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. 

• by Yap Leng Kuen is a former StarBiz editor.

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

A customer stands outside of a shuttered Silicon Valley Bank (SVB) headquarters on March 10, 2023 in Santa Clara, California. Photo: VCG

Infographic: SVB meltdown exposes risks of fragile US bank system Infographic: GTSVB collapse 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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Property prices to further rise in Malaysia, Credit Suisse predicts

Higher selling prices does not necessarily mean bigger profits for developers with Credit Suisse noting that developers’ cost of doing business has reportedly risen 20% in the first half of 2014. “Margins are being compressed,” it said in a sector report on. The firm is negative on the sector.

PETALING JAYA: Property prices, which rose 8% in the first quarter of this year, will continue to head north, as developers pass on the rising cost of building houses to buyers, according to Credit Suisse.

But higher selling prices does not necessarily mean bigger profits for developers with Credit Suisse noting that developers’ cost of doing business has reportedly risen 20% in the first half of 2014.

“Margins are being compressed,” it said in a sector report on Monday. The firm is negative on the sector.

Property sales, especially in the affordable category, had slowed since the start of the year with measures to curb speculative purchases dampening sentiment in the property market.

The report indicated that the Government was considering additional measures to cool down rising prices with specific plans to address the issue of affordable housing.

Credit Suisse said it believed that measures to facilitate home ownership among the lower and middle income groups such as allowing developer interest bearing schemes for first-time house buyers or those below a certain income level, would be positive for the market.

“However, a blanket policy to stop the rise in property prices would be negative as sentiment is already so low,” it added.

According to the Real Estate Housing Developers Association’s first half of 2014 property industry survey, a majority of developers are either neutral or negative about the outlook for the second half of 2014.

This sentiment is expected to carry through to next year, with only 13% of respondents optimistic about the outlook in the first half of 2015. Developers have been holding back new launches this year, with only 39% of respondents launching in the first half compared with 52% a year ago.

Take-up rates fell to 49% in the period, the first time it dipped below the 50% level.

The main reason for slower sales was the difficulty for buyers in securing financing. Properties priced between RM250,000 and RM500,000 saw a 30% rejection rate, while properties prices between RM500,000 and RM700,000 experienced a rejection rate of 24%.

Additionally, growth in housing loan approvals has slowed since December 2013 and fell 13% year-on-year in July 2014. For the first seven months of the year, total housing loan approvals were up only 1% year-on-year at RM68bil.

But despite the soft market condition, Credit Suisse said it believed that prices would continue on an uptrend next year as input costs are pushed up by the Goods and Services Tax (GST).

“Residential properties are GST exempt, but developers would look to pass on the higher costs via higher launch prices,” it said.

Sources: Credit Suisse/PropertyGuru/The Star/Asia News Network, Wed Sept 17 2014

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Moody's downgrades 15 major banks: Citigroup, HSBC ...

Citigroup and HSBC were among the banks downgraded

The credit ratings agency Moody's has downgraded 15 banks and financial institutions.

UK banks downgraded include Royal Bank of Scotland, Barclays and HSBC.

In the US, Bank of America, Citigroup, Goldman Sachs and JP Morgan are among those marked down.

BBC business editor Robert Peston reported on Tuesday that the downgrades were coming and said that banks were concerned as it may make it harder for them to borrow money commercially.

"All of the banks affected by today's actions have significant exposure to the volatility and risk of outsized losses inherent to capital markets activities," Moody's global banking managing director Greg Bauer said in the agency's statement.

The other institutions that have been downgraded are Credit Suisse, UBS, BNP Paribas, Credit Agricole, Societe Generale, Deutsche Bank, Royal Bank of Canada and Morgan Stanley.

Moody's said it recognised, "the clear intent of governments around the world to reduce support for creditors", but added that they had not yet put the frameworks in place that would allow them to let banks fail.

Some of the banks were put on negative outlook, which is a warning that they could be downgraded again later, on the basis that governments may eventually manage to withdraw their support.

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The most interesting thing about the Moody's analysis is that it, in effect, creates three new categories of global banks, the banking equivalent of the Premier League, the Championship and League One”

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In a statement, RBS responded to its downgrade saying: "The group disagrees with Moody's ratings change which the group feels is backward-looking and does not give adequate credit for the substantial improvements the group has made to its balance sheet, funding and risk profile."

The BBC's Scotland business editor Douglas Fraser tweeted: "Cost of RBS downgrade by Moody's: having to post an estimated extra £9bn in collateral for its debts."

Of the banks downgraded, four were cut by one notch on Moody's ranking scale, 10 by two notches and one, Credit Suisse, by three notches.

"The biggest surprise is the three-notch downgrade of Credit Suisse, which no one was looking for," said Mark Grant, managing director of Southwest Securities.

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Credit Suisse cuts M’sia GDP forecast

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By JEEVA ARULAMPALAM jeeva@thestar.com.my

It says Asian growth set to slow more sharply

PETALING JAYA: Credit Suisse AG has cut its real gross domestic product (GDP) 2011 growth forecast for Malaysia to 4.6% from 5.3%, as the Western world is teetering on the brink of recession and large parts of Asia remain highly susceptible to growth developments in the United States and Europe.

It also cut its 2011 GDP forecast for other Asian economies such as Thailand, Hong Kong and South Korea.

In an economics research yesterday, Credit Suisse said Asian growth was set to slow more sharply over the coming months.

 “With the fiscal support provided during the global financial crisis removed and the lagged effects of higher interest rates working their way through, we had expected the Asian economies to soften from second quarter of 2011.

“Now that the Western world is teetering on the brink of recession we believe the outlook has dimmed further,” it said.

In addition to cutting its GDP forecast for this year, Credit Suisse trimmed next year's forecast to 4.8% from 5.8% previously. The new 2011 and 2012 GDP forecasts imply annualised sequential growth rates of an average 3.5% in the second half of this year and 5.5% for next year.

“What has kept us from cutting our growth forecasts further is the likely support from domestic demand. We think more investments from the Economic Transformation Programme (ETP) should come onstream, especially in the oil and gas sector which benefited from high oil prices.

“Also, the Government has underspent its budget in the first half and we expect it to increase spending in the second half to meet its target,” it said.

It added that some factors that exacerbated the slowdown in the second quarter were likely to be temporary but Credit Suisse did not expect domestic demand to be shielded from a further weakening in external demand.

“Moreover, Malaysia's growth is vulnerable to a collapse in commodity prices if this were to happen,” it said.

In the report, Credit Suisse said it expected Bank Negara to keep the overnight policy rate unchanged at 3% until the end of next year (it previously expected one 25 basis points hike).

With the global growth outlook highly uncertain and inflation slowing, it suspects that the central bank will be in no hurry to raise the overnight policy rate further. However, a severe global recession could see rates being cut.

“In contrast, we think there is little scope for the Government to stimulate the economy through fiscal policies above and beyond the existing high deficits they projected (5.4% of GDP for 2011).

“Even as things stand now, Malaysia would probably need to undertake significant fiscal adjustments over the next decade if it wants to bring its relatively high debt to GDP ratio down.

“A prolonged weakness in growth would increase the risk that the Government would further delay its plan to cut subsidies and raise the consumption tax,” it said.

Bank Negara is maintaining its GDP forecast of 5% to 6% for the full year as it expects strong domestic demand and ETP projects to fuel economic growth in second half of the year. Malaysia's second-quarter GDP moderated to 4%, compared with 4.9% in first quarter, dampened by a slowdown in the manufacturing sector and weaker external environment.

AmResearch Sdn Bhd, in a report last week, said that while it expected a full-year 5% growth rate to be achieved given the current climate, possible trigger points for a downgrade included an adverse impact of a very large drop in crude oil prices and any further delay in the ETP projects.

“As a net exporter of oil, Malaysia still relies heavily on crude oil in terms of generating income for the country. As long as the full-year average lies between US$85 and US$90 per barrel, all is well and within budget.

“On a positive front, a sharp fall in crude oil may well mean a reduction in total subsidies spent by the Government. The net impact will, however, be detrimental to the Government's coffers and overall growth,” AmResearch director of economic research Manokaran Mottain said in his report.

For latest GDP reports from the Statistics Department click here  

Layoffs sweep Wall Street, along with low morale

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By Lauren Tara LaCapra  NEW YORK

(Reuters) - In early summer, before layoffs began sweeping across Wall Street, billboard-sized photos of employees were plastered on the walls, pillars and elevator banks of Credit Suisse Group AG's offices in the United States and abroad.

The museum-quality prints, depicting workers from administrative assistants to senior executives, were emblazoned with motivational words like "Proactive" and "Partner." By mid-July, however, the photos disappeared and the Swiss banking giant began laying off 2,000 employees.

Security guards prevented employees from taking cell-phone pictures as the posters were stripped away, according to one employee who was present.

"It sent an entirely wrong message," said an employee, who was not authorized to speak publicly. "Management literally threw away that kind of money on something so trivial, while planning to cut thousands of jobs."

A bank spokeswoman declined to comment on the internal campaign or the employee's comments.

Credit Suisse's timing illustrates the unanticipated dangers of rampant job-cutting, which tend to run in cycles on Wall Street. Employee morale often plummets at a time when survivors are asked to pick up more responsibility and customer relations can suffer as service and relationships deteriorate.



CUTTING 'MUSCLE AND BONE'

What's more, layoffs inartfully constructed can come across to shareholders as Band-Aid solutions that at best temporarily cut expenses and at worst pare away reserves of talented people.

"They finished cutting the fat and now they're into the muscle and bone," said Tim White, a managing partner who specializes in wealth management at the recruiting firm Kaye/Bassman International in Dallas.

Credit Suisse has plenty of company in its cost-cutting campaign. HSBC, Barclays PLC, Goldman Sachs Group Inc and Bank of New York Mellon Corp have announced plans to ax thousands of workers in recent months. On Thursday, Bank of America Corp Chief Executive Brian Moynihan sent a memo to senior executives outlining plans to cut another 3,500 jobs.

The planned cuts at Bank of America have pushed the number of financial sector layoffs this year to 18,252 -- 6 percent higher than in the comparable period in 2010, according to Challenger, Gray & Christmas, an outplacement firm that keeps a daily tab on layoff announcements.

Some companies began the culling earlier this year -- HSBC has already axed about 5,000 employees, with 25,000 more set to get pink slips by the end of 2012 -- and others, such as Goldman Sachs, said that cuts will come by year's end.

That is not good for morale.

BITING INTO CLIENT SERVICE

Hours have become longer, trading floors have more open seats and fresh young faces are taking over offices where high-level personnel once sat. The highest-paid people can be easy targets for layoffs now, given the cost of keeping them employed and the eagerness of younger workers to take on their roles, even at less pay, executive recruiters said.

Changes in pay structures mandated in part by the Dodd-Frank financial reform laws have exacerbated the problem.

Banks that used to pay modest base salaries supplemented by opulent stock-and-option packages that encouraged meeting short-term performance goals now are weighting compensation toward base salary.

Managing directors at investment banks have seen a typical base salary double to $400,000, said Paul Sorbera, president of Alliance Consulting. Meanwhile, 2011 bonuses are expected to fall by up to 30 percent for top earners, according to pay consulting firm Johnson Associates.

The shift erodes Wall Street's former flexibility to lower end-of-year bonuses in bad times and forces a heavier reliance on layoffs.

The danger is that client service suffers.

"Banking clients abhor relationship-manager turnover," said Heather Hammond, a senior member of Russell Reynolds' financial services practice.

Investors, for their part, tend to view cost-cutting as a short-term solution that fails to address fundamental issues relating to capital, strategy and the ability to endure through hard economic times.

At Credit Suisse, some senior jobs have been consolidated as executives have been escorted toward early retirement with offers of bonus bridges and other payments, sources familiar with the matter say.

Managing directors in businesses that have missed revenue targets have been told to reduce millions of dollars' worth of headcount expenses, according to a managing director who received such a request. In some areas, including operations, legal and technology, more work is being outsourced and mid-level employees are being replaced by consultants.

"People are leaving resumes on the printers, hoping someone picks it up," the Credit Suisse employee said.

Some sources believe that banks are repeating their typical hiring strategy: Cutting staff levels too deeply in bad times only to rush out with open checkbooks when markets recover.

"When people are getting hired, fired, hired, fired, every two years, it's very difficult to run a business," said Conrad Ciccotello, a finance professor at Georgia State University who has studied the issue. "There is precious human capital destroyed in vicious boom-and-bust cycles that is costly to replace."

(Reporting by Lauren Tara LaCapra; Editing by Richard Chang and Jan paschal)

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