The answer to the headline question is Yes, unless you are invested in Silicon Valley Bank (SVB).
As DisruptiveAsia, a tech and telecoms website, puts it, “Many analysts have come to a consensus that SVB’s demise is unlikely to have a major contagion effect due to Southeast Asia’s superior growth prospects.
“Qin En Looi of Saison Capital stated that the majority of local tech startups are likely to escape any direct impact.“
Meanwhile, markets worldwide were breathing collective sighs of relief last week amid news that First Citizen’s Bank had acquired SVB after more than two weeks of uncertainty and financial distress that has infected Europe and rattled Asia.
That does not necessarily mean the dust has completely settled and it is time to move on. Let’s remember that so far three midsized lenders (SVB, Signature and First Republic) have collapsed in the US and Credit Suisse was absorbed by UBS in Europe.
First Republic, it should be added, looks to be getting a second lease on life, though its stock is down nearly 90% over the past month.
Overall, it appears that the worst is over for the moment in the US and Europe, and that Southeast Asia and the rest of the region are relatively unscathed. That is, ruling out ramifications for the global financial sector that nobody has spotted yet.
That Southeast Asia and likely the rest of the region would be spared was the broad consensus at the time of SVB’s collapse and that’s being borne out in recent days.
“I think it’s a watch out, but I don’t think that contagion spreads,” said David Gowdey, managing partner at Southeast Asian venture capital firm Jungle Ventures, on CNBC’s “Squawk Box Asia” at the time of the SVB meltdown. So far, he is right.
In Thailand – the epicentre of 1997 Asian Financial Crisis – solid fundamentals of local banks, the strong supervision of the Bank of Thailand, and bearing minimal exposure to US regional banks have kept the sector in a strong position despite the US crisis. “Thai banks generally have stable liquidity and there is no significant dependence on offshore funding, [while] core capital and loan-loss allowance coverage are reasonably strong, offering sound buffers against downside risks,” the senior director of Fitch Ratings Thailand was quoted as saying in the Bangkok Post.
In Vietnam – Southeast Asia’s fastest growing economy in 2022 – the banking sector has been virtually unscathed and recent headlines dominating the sector have been related to tightening foreign ownership caps of Vietnamese banks, not the bank failures in the US and Europe. Last week, Japan’s Sumitomo Mitsui Financial Group just acquired a 15% stake in Vietnam Prosperity Joint Stock Commercial Bank, underscoring Japan’s interest in capturing growth in Asian emerging markets through acquisitions.
In Malaysia, Central Bank Governor Nor Shamsiah Mohd Yunus last week was firm that she he does not expect any significant impact from the US and European crisis. “Our banks are resilient, and we do not expect what we see in other countries to happen here,” she was quoted as saying in a Forbes article.
In Indonesia – Southeast Asia’s largest economy that was spun into political turmoil as a result of the 1997 Asian Financial Crisis, banking authorities have expressed confidence that the US crisis will have minimal impact on the country’s banking sector. In a statement issued on 13 March, the chief executive for banking supervision of Indonesia’s Financial Services Authority (OJK) included a remark that after the Asian financial crisis of 1997-98, Indonesia had taken “fundamental steps to strengthen institutions, legal infrastructure, governance and customer protection, creating a robust, resilient and stable banking system.”
Back in the US, the Federal Deposit Insurance Corporation (FDIC) took over SVB on March 10 amid a bank run that spilled over to Signature Bank, bringing it down, as the general chaos halved the value of several other US lenders.
The FDIC-brokered deal with First Citizens provided some much-needed uplift for shares of other midsized banks, while Asian and European stock were up this week, “as fears of a banking crisis eased further,” according to reports.
What happened?
SVB, a San Francisco-based bank for startups – and the 16th-largest lender in the US – went bust. Things had not been going so well for the bank for several years, but the death knell was sounded on March 8, when SVB announced that it was seeking to raise USD 2.5 billion due to liquidity issues, to which the FDIC, which regulates American bank deposits, responded that SVB was out of luck.
Enter a classic bank run, hastened no doubt by the fact that news spreads fast in Silicon Valley. SVB’s share price plunged by 60%, as the bank’s CEO pleaded with clients for support. By March 10 the share price had plummeted another 70% in pre-market selling, leading to a halt in trading.
The regulators (FDIC) stepped in as SVB said it was looking to sell itself to a larger player.
The Economist provides a superb explainer, and we are running with it:
“SVB is a bank for startups. It opened accounts for them, often before larger lenders would bother. It also lent to them, which other banks are reluctant to do because few startups have assets for collateral. As Silicon Valley boomed over the past five years, so did svb. Its clients were flush with cash. They needed to store money more than to borrow.
“Thus, SVB’s deposits more than quadrupled – from USD 44 billion at the end of 2017 to USD 189 billion at the end of 2021 – while its loan book grew only from USD 23 billion to $66 billion. Since banks make money on the spread between the interest rate they pay on deposits (often nothing) and the rate they are paid by borrowers, having a far larger deposit base than loan book is a problem. SVB needed to acquire other interest-bearing assets. By the end of 2021, the bank had made USD 128 billion of investments, mostly into mortgage bonds and Treasuries.”
The big story
Stephen S Roach, a faculty member at Yale University and former Chairman of Morgan Stanley Asia, writing for The Wire China, makes the point that SVB’s failure “is symptomatic of a far bigger problem: a US financial system that is woefully unprepared for the return of inflation and the concomitant normalization of monetary policy.”
SVB risk managers were clearly in denial about the changing circumstances, but argues Roach, that is no excuse for the Federal Reserve to have missed what was coming.
“The Fed sadly, blew it again. Starting with reckless monetary accommodation that perpetuated a dangerous string of asset bubbles – from dot-com and housing to credit and long-duration assets – and continuing with the misdiagnosis of post-COVID inflation as “transitory,” the Fed has now made a supervisory error of monumental proportions: It fixated on large banks and overlooked smaller regional banks like SVB, Signature, and First Republic, where accidents were waiting to happen.”
In the end, it is likely to be the startup sector that suffers most, with investors warning their portfolio companies to keep enough money in the bank to last until 2025, according to The Economist.
But the financial sector in the US has taken a significant hit as well.
When the FDIC announced the deal with First Citizens, it said that the SVB bail-out could cost its deposit insurance fund, paid for by member banks, about $20bn.
“That would make SVB the most costly failure in the history of the US insurance deposit fund, which was started in 1933, eclipsing the $12bn loss it took on the failure of IndyMac at the start of the global financial crisis in 2008,” reports the Financial Times.
It’s difficult to see any beneficiaries of the above events, but they definitely play into the narrative of China’s President Xi Jinping, who argues the West is in terminal decline and that China and its allies (Russia and North Korea) are the future.
That is unlikely to eventuate, but if the latest financial shenanigans help tip the developed world further into recession and high inflation, China will start to become even more attractive to emerging markets,
“It is highly likely that China will be an important growth pole for emerging markets this year,” and particularly those in Asia, Nomura’s economists concluded, according to a report by Bloomberg.
Meanwhile, the current banking crisis has also highlighted the fragility of the current, centralized financial system and the potential problems that will inevitably arise from government intervention, including nurturing unprofitable banks. This is all taking place in the backdrop of the lighting emergence of decentralized finance, fostered by innovative blockchain technology and the advent of digital currencies that are disrupting the traditional finance sector – whether one likes it or not. As the current banking crisis unfolds, the dinosaur in the room is Bitcoin – which was created as a direct response to the last major banking crisis in 2008. In our view, there will be a close correlation between the trajectory of the current banking crisis and the adoption trajectory of Bitcoin.