Published: 14:29, March 15, 2023 | Updated: 14:33, March 15, 2023
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SVB demise a wake-up call to banks
By Jiang Xueqing

Pundits urge stronger regulation of rate hike risks and asset-liability structure

A sign of a branch of the Silicon Valley Bank is pictured at an office building where the bank is located in Frankfurt, Germany,  March 13, 2023. (PHOTO / AP)

Financial experts in China said Silicon Valley Bank's demise in the United States appears to suggest it is probably time for the US Federal Reserve to reconsider sustained aggressive rate hikes, which many believe have caused lethal liquidity problems in banks like SVB.

"The SVB failure is closely related to the rate hikes, which led to liquidity problems. Therefore, the Federal Reserve should slow down and even cease rate hikes," said Dong Ximiao, chief researcher at Merchants Union Consumer Finance Co and a banking analyst.

The main reasons for the SVB failure include a significant maturity mismatch risk, as well as inadequate anticipation of, and untimely adjustment to, rate hikes, which caused the bank to bear a huge interest rate risk, said the Institute of China Merchants Bank in a report on Monday.

The sudden collapse of SVB, CMB's research unit said, is not an isolated incident but one of the liquidity shocks that resulted from the rapid shift in the US monetary policy. SVB is not the first financial institution to suffer from a collapse, nor will it be the last.

Chinese banks must closely monitor interest rate changes in the US dollar market and liquidity conditions, and strive to avoid counterparty risks, said the report. "Under the current trend of reduced domestic liquidity surplus, we must maintain a dynamic monitoring and forward-looking management of asset-liability mismatch risks."

The potential impact of the SVB collapse is that depositors of other small and medium-sized banks in the US may withdraw their deposits in the short term, leading to bank runs, said Dong.

The long-term impact is that US depositors may lose confidence in small and medium-sized banks and transfer deposits to large banks. Therefore, the US government has taken measures to address the issue. In the short term, if these measures are effective, risks may be contained, he said.

"However, US regulators need to pay attention to changes in depositor sentiment and strengthen guidance for them. Once the panic spreads and a bank run occurs, a domino effect might ensue and would be difficult to control," he said.

The SVB episode serves as a warning to China's banking industry, said Dong. He suggested Chinese regulators should strengthen the regulation of bank interest rate risks and urge banks to optimize their asset-liability structure.

Regulators should also strengthen the supervision of financial market businesses, urge banks to make rational use of funds for investment, improve the system for managing liquidity risks and optimize the monitoring system for liquidity risks, he said.

Recent risk events in several US banks are unlikely to trigger a larger systemic financial crisis, said Zhang Qiaoyun, head of the Yangtze River Financial Research Institute at the Southwestern University of Finance and Economics.

Different reasons caused the risks at these banks. The SVB collapse and First Republic Bank's share price plunge were primarily due to excessive mismatches in asset-liability maturity. The Signature Bank failure was mainly due to investors' concerns about its business related to cryptocurrencies. There is no risk of contagion among these banks, said Zhang.

The US government has taken a fast and targeted approach to handle the risks, sending a signal to depositors and investors that the government attaches great importance to stabilizing their confidence, he said.

Currently, there are no widespread defaults of borrowers at these banks, which is completely different from the 2007-09 global financial crisis, he said.

China needs to continue to observe the trends in the US banking industry and maintain relatively sufficient bank liquidity. At the same time, it is essential to focus on changes in the production and operations of domestic technology companies related to Silicon Valley, he said.