For markets in Malaysia, this contagion risk appears to be controlled and it does not appear to be spreading to the broader real local economy at the moment, said Lee.
KUALA LUMPUR: The ghosts of the 2008 global financial crisis (GFC) which sparked a strong sell-off in stocks worldwide beginning with US equities continue to remain a vivid memory in the minds of many investors.
The Silicon Valley Bank (SVB) crisis, which was recently sparked by rising bond yields due to the continued expectations of interest rate hikes from the Federal Reserve (Fed), appears to be frequently associated with this and is being labelled as the “second biggest financial event” after the GFC.
This contagion risk appears to be especially developing more prominently in the West, following the recent moves in Switzerland, which saw the forced takeover of Credit Suisse by UBS Group AG.
For markets in Malaysia, this contagion risk appears to be controlled and it does not appear to be spreading to the broader real local economy at the moment, said Socio-Economic Research Centre executive director Lee Heng Guie.
This is because of the proactive moves by the financial regulators as they might have been trained by circumstance to look out for any sign of early weakness in the banking system and instantly extinguish it, if necessary by force.
“If you look at how swift the Fed and recently the Swiss financial regulators have moved, it’s fast, especially when compared to the 2008 GFC. And I think it would be the same with the other regulators as well. However, we may still be in the early days of this latest development as the lingering concerns appear to be still present,” Lee told StarBiz.
Lee also cautioned that the final outcome as to the impact to the real economy globally could go both ways, and the downsides could be deep as well, urging regulators to be extra vigilant.
Recently he noted there has been a small impact from the Credit Suisse investments to AHAM Asset Management’s AHAM Single Bond Series 2 and AHAM Single Bond Series 4 and the market appears to be awaiting a clearer signal from this front if things have indeed stabilised.
Notwithstanding these latest developments, Lee said the US economy is still expected to slow this year, weighed down by inflation and the lagging impact of higher interest rates.
“The regional banks’ collapse will cause negative financial spillovers to households and business spending. Small and mid-sized banks account for 50% of commercial and industrial lending and 60% of residential real estate lending, among other loans,” Lee said.
“If the US regulators fail to contain the regional banks’ fallout rout, it will amplify deep recession fears in the US economy, as the banks will turn more cautious in their lending while households may be wary about their deposits. The effect of share wealth loss due to a sharp falling stock market, followed by demand retrenchment could slow down the economy,” he added.
Meanwhile, RAM Rating Services Bhd’s (RAM Ratings) co-head of financial institution ratings, Wong Yin Ching, said earlier in the week that the collapse of SVB and two smaller banks in the United States would have no rating impact on domestic banks.
Wong said she expects loan growth to still be led by the Islamic banking sector, which contributed to over 80% of the industry’s growth in 2022.
“In Malaysia, banks’ credit fundamentals remain robust and resilient, supported by strong regulatory supervision to weather heightened volatility in global financial markets,” RAM Ratings’ said.
The ratings agency maintained its “stable” outlook on the Malaysian banking sector.
On a related matter, Maybank Investment Bank Bhd recently said local banks had ample liquidity with a loan-to-deposit ratio of 92% and liquidity coverage ratio of 145%.
It pointed out that capital, sticky or diversified deposit bases, and balance sheets are also far less exposed to any further hikes in interest rates.
In its strategy note, CGS-CIMB Research said the FBM KLCI fell 1.4% from the previous week in the week ended March 10, 2023 due to concerns over the SVB crisis.
“Foreign investors were the largest net sellers. They were net selling Maybank and Public Bank Bhd
, while retail investors were the second-largest net buyers last week, net buying Maybank and Public Bank. We expect the market to remain weak in the near term due to concerns over a possible contagion effect from SVB’s fallout,” CGS-CIMB Research said.
Meanwhile, the Center for Market Education (CME) said the SVB collapse and the consequent bank crisis is due to rapid monetary manipulations, which brought the world economy to experience a very rapid then alternated between inflation and credit crunches.
“The SVB collapse needs to be seen as a consequence of the industrial difficulties faced by the tech industry in the last few years. However, such a process would not have happened without the excess liquidity created as a consequence of the lockdowns. The turning point of the cycle was determined by inflation and the need to fight it,” CME said in its statement.
