Back in March, the news of the Silicon Valley Bank (SVB) bank run flooded every news outlet and social media platform, causing chaos to erupt in the US. People were pulling out money from their banks which caused even more bank runs to happen.
All of this resulted in one thing: People doubting the stability of the traditional banking system.
Now, you might be thinking, “Okay, what does this have anything to do with me in Malaysia?”
Well, the thing we need to understand is that bank runs can happen anywhere. Malaysia included.
So, in this article I’ll further delve into the SVB's downfall, explore the implications for the traditional banking system, and evaluate the readiness of Malaysian banks to weather similar challenges.
SVB Bank Run
Silicon Valley Bank (SVB) was the go-to bank for startups in Silicon Valley. In fact, they were so popular among these start-ups that they quickly rose to top, becoming US’s top 20 commercial banks! That was until earlier this year.
After some rumours of instability, SVB depositors rushed to withdraw their funds simultaneously. 42$ billion worth of deposit withdrawals were demanded of them. SVB didn’t have the liquidity to meet those demands hence leading to a domino effect that resulted in substantial losses and shattered confidence.
But what caused this bank run to take place?
After some investigation, it was found that the primary cause of SVB's decline was its over-reliance on bond investments, which turned into liabilities when the Federal Reserve rose interest rates rapidly.
It works like this: when the Federal Reserve aggressively increased interest rates to combat inflation, new bonds issued carried more attractive returns than existing ones. As a result, investors moved away from SVB's bonds, rendering them worthless and forcing the bank to sell them at a loss.
Deposit holders, fearing for the safety of their funds, began withdrawing their money, exacerbating the bank's financial troubles. And despite efforts to alleviate the situation, SVB ultimately incurred significant losses, leading to its collapse.
The Crumbling Traditional Banking System
SVB's collapse was just the start. Wind caught on and people starting withdrawing from their banks in fear losing their money. This caused even more bank runs to happen. Signature Bank and First Republic Bank were the victims of this.
At this point, people were not only losing confidence in one particular bank but they were starting to lose confidence in the entire traditional banking system. This can be seen when people started moving their money into cryptocurrency where they didn’t need to worry about how irresponsible bankers use their fund since they had full control over their own money.
But this begs a bigger problem. The traditional banking remains the bedrock of the economy, and any disruptions in this sector can have far-reaching consequences, even triggering global economic instability and conflicts. So, something had to be done to restore the public’s confidence in the system.
Efforts to Restore Confidence
In response to the growing concerns about the stability of the banking system, regulators took steps to protect depositors' funds.
In a historic move, a group of well-known, bigger banks joined forces to pledge $30 billion to rescue the collapsing First Republic Bank, demonstrating their commitment to supporting smaller banks and rebuilding confidence in the traditional banking system.
This powerful move worked and US citizens found a renewed sense of confidence in their banking system.
But what about the bank back home in Malaysia? Are you confident in our banking system?
The Strength of Malaysian Banks
One of the ways to measure confidence in a bank is thorough Capital Adequacy Ratio (CAR).
This refers to the reserve funds that banks hold to sustain potential losses in investments like bonds, loans, mortgages, and stocks. A higher CAR indicates greater liquidity and resilience which is always a good thing.
Now, comparing the CAR of Malaysian banks to that of US banks reveals a more favorable situation for Malaysia. Malaysian banks maintain a higher CAR in absolute terms (18.9% vs. 14.6% in the US), and this ratio has been on a positive growth trajectory. The higher CAR suggests that Malaysian banks have fortified themselves with sufficient liquidity to withstand external threats.
Furthermore, Malaysian banks tend to have limited exposure to high-risk investments, such as the volatile startup economy which we see in Silicon Valley. Local banks often require collateralization before extending credit, adding an extra layer of security. These risk management practices contribute to the resilience of Malaysian banks and their ability to absorb potential shocks.
Conclusion
While the collapse of SVB and other regional banks may seem distant, it still serves as a reminder for Malaysia to remain vigilant and maintain a robust banking system. Although Malaysian banks are likely to be able to hold its fort should a bank run were to happen, it doesn’t mean that we should be starting one to begin with.
If you found this read interesting, you should also check out this video over on our YouTube channel. We delved further into this topic, so I'm sure you'll enjoy it as well!