A tumultuous fortnight of bizarre banking failures has put the world on edge.
The folding of 3 US banks — Silvergate Capital, Silicon Valley Bank and Signature Bank — and the acquisition of a big global lender Credit Suisse by UBS is causing ripples of uncertainty around the world.
Worldwide, banks are still adjusting to the steep rise in interest rates after years of low-cost borrowing. But the past year has seen interest rates go up.
Borrowing will become difficult as banks become more scrupulous about the creditworthiness of borrowers. Talk of recession has picked up a notch or two. Central banks are battling inflation while trying to calm things down as best they can.
You can’t help but feel there are still a few more shake-ups forthcoming.
Meanwhile, STORM-ASIA gathers the opinions of business people and economists on their take on what’s just unfolded.
Markets In The Balance
Assoc Prof Jamus Lim, ESSEC Asia Pacific
The banking system is facing unprecedented pressure, as the Fed’s rate-hike march continues unabated, with the most recent 0.25 percentage-point hike.
While much of this is anticipated — and has been telegraphed well in advance by the Fed — it has not shielded banks (as well as consumers and firms, for that matter) that have not managed their interest rate exposure well.
I see little reason at this stage to doubt the Fed’s so-called “dot plot”, which conveys the institution’s expectations for the future path of interest rates. That means rates are likely to peak at 5.125% (from the current 4.75–5.00% range) before the year is done.
If so, the recent bank failures will only be the first among many.
While I do not believe that the recent failures are symptomatic of the beginning of a more generalised banking crisis, there are real imbalances and stressors in financial markets, including a buildup of sovereign debt in the aftermath of the pandemic, and eroding foreign exchange reserves in a number of emerging Asian economies.
Even if we do not see rolling crises, the environment for global investors will continue to be challenging, and this includes those in Asia. As long as the Fed’s hiking cycle isn’t over, there is residual concern about a recession there — which will trigger the usual flight to safety — and Asian equity and debt markets will in turn struggle to gain enduring traction. I have viewed Asian markets — especially emerging markets (EM) — as good value for a while now, but EMs over the past three years have disappointed even their most bullish proponents, and I hesitate to suggest that their woes are definitively over.
I think that Asian EMs are better positioned today to weather both the rate hike storm as well as the overall tough environment for sovereign borrowers (especially those lower down the credit scale), but there are certainly some Asian economies that will face challenging times ahead. It is hard to overlook Pakistan, Sri Lanka, and Kyrgyz Republic (among the tiniest currency reserves to import cover) and Lebanon, Mongolia, and Papua New Guinea (high debt/GDP ratios).
Pick Up New Businesses
Prof Lim Soon Hock, Managing Director, Plan-B ICAG
The recent SVB and CS debacles have placed greater focus on banks’ ability to manage their liquidity and credit risks and their capital adequacy. In an operating environment already hit by high interest rates globally, access to financing and liquidity by business and industry going forward in the next few years can only become more difficult as banks become more stringent and selective. Businesses will have to be more circumspect with cash management.
Businesses that took loans may face a real risk of banks recalling them to shore up their capital base! If this happens, more companies may be subject to liquidation or Schemes of Arrangement ( Chapter 11).
The contagion unfortunately is unstoppable, for now; it is systemic and will continue to be so for a while.
During financial crises with heightened risks, uncertainty and volatility, cash is king. Companies with cash hordes cannot find a more opportune time, for example, among a myriad of options, to acquire promising businesses for less.
Small Is Beautiful
Dr Stephen Riady, Executive Chairman & Group CEO, OUE Ltd
We have reached a critical point in time when the world economy, geopolitics and security is reaching a very dangerous level. If this is not managed properly, it could trigger a major conflict or even war.
This is why being small is beautiful.
The bigger you are, the more vulnerable you become to shocks in any part of your business, stakeholders and supply chain.
Keep Your Gunpowder Dry
Charlene Kang, Director, Vault@268
These large banks collapsing have left investors reeling. It will shake the confidence of the financial market.
However, this reinforces the need for secure offsite storage. While growing our wealth, we shouldn’t forget to put time aside to protect our nest egg.
Uncertainty highlights why there is a need to plan ahead, to keep our gunpowder dry, and to switch to private vaults for security and privacy. We should also maintain our assets in safe havens such as Singapore.
Dom Meli, Principal, People At Their Best (Australia)
For the first time in my life (and I have been around since the ‘60s), I am taking note of the price of goods and making choices about what I can afford or what I can do without. This is a good thing and better appreciating the value of what we consume might lead humanity to change its behaviour. That’s a good thing.
Financial institutions falling over are part of the same recalibration and renewal of how we organise our societies.
The problem is that the human brain perceives uncertainty as a threat and presently, people, industries and nations are shutting down; the inevitable reaction to the uncertainty around us. This is bad news.
At a time when we need expansive and creative thinking, growth and abundance mindsets, most people are adopting a fixed mindset and believe there’s not enough to go around. Self-centredness, protectionism, bigotry and fear seem to be the order of the day and will be for a while yet.
Lost Opportunity Cost
Jason Chiam, lecturer, SUSS
In the education industry, we are not subjected to the fluctuations of the business world.
However, we will have students that are graduating and will soon be looking for jobs. What’s going on in the banking industry may impact their job hunt.
For example, with UBS buying over Credit Suisse, there will be bankers that will be ‘let go’ and these bankers will be in the job market. Granted, the positions that the “fresh graduates” will apply for could be different from those that are let go in the financial sector, but overall there is only so much headcount these institutions can have, and indirectly, the hiring of fresh new graduates may be adversely affected.
Where Are The Reassurances?
Alex Strang, Insights Editor, Canvas8
The spectre of 2008 is all around consumers at the moment — banks failing, interest rates rising, and inflation rocketing up. On a basic level, consumers will be looking to feel a sense of trust in the financial institutions that they bank with. They’ll be looking for reassurance of stability and safety — and for those that can remember the 2008 crisis, this might be harder to achieve.
On a personal level, people will begin to see money as even more scarce, delaying big-ticket purchases and even reverting to using cash as a physical and tangible budgeting tool.
In contrast, the ongoing culture of poly-crises is causing some people to just live for today and spend money on things that make them happy in a context of worldwide uncertainty.
Fire Will Strengthen Earth
Helen Ong, Founder, Sense.Live
In 2008, when Lehman Brothers created a huge fear in the financial market, it was a year of the Earth and Water elements.
Besides being known for stability and trust, Earth element also represents the banking industry. This year we have Water and Wood, which makes Wood energy extremely strong in countering the Earth element.
This creates extreme pressure for those who have made bad decisions in their investments previously.
All the banks affected by the current crisis seem to have forgotten the basics; putting all their eggs in one basket. They invested in areas that helped them gain profits but they forgot every investment carries a measure of risk. If only they’d invested in risk management then I think they won’t be suffering so much.
They should have a hedging option in mind to cushion their risk.
Every bank has its own brand and identity. They should leverage on what they can do best and come together.
Fire will strengthen Earth — that’s the act of giving or marketing.
Sometimes, bad news brings opportunity for marketing and more media attention, which is what’s happening now.
The only way to ease themselves out of this position is to gather the strength of Earth. Mergers!
And that’s already taking place.