Alternatives needed if bank crisis threatens to spread

The recent Silvergate, Signature, and Silicon Valley Bank (SVB) collapses in the United States were easy to blame on their exposures to cryptocurrency and technology speculators. The US Federal Reserve and the White House told the world not to panic, even though the Signature and SVB collapses were two of the biggest in American banking history.

Ranjit Thambyrajah - Managing director Acuity Funding

By mid-March, 11 major US banks had put together a $30 billion rescue package to protect First Republic bank from collapse. Various other American banks had borrowed around $150 billion from the Fed’s liquidity facility to avoid a capital reserve crunch. Then Credit Suisse put its hand up. Switzerland’s second-biggest lender’s share price crashed after one of its principal supporters, the Saudi National Bank, said it was not prepared to put any more funds into Credit Suisse, having already attained 10 per cent of the bank last year at a cost of $1.5 billion.

The troubles suddenly meant an American regional banking crisis was a global banking crisis. Credit Suisse secured a $54.7 billion lifeline from the Swiss National Bank, which gave it some time to get out of trouble. The Swiss government then brokered a deal for the nation’s biggest bank, UBS, to take over its biggest competitor for around $3.25 billion – its market value halved in two days.

In the aftermath of the secretly negotiated UBS takeover, it was reported that Credit Suisse had been battling a crisis of confidence of its own making for months, after years of losses. Reuters’ reporters argued that the UBS takeover broke one of the golden lessons out of the global financial crisis by concentrating even more capital in a single global banking behemoth – UBS.

Many commentators and analysts are arguing this crisis in international banking is far from over. The impact of this crisis on bond markets around the world will be one of the most troubling factors for lenders, borrowers, and investors.

Prior to the recent run of bank failures, many banks in the US had been investing their reserves in US Treasury Securities bonds, which had been paying very low-interest rates.

Then the Fed started to increase the official cash rate to bring escalating inflation under control. As rates went up, bond prices went down and the market value of bank capital reserves followed. Forced to shore up their capital reserves, some banks started selling bonds at substantial losses.

Outside of Europe and the US, China’s banking sector remains the most immune to the banking crisis. According to Bloomberg, almost all of the top bank performers during March were in China, where interest rates have been adjusted at a slower pace by the People’s Bank of China than by other central banks around the world.

The greatest pain from the unravelling of the international banking system will be felt in smaller economies, where bond markets are less mature. Repercussions will be felt by those who have used bonds to raise funds for major projects. If those bonds have been backed by any of the crisis-hit banks, such as Credit Suisse, their value has been destroyed.

In countries where financial regulations are still developing, it is very difficult for the authorities to take action against the bondholders or banks backing the bonds. They can only act against the developers and project managers.

The key to successful investing, borrowing, lending, and project management is liquidity or cash flow. It is essential to have access to enough cash or highly disposable assets to keep the wheels of any project turning. Without cash, you cannot pay for your supplies, your labour, for anything.

A long-held expectation of investors and borrowers is that banks that make funds available via loans or bonds will be able to honour those products with cash when needed by their borrowers or investors. We have learned in recent weeks that, even with the reforms to the banking system put in place after the global financial crisis, not even a global bank like Credit Suisse is immune from the consequences of a lack of market confidence.

A bank may have a big name and branches all over the world, but its bonds can become worthless overnight. Credit Suisse bonds were not insured or guaranteed, and that is a massive lesson to learn when you are relatively new to using bonds.

Fortunately, there is a new wave of innovators or disruptors, including Acuity Funding, who combine the best of investing and lending to arrange funding for even the world’s biggest projects. A conventional lender, such as a bank, can lend money for a project in return for security, such as a lien over a piece of real estate or property. The limitation of this type of funding is that the lender only has a set amount of money available to lend.

Investors, on the other hand, can make funds available for a particular project, but they usually have quotas or caps on the amount that they can invest in any individual project or any particular type of project. This is due to the fact that they usually invest in accordance with a particular mandate or asset allocation or profile/mix.

And when your project is dependent on either a lender or an investor who suddenly experiences a capital or liquidity crisis, your source of funding can dry up, completely and unexpectedly.

The repercussions are obvious. If your project is to deliver a major infrastructure project for a national government with stringent timeframes and deadlines, you are in the firing line, not your investors or your lender. In some countries right now, developers who’ve lost their financial backing are being blamed and sometimes punished for failing to fulfill their contracted obligations.

Developments for Vietnam to watch in midst of bank crisis The banking system is bracing for difficulties after the events surrounding Silicon Valley Bank, Credit Suisse, and others. Patrick Lenain, senior associate at the Council on Economic Policies, shared his views on what should Vietnam watch for during this period.