This time last year, few would have heard of Silicon Valley Bank. But the recent collapse of the US bank has raised the spectre of the Lehman Brothers meltdown, sparking fears of a banking crisis. CNA’s Steven Chia drills down on some financial basics.
SINGAPORE: The successive collapse of three US banks and the takeover of 167-year-old banking institution Credit Suisse by its Swiss rival UBS, has raised nervous questions about banks and whether the money they hold to is secure.
Would this spiral of fear spread to Asia and can a bank run – where depositors rush to withdraw their money – happen in Singapore?
The short answer: Highly unlikely.
That’s according to guests on the CNA podcast Heart of the Matter.
Sumit Agarwal, Professor at the School of Business at the National University of Singapore and Thilan Wickramasinghe, head of research Singapore and regional financials at Maybank Investment Banking Group, pointed to the tight regulation that is present in the country.
“I don’t think we should worry that much in Singapore context, because a few things have to happen. One is bad regulation. Two is macroeconomic conditions turning on you. and three, the bank making bad decisions – taking on a lot of risk, either credit risk or maturity risk,” said Agarwal.
“Both should be caught by stress tests by the regulators,’’ he added.
Wickramasinghe said oversight is important in any jurisdiction, not just Singapore. And it boils down to knowing what sort of risks banks are taking with their businesses.
“As regulators, you need to put in very strong safeguards to ensure that there’s trust, not just in a single bank, but within the overall banking system. That’s what you see in Singapore,’’ he said.
This applies broadly in the Southeast Asian context too, where regulators tend to be conservative.
“They’ve been through this collective experience of the Asian Financial Crisis and the global financial crisis as well,’’ added Wickramasinghe.
Here are some highlights of that conversation:
A BANK RUN IN THE AGE OF ONLINE SPEED
Wickramasinghe: “People get spooked when there is a question on a bank’s solvency … Banking is all about balancing confidence and taking risks. As soon as that balance breaks down, you start losing faith.”
“If you look at Silicon Valley Bank, they actually had enough assets to cover their deposits. But that didn’t matter … People were spooked, and they wanted to take their money out.”
There was no way they could liquidate their assets at that sort of speed without making major losses.
Agarwal: “Today’s bank runs don’t have to be sequential. You can sit on your app, and you can just withdraw all your money. But where do you take your money? You can’t just put it under your mattress, you must find alternative places to park that money.”
HOW WILL DIGITAL BANKS FARE?
Wickramasinghe: “The licensing regime makes (digital banks in Singapore) focus on the underbanked … In terms of risk and liquidity, they come under the same sort of regulatory umbrella. From that point of view, I don’t think there is any difference.”
Agarwal: “I would argue we should be worried … It’s about trust. I know my money is sitting in a physical location (in the case of a traditional bank). If you start panicking … you will (be) more likely to withdraw your money from this digital bank (compared to) a physical bank that has been around for at least 50 years.”
IS MY MONEY SAFE?
Agarwal: “(The) average Singaporean doesn’t have hundreds of thousands of dollars in their checking account … From the data itself, it’s not true that they are holding more than S$75,000. They are by and large protected.”
Wickramasinghe: “(Personally), one of the things I’d be worried about and want to learn more about is the risk culture of the bank that I am banking with.”
A lot of the pressures in the (banking) system over the last few days can be pointed to the risk cultures within these banks.
Agarwal: “So as long as the regulator is steady and stable … we should not be focused on figuring out if a bank is behaving badly. They will be behaving correctly, because the regulator is making them behave correctly.”