A n event occurred last week that never in my 25-year career in finance had I ever imagined would happen. Michael Barr, the US Federal Reserve’s vice-chairman of supervision appointed by President Joe Biden to lead an exhaustive probe into Silicon Valley Bank’s (SVB) collapse in March, concluded that amongst the myriad of triggers, the Fed itself had been somewhat asleep at the wheel.
As my column “This time it is different — or is it?” (The Edge Singapore, March 20) had surmised, the report highlighted “textbook” failures in managing interest rate risk — the lack of a chief risk officer and management failure, for example. Despite many other market commentators, including Nobel laureate Joseph Stiglitz, lamenting in “No confidence in the Fed” (The Edge Singapore, May 1) while we were pointing out that culpability in US banking regulators was hard to excuse, the self-flagellation was nonetheless a bit of a shock.
It is normal for harsh words to be extended to management of a failed financial institution, its culture and conduct — and indeed sometimes, the excesses of market speculation and/or greed. It is rare, however, to conclude that the Fed regulators themselves failed to understand the depth of SVB’s problems and were then too slow to react.
If one looks behind the political recriminations — with the report also alluding to Trumpera changes that led to a “shift in the stance of supervisory policy” impeding “effective supervision by reducing standards, increasing complexity and promoting a less assertive supervisory approach” — US Fed chairman Jerome Powell would now be citing this report to ask for more powers to lead to a “stronger and more resilient banking system”. It is, however, not reassuring at all. If we cannot trust the Fed, whose policy sets the agenda for central banks and economies around the world, who or what can we trust then? Bitcoin?
Troubling details
Barr’s report, for those of us who pored over it, is troubling. While one could point to Trump-era politics for lowering standards, the finding that “the supervision of SVB did not work with sufficient force and urgency” and “contagion from the firm’s failure posed systemic consequences not contemplated” is surely unacceptable. While the regulators may not be complicit, in more simplified terms — I would paraphrase it as lazy and stupid.
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As far back as 2017, rapid growth had been identified to have “placed a strain” on “effectively identifying and monitoring key risks”. Management was rated “deficient” after they failed to act on six citations by regulators to fix deficiencies in the bank. In 3Q last year, regulators deemed the bank’s “interest rate risk simulations” “not reliable”. Yet, the bank continued to operate well rated — with the CEO of SVB then, sitting on the board of the San Francisco Fed — which had the primary regulatory oversight of his bank! It is a governance mess that fails the optics a priori.
“The combination of social media, a highly networked and concentrated depositor base, and technology may have fundamentally changed the speed of bank runs,” stated the Fed — a belated recognition of the world we live in today.
First unravelling
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Hot on the heels of the Barr report, another US bank — the much bigger First Republic Bank (FRB), with a similarly large Silicon Valley exposure, would fall. In March, in a bid to stem the contagion ignited by SVB, a coalition of 11 willing banks pledged fresh deposits of some US$30 billion ($40.5 billion) to keep FRB afloat. This show of support was overwhelmed by over US$100 billion in deposits that fled FRB last month anyway, causing its stock price to lose 97% for the year to US$3. Back in the 2021 Covid bubble, FRB was trading as high as US$200.
Just like SVB and Signature Bank just a couple of months prior, FRB was seized by the FDIC, who promptly hunted around for a white knight. On Labour Day, JP Morgan Chase was chosen over PNC Financial Services Group and Citizens Bank. Big gets bigger — to what end?
There’s a certain irony as to what changes in US banking regulations had ensued. Wary about not repeating the Global Financial Crisis, tighter rules were applied on the larger financial institutions, but not the smaller ones. This led to the creation of this rarefied caste, otherwise known as “systemically important financial institutions”, which includes a certain Credit Suisse. Under the no-nonsense Swiss regulators, Credit Suisse was very quickly folded into UBS amid the crisis of confidence in March, worsened by hedge funds making big bets.
Amid the shaking suffered by the European banks, the US markets continued to ho and hum, comforted by how the Fed has a new policy of re-minting money: lending US$100 for “good quality” paper issued by the banks, marked far below market. If not for this alternative form of backstopping, the banks’ capital would have been depleted by the good old medicine prescribed by the IMF to Indonesia back during the Asian Financial Crisis: sell and take the loss.
True, we avoided immediate financial Armageddon in March 2023, with this Fed sleight of hand of its new “super” discount window to warehouse bad trades taken by its banks. But have we merely extended the pain to a long drawn-out one, with weaker and weaker banking capacity, that will function like a hot air pocket on the way down, unable to lend, even as rates peak and maybe ease in the coming months, sending the US economy to a selfmade recession?
Or, will the party continue like it’s 1999, supported by the Greenspan put? Or, will this be more like 2021, with results from an overaccommodative monetary policy fuelled with large US fiscal expenditure during Covid, which is in a large part responsible for persistent OECD inflation? Just like the subprime crisis that unfolded in 2008, what comes next after the eventual day of reckoning will not be pretty.
One can’t blame the Russians and supply chains for everything. The truth is that Big Oil (Exxon, Chevron, Shell) have huge cash stashes from supernormal profits earned last year. It is not entirely clear that those will necessarily hasten their drive to renewables too. Soaring inflation has kept the food and beverage industry growing around the world, with the value of the top 25 companies in the sector, including Kraft Heinz, Mars, Tyson Foods, Cargill and ADM, increasing by more than US$155 billion. Local stocks in the energy, infrastructure and consumer sectors have also been outperforming and may continue to do so, as we have flagged.
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Again, if we cannot trust the Swiss National Bank, which, days before shoving Credit Suisse into the loving hands of UBS, declared that the former was sound, or Powell, who testified to the US Congress days before SVB’s collapse that the US banking system was sound, then what do we have to rely on? Sadly, in both instances, the market seemed to correctly pronounce the imminent death of these three banks, whatever one thinks of short-sellers. Personally, I always prefer market signals to policy statements, but the erosion of trust in institutions that should be functioning as credible beacons in times of market stress heralds an unravelling potential that appears unprecedented and scary to envisage.
Safely at home
Having worked for various financial institutions over the past 25 years, I’ve seen how the Monetary Authority of Singapore regulates from a tightrope. On the one hand, it wears a velvet glove as it encourages global financial institutions operating here to embrace innovation and to help foster Singapore’s status as a global financial centre. On the other hand, it wields an iron fist: putting in place tough regulations to protect local investors and depositors, based on impeccable credentials in governance and trust. As such, I am surprised by the standards in America, but less surprised by the different standards expected — when they lean in on the rest of the world directly or through multilateral institutions. It may be unfair but we are probably better for it.
MAS’s managing director Ravi Menon, rightly recognised as the best central banker in 2018 by The Banker magazine, is reportedly leaving this office soon. Whether or not he joins the list of Singaporeans who are starting to lead UN or global agencies or stands for public office, I am comforted to say within the first world banking industry, the issues that are of concern in Singapore are but the odd IT service outages (just get on with it) or scams (for which the public must take some personal responsibility too), and trying to keep consumers from hurting themselves speculating in all manner of crypto without education. Not quite existential for individuals and the economy.
True, it is a challenge for retail-focused digibanks like GXS (co-owned by Grab Holdings and Singapore Telecommunications) to build up, with the many regulatory caps limiting their initial foray, but it forces a focus on a segment of new banking needs that complements the traditional ones as these digibanks compete with incumbents. I am personally a happy user of Trust Bank — a joint venture between NTUC and Standard Chartered, made possible by the latter’s Significantly Rooted Foreign Bank status, which is less constrained by its more traditional banking licence — especially with the zero foreign exchange fees when travelling overseas.
For the listed companies, United Overseas Bank was first off the bat in earnings season with a proud report card. Delta from its bold acquisitive moves in the region is starting to show. The recent AGM of Oversea-Chinese Banking Corp saw a few ripples, as shareholders pressed the board on whether the already steady dividend can be further improved, or if more value can be extracted from its closely held but separately listed insurance subsidiary, Great Eastern Holdings. Since it is a bit less fashionable now, DBS Group Holdings has diminished its narrative on fintech of late. Nonetheless, it could see contributions from its new consumer banking business in Taiwan acquired from Citibank further extending its record earnings reported on May 2.
As the three banks go ex-dividend progressively, there could be some potential “over adjustments” or “under adjustments” versus the dividends paid. I see these as good reinvesting opportunities, on top of the 3%–4.5% dividend yield that the Straits Times Index (STI) can reliably give, especially if Singapore and the region’s economy continue to hold up relative to developed markets. With yet another round of cooling measures, notably in the form of higher additional buyer’s stamp duties designed to curb investing appetite, a stable local property market is, in my opinion, also positive.
It’s early days yet, but iFast Corp is seeing some initial results from its UK Bank acquisition, while returns from its HK MPF project are still “coming soon”. If we are to see a mild correction in May — related to dividends or macro winds from the US — this might be one to consider running into; if my prognosis holds for a positive STI by the year-end, our three “local” banks, accounting for 40% of the index benchmark, will certainly weigh in.
Chew Sutat retired from Singapore Exchange after 14 years as a member of its executive management team. During his watch, the exchange transformed from an Asian gateway into a global multi-asset exchange, and he was awarded FOW’s lifetime achievement award. He serves as chairman of the Community Chest Singapore
