Rugged by Banks 🏦💸

On Thursday, March 23rd, I had the privilege of hosting a discussion featuring financial experts Hann Liew and Sani Hamid.

The focus of our conversation was on the current banking crisis, which has seen three US banks collapse within two weeks. This has understandably left a bitter taste for Malaysians, who are growing ever-more concerned about the safety of their deposits. Our session addresses these worries and shed light on the fragility of the banking industry.

For those who were unable to attend, a full replay of the discussion is now available on Spotify. You may listen to it here.

Scroll down for the written summary of the session.

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1. What do banks do with your money? Do they store it safely or use it for other purposes such as lending out or investing?
   

   If banks are able to create money out of thin air, how is it possible for them to go bankrupt?
   
   Hann explained that banks function as middlemen that connect depositors and borrowers. When customers make deposits, banks loan out these funds at a higher interest rate to borrowers and make a profit off the spread. They may also use those funds to invest into government securities such as bonds.
   
   They are not magic money printers and hence do not have the ability to “create money out of thin air”. The amount of loans issued by banks is limited to the reserve requirements set by the nation’s central bank (ie. Bank Negara Malaysia).
   
   The better description to use is that banks are money multipliers. With a 2% reserve requirement, banks are legally able to lend out 98% of the deposits they receive.
   

2. How and why did Silicon Valley Bank (SVB), the 16th largest bank in the US, collapse in just two days?
   
   It was a perfect storm of failures.
   
   i) The COVID-19 pandemic saw an injection of over $13 trillion into the US economy through extremely low interest rates and government aid programs, resulting in a four-decade high inflation where prices of nearly everything surged.
   
   

   ii) Citizens' excessive spending fueled by the Federal Reserve's extremely low rates led to tech companies posting record quarterly earnings. Tech-friendly banks such as SVB experienced a significant influx of deposits from these companies.
   
   

   iii) SVB invested the deposits into long-term government securities, specifically bonds, which are known to be sensitive to interest rate fluctuations.
   
   

   iv) Rapid increases in interest rates caused the prices of these long-term bonds to fall, which resulted in SVB experiencing huge unrealized losses. But this was not a significant issue since US government debt is one of the safest forms of investment, and as long as the bonds are held until maturity, the principal will be paid back in full.
   
   

   v) As rates rose, citizens and companies had to tighten their spending. Tech companies, which had aggressively expanded during the early stages of the pandemic, began requesting withdrawals from banks.
   
   

   vi) Due to the unrealized losses, SVB was unable to meet customer withdrawals and was forced to sell their long-term bonds at a significant loss, resulting in a $2 billion deficit.
   
   

   vii) This announcement led to mass panic, prompting US regulators to step in and take over the now-collapsed bank, as a bank run had occurred.
   

3. The contagion from SVB's collapse is still spreading, with other lenders such as First Republic seeing a significant decline in their share prices, and globally systematically important bank Credit Suisse receiving a $50 billion lifeline loan from the Swiss National Bank.

   
   Should Malaysians be concerned about this contagion?
   
   Malaysia's economy is relatively centralized, with limited diversification in global assets. For now, our country appears to be somewhat sheltered and insulated from the global impact of the recent banking crisis.
   
   Additionally, SVB is not considered a systematically important bank as it falls within the small to mid-tier category, posing little to no global risk.
   
   However, there has been a significant decline in bank share prices from the contagion, but some Institutions (such as EPF) are considering this as an opportunity to accumulate more banking stocks.
   

4. The PIDM protection guarantees coverage of up to RM250,000 for each depositor from eligible banks.
   
   What are the essential facts we should know about this?
   
   PIDM protection extends not only to each depositor in different member banks, it also provides separate coverage to various types of accounts.
   
   So, if you have an Islamic savings account, a conventional account, and a joint account, PIDM protects all three separately, each up to RM250,000.
   
   *I’ve done a detailed post about PIDM’s coverage in Instagram. View it here.
   

5. The recent disaster has caught the attention of the US Federal Reserve, who have introduced the "Bank Term Funding Program," lending money to struggling banks to boost their liquidity. The "assets held by the Fed," which has historically been an excellent indicator of the money supply in the economy, rose by $300 billion in a week.
   
   There are widespread rumors of the US dollar hyperinflating - is this a plausible scenario?
   
   Plausible, but extremely unlikely.
   
   The COVID-19 pandemic led to the printing of over $13 trillion by the Federal Reserve. However, despite such a massive supply of money, the US inflation rate only increased to 9.1%, which is still far from hyperinflation levels of 1,000%.

   
   

   The $300 billion infusion for banks in this case will have only a minimal impact on US inflation.

   
   

   The speakers also noted that the US dollar is an international currency with high demand, leading to its inflation being exported worldwide.
   

6. Bitcoin maximalists and crypto enthusiasts have celebrated the collapse of traditional banking systems, with some such as CT influencer @Balajis even betting on BTC reaching RM1 million in 90 days.
   
   What is your perspective on this, and is Bitcoin genuinely a solution to the banking crisis?
   
   While it may be unlikely to reach $1 million in a short span of time, there is a high possibility that Bitcoin will reach this value as adoption grows exponentially and fiat currencies continue to depreciate.

   
   

   Several countries, such as Lebanon, Argentina, Sri Lanka, Turkey, etc., have experienced hyperinflation or high levels of currency depreciation. If citizens had some exposure to Bitcoin, their wealth would have been better preserved. Bitcoin is not a comprehensive solution to banking crises, but it is the only asset that cannot be manipulated by governments.

   
   

   Fiat currencies have a 0% success rate, as any government will eventually print it out of value. Therefore, acquiring something that is out of their control is a wise choice.

   
   

   Mr. Sani recommended having a little exposure to Bitcoin (i.e., 3-5% of your portfolio) for diversification, while Hann suggested that a mere 1% exposure to Bitcoin reduces the overall volatility of your portfolio.

The full replay of the discussion is available on Spotify. You may listen to it here.

That’s all for part II of this week’s newsletter!

Disclaimer: I am not a financial advisor. This newsletter is based on my own analysis and research. Do not take any of it as financial advice.

*This newsletter was written at 9.30 AM on 27 March 2023 and completed at 2.30 PM the same day. To get early access to our newsletter, be our patron for as little as $1/month!