it means that the risk control system has failed, Dong said.

SVB is not the only risk point, a total of 186 US banks have reportedly been exposed to similar risks. “Even if only half of uninsured depositors decide to withdraw, almost 190 banks are at a potential risk of impairment to insured depositors, with potentially $300 billions of insured deposits at risk,” read an analysis conducted by New York-based Social Science Research Network.

Counting on its advantages as the world’s dominant financial power, US policymakers have believed that they could reap interests of others to plug their own loopholes. It is such “financial confidence” which has supported them to adopt a radical quantitative easing and then a drastic tapering policy, Dong said.

Yet, a considerable number of emerging countries are attaching more importance to financial risk management and firmly safeguarding their own autonomy, Dong said.

China has attached great importance to preventing and defusing systemic risks, and it is further improving its financial regulation including setting up a central commission for finance following the two sessions to optimize and adjust setting and functions of regulatory institutions, Lou said.

Lou said that China will continue to cooperate with other countries in financial regulation to jointly forestall and defuse systemic risks in the global financial system and maintain stability and prosperity of the global financial market.

The People’s Bank of China (PBC), the nation’s central bank, recently stressed the overall financial market is running smoothly and risks are under control. Large banks with excellent ratings are the “ballast stone” of China’s financial system. Reforms of a few problematic small and medium-sized financial institutions have achieved important progress, and illegal financial activities have been effectively curtailed, it said.

Amid a steep drop in the value of global banking shares following the SVB meltdown, however, Chinese banking shares rallied collectively. The Bank of China saw its share price surged from 3.33 yuan ($0.48) on March 8 to 3.48 yuan on March 17, reaching a five-year high.

The Chinese economy has contributed more than 30 percent of global growth annually for the past two decades, and this momentum will continue in the future, Yang Delong, chief economist at Shenzhen-based First Seafront Fund Management Co, told the Global Times on Saturday.

Under such circumstances, China’s strong enterprises, robust core assets will remain very attractive to foreign investment, Yang said, predicting that it is highly likely that the inflow to China’s A-share market from overseas investor will exceed 300 billion yuan this year. 

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