March 17, 2023
JAKARTA – The short answer to the titular question is most probably no. And that answer is not an invitation for complacency or carelessness. Investors can get too emotional and act irrationally and thus change the trajectory moving forward.
Still, there are many tidbits and lessons Indonesian regulators can take from the abrupt closure of Silicon Valley Bank (SVB).
The closure of SVB, with US$206 billion in assets, will hardly start a global financial crisis like in 2008 in the aftermath of Lehman Brothers’ collapse. In fact, SVB is rather a typical case of run on a bank that initially faced liquidity issues that rapidly became an issue of solvency, meaning that regulators are facing a “known known” and most likely have standard operating procedures in place to deal with it.
SVB was indeed the 16th biggest bank before it was transferred to the United States Federal Deposit Insurance Corporation (FDIC) for “burial”. But unlike in 2008, when regulators had to engage in some maneuvers to deal with failing shadow banks, the FDIC arguably has all the tools it needs now to arrange on orderly liquidation of a conventional bank like SVB.
Moreover, the systemic risk determination for SVB and Signature Bank, another bank that failed last week, has gained supermajority approval from the FDIC board. This means that the normal limit of $250 per customer notwithstanding, all deposits at SVB and Signature are now fully insured. Thus, depositors in other banks have fewer reasons to panic.
Although SVB’s closure does not raise significant risk of a global crisis, Indonesian regulators can take some lessons from the headline-worthy event.
First, a bank should have a sufficiently diversified portfolio and customer base. At a glance, SVB actually had very conservative asset placement. Most of its portfolios were in US Treasury bonds, a safe haven by almost all standards.
But as the Fed has been aggressively raising interest rates since last year, the value of SVB’s assets had consequently fallen sharply. Additionally, its credit was fairly limited for traditional activities like mortgage and business loans. So it had virtually no automatic counterbalance or offset for a decrease in a particular asset class.
On the other hand, the bank was facing increased competition from other banks in retaining deposits in an environment of rising interest rates. More customers were leaving SVB to find a better deal.
Day by day, more people recognized that vulnerability. And to make things worse, SVB’s customers were mostly tech start-ups or venture capitalists with tight-knit relationships, so information propagated rather quickly across their network. Hence, bad news about the bank destroyed customers’ trust rather quickly, leading to massive withdrawals and finally, forced SVB to sell its financial assets at a markdown.
In Indonesia, we do not have banks like SVB serving a markedly limited segment of customers and have highly concentrated asset placements. Our banks might have a specific focus, but their customer bases are quite diverse. Some might focus on micro, small and medium enterprises but still have substantial exposure to big corporations. Several others focus on retail businesses, yet their wholesale portfolios are not small.
Second, bank closures are not inherently a bad thing. US regulators have shown that bank liquidation is a normal measure to ensure the system is not hiding a zombie bank, and that this an effective tool to swiftly remove risks associated with the failing institution from the broader ecosystem. As a result, the general public does not need to guess which bank is safer and will therefore have full confidence in the soundness of their financial system.
Our collective memory from the 1997-1998 monetary and financial crises might suggest that bank closures should be avoided to prevent crisis. But upon further reflection, bank closures at that time resulted in catastrophe only because the closures were conducted hastily and without clear public communication about their terms and follow-up actions.
Also, the institutions tasked with liquidating banks in 1998 did not have core competencies in handling matters related to “gone concerns”. Today, Indonesia’s Deposit Insurance Corporation (LPS) already has plenty of experience with liquidation. From a rural bank to a high-profile case, the LPS has many case studies in its vault. Managing proper liquidation should not be too big a task for it.
The LPS might have some challenges to avoid a “split personality” problem since now it must also assess “going concern”, while its traditional role and expertise have always been “gone concern” matters. To borrow an analogy from another field, in addition to performing proper burials, the LPS is also expected to perform emergency room triage, albeit only sometimes.
Lastly, SVB’s collapse has made the intertwined relationship between monetary policy and financial stability more pronounced. It is not difficult to find experts who will point out that ultra-low interest rates over more than a decade and rapid hikes in recent months had contributed to the abrupt deterioration of SVB’s performance. The impact of interest rates on asset prices is not just theoretical abstraction. It has clearer and greater real-life implications.
Hence, central banks cannot focus exclusively on inflation. They cannot afford the luxury of becoming a single-issue policymaker. In fact, most analysts believe that the Fed interest rate hikes will stop or at least continue at a slower pace due to financial stability concerns stemming from the fallout of SVB and Signature Bank’s failure.
On that note, I would like to conclude this article by rephrasing my initial answer so I sound more like an economist: Ceteris paribus. All other things remaining the same, there is a low probability that the SVB bust will trigger a 2008-style global financial crisis, but central banks should nonetheless remain vigilant in maintaining the economy and safeguarding financial stability.
The writer is an economist at Bank Indonesia. The views presented here are personal.