You suddenly receive an ALL CAPS email from your boss. You are told to do something immediately. No question asked. Do you trust your boss and do it right away? Or you think the email account has been hacked and delete the message? Will you at least go and verify?
Such is the case two weeks ago when the CEO of a Silicon Valley startup received urgent messages from the company’s big investors.
“Go into your SVB (Silicon Valley Bank) account now. Take all your money out as soon as possible.”
The CEO decided to check with some friends to confirm what has happened. Next, she hurriedly withdrew as much money as possible from her company’s SVB account by transfers and wires. Right before the website clashed, only less than $250,000 left – the maximum amount insured by FDIC (Federal Deposit Insurance Corporation).
This is the story she shared in the CNN video CEO describes pulling money from bank hours before collapse.
SVB failed after customers’ loss of trust
In 1995, one of England’s oldest banks Barings Bank collapsed after a trader in its Singapore office lost $1.3 billion in unauthorized trades. In June 2007, Bear Stearns failed after two subprime mortgage funds went into troubles and kickstarted the Global Financial Crisis. The next year the US government seized Fannie Mae and Freddie Mac. Then Lehman Brothers collapsed. 2023 banking turmoil started with a crisis in Silicon Valley Bank, followed by First Republic Bank and Credit Suisse.
Ironically, in the case of SVB, the panic was the result of trust and honest sharing. The CEO announced $2.25 billion share sale to cover the loss of $21 billion US Treasuries and mortgage-backed securities. In fact, these are safe investments. If they are held to maturity, there is no loss. It is all because Fed keeps hiking rates that makes these “safe investments” unattractive now.
However, SVB share price plunged 60 percent the next day. Some venture capitalists lost their trust in SVB and advised their invested companies to withdraw deposits from the lender. SVB customers raced to withdraw a total of $42 billion in a single day, leaving the bank with negative $1 billion in cash balance. For the week ended March 15 when SVB and Signature Bank failed, customers had withdrawn a total of $98.4 billion from their accounts.
To stop losing customer deposits, SVB could have set a limit on withdrawal amount or blocked it altogether. These practices are not rare in the industry. Last month, the world’s largest alternative asset manager Blackstone blocked investors from cashing out $71 billion REIT. Early this month, Blackstone just defaulted on a $562 million bond backed by a portfolio of offices and stores.
Bank runs – the past and present
A bank run starts with a rumor. Then customers lose trust, become panic and withdraw deposits from their accounts. They do so for fear of bank insolvency that can wipe out their savings. When too many customers get their money out at the same time, the bank’s reserves may not be sufficient to cover the withdrawals. This is when defaults happen which eventually leads to the collapse of the bank.
In the 1970s and 1980s, the banking system was shaky during economic crises. The bank run I remember the most is Hong Kong’s Kah Wah Bank. It was founded in 1922 and taken over by a Singapore businessman in 1974. It went bankrupt in 1986 after a bank run.
I still recall the long line of Kah Wah Bank customers queuing in front of a branch near our home. The funny thing was: As I watched many anxious customers standing in line, my brain kept replaying their famous commercial jingle on TV: Kah Wah trust me. I trust Kah Wah.
These days customers no longer line up in front of the bank branches physically in a bank run. Rumors also spread much faster with whatsapp and twitter. We can withdraw funds from our accounts online using mobile devices in a matter of minutes.
In a few days after SVB failed, Goldman Sachs, JPMorgan and Fidelity found an influx of $52 billion, $46 billion and $37 billion respectively from panic customers of their competitors. Investors got their money out of risky savings, equities and bonds. Over $286 billion flooded money market funds. Money-market mutual funds reached a record high of $5.4 trillion. Hot money fled to safe havens US dollar and Japanese yen. Gold and bitcoin prices soared. Citi economists said China is a “relative safe haven” this year.
Contagious and irrational fear after loss of trust
The recent takeover of Credit Suisse by competitor UBS saw a complete write-down of the fallen bank’s AT1 bonds. A total of $23 billion risky bonds held by the bank’s customers are now worthless.
On one hand, high inflation and rising mortgage payments are making the poor poorer. On the other hand, the collapse of the banking system is making the rich poorer. This somehow works to narrow the gap between the rich and the poor.
Trust in the European banking systems has reached a new bottom. Over the weekend, fear of European banking crisis returned. Yesterday (March 26) IMF said that risks to financial stability have increased and called for continued vigilance. The warning came after Deutsche Bank’s share price dived on Friday (March 24) amid irrational market fear. The German lender was rumored to be the next European bank to fail. This is despite the fact that it has demonstrated strong financial performance with ten consecutive quarters of profits.
Singapore was not spared of financial alarms. During the Global Financial Crisis in September 2008, Federal Reserve Bank agreed to lend $85 billion to a failing AIG. Within hours, hundreds of anxious policyholders rushed to AIA Singapore’s Customer Service Centre in Finlayson Green to terminate their insurance policies. MAS immediately issued an announcement to calm the market:
“AIA currently has sufficient assets in its insurance funds to meet its liabilities to policyholders. Policyholders should, therefore, not act hastily to terminate their insurance policies with AIA as they may suffer losses from the premature termination and lose the insurance protection they may need.”
A week later, phone messages spread questioning the financial health of Hong Kong’s Bank of East Asia. This led to hundreds of terrified depositors queuing in front of the bank’s branches to withdraw their savings.
The dilemma of trust or not trust
Trust implies firm belief or strong confidence with something or someone. But trust is also tricky. It can be easily lost in unforeseen circumstances. And once trust is gone, things become complicated.
Trust is always relative in the financial market. Depending on the position of the spokesperson, the truth can be partial, outdated or hidden.
When people believe strongly that a market will do well, they will continue to pour money inside. However, once they are convinced that risks and crises are building up and the market may collapse, they will run for their life in a stampede manner.
One Saturday evening, when diners crowded the restaurant and waiters were busy serving the customers, someone shouted out of the blue, “Fire! Fire!”
Some sat still, at a loss how to react. Some looked around, wondering what happened. Some stood up, trying to check the extent of the fire.
Then they heard someone screaming, “Get out! Now!” Suddenly the customers all came to their senses, got up and ran for the nearest exit.
By then, there were too many people rushing out at the same time. In a small place with dimmed lights, with everyone running in the same direction in a panic, the most unfortunate thing happened: The rush to get out for safety ended up in a stampede. Coupled with the already shaky structure of the building, the whole place soon collapsed in the fire.
The accident resulted in heavy casualties.
– Vina Ip, No BS Guide To Property Investment
Food for thought
It is difficult to decide who to trust in today’s media. Many reporters taking the role of “you said I write” with quotes to fill up their articles. More are biased with vested interests. Some believe that they must have stand and take side. Few dare to deep dive, find and report the truth.
“In this digital world, trust is more valued than ever. Unfortunately, trust is increasingly rare in the mass media. It is common to see company spokespersons interpret market data in their favour and craft a misleading picture to showcase their products in a good light.”
– Always question what the media tells you, Propertysoul.com
“We don’t have to earn a degree to survive in a low-trust industry in a high-trust society like Singapore. We can choose to trust, but trust smartly rather than blindly. We can read any analyst’s comment with our eyes wide open. Amid mixed property market signals, we can stay sensible to tell facts from speculations and use official data rather than fictitious projections.”
– Vina Ip, Behind The Scenes of The Property Market
Our next event will be Property Soul Meet the Blogger Session to be held on 15 April 2023. Check it out now.
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