WEBVTT - 5 things about the banking crisis

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<v Speaker 1>Is your money safe? You may have been wondering about

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<v Speaker 1>your deposits after a series of bank runs in the

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<v Speaker 1>US and the emergency rescue of credit suisse. So what

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<v Speaker 1>do you need to know about this crisis? That's been

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<v Speaker 1>unfolding in the banking sector? I'm Jonathan Piris from the

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<v Speaker 1>money mind team. And my guests today are Samuel, re

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<v Speaker 1>chairman and chief investment officer of fintech startup in DAAs

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<v Speaker 1>and lien, chief investment strategist of lion global investors.

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<v Speaker 1>Now guys, let's start with the two major episodes in

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<v Speaker 1>the past weeks, the bailout of credit suisse and the

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<v Speaker 1>bank runs in the US. Samuel. Are we in a

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<v Speaker 1>global banking crisis?

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<v Speaker 2>Yeah, we are in a kind of a mini banking crisis.

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<v Speaker 2>I wouldn't call it a full blown banking crisis. What

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<v Speaker 2>we've experienced in the US and what we experienced, the

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<v Speaker 2>creditors are very fundamentally different things. So in the US,

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<v Speaker 2>it's because the fixed income market has created a loss.

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<v Speaker 2>There's a mismatch of asset and liability

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<v Speaker 2>for the banks had a run on their deposits, any

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<v Speaker 2>bank at any point in time, if they have a

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<v Speaker 2>massive run where depositors ask for all of their money back.

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<v Speaker 2>There's no bank that will survive. What that results in

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<v Speaker 2>is the flight to quality that we are seeing. So

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<v Speaker 2>the money that people are fearful of not getting back

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<v Speaker 2>unless the government guarantees it, they will fly to the

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<v Speaker 2>quality and bigger banks like Chase or Bank of America

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<v Speaker 2>where they have seen massive inflows of deposits which makes

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<v Speaker 2>them even stronger.

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<v Speaker 2>That's I think very different from credit suisse where I

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<v Speaker 2>think credit suisse was really a result of risk management,

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<v Speaker 2>not really being there. Credit Suisse is traditionally known as

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<v Speaker 2>a bigger risk taker than its competitor like U BS.

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<v Speaker 2>If you take those risks, then you blow up, then

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<v Speaker 2>you're going to face the consequences of that. Credit Suisse

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<v Speaker 2>was a very company specific problem that was exacerbated by

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<v Speaker 2>a crisis of confidence. And so when there's a crisis

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<v Speaker 2>of confidence in financial markets, they attack the weakest link

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<v Speaker 2>and in Europe, that was credit Suse

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<v Speaker 1>le me. And do you agree not at this moment,

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<v Speaker 1>the current issues that we face in the States or in,

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<v Speaker 1>in crisis, these are unique issues that are present at

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<v Speaker 1>the banks themselves. After 2008, the global financial crisis, banks

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<v Speaker 1>are now very well capitalized and fairly well regulated. Second

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<v Speaker 1>thing this time around the regulators have come in very

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<v Speaker 1>quickly to address the issues with confidence. So if you

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<v Speaker 1>look at the US

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<v Speaker 1>financial regulators, they have come in with two policies, one

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<v Speaker 1>which is they have in a way assured that the

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<v Speaker 1>uninsured deposits at Central bank and also at Silicon Valley

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<v Speaker 1>Bank will be made whole. What this means is that

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<v Speaker 1>banks that are larger than central bank or S V B,

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<v Speaker 1>your deposits will definitely be safe, you know, in a

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<v Speaker 1>way that's an implicit guarantee. Secondly, the regulators will also

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<v Speaker 1>come in to help out with the liquidity of the

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<v Speaker 1>banks themselves.

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<v Speaker 1>For Silicon Valley Bank, when depositors flee, they are forced

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<v Speaker 1>to sell their portfolio of bonds by doing so, they

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<v Speaker 1>realize losses. But in this case, what the regulators allow

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<v Speaker 1>is that the banks could now pledge their assets to

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<v Speaker 1>the government on par, meaning there's no haircut so that

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<v Speaker 1>resolves the liquidity issue at the banks. So the really

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<v Speaker 1>quick actions by the central bankers and the regulators have

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<v Speaker 1>actually addressed the confidence issue. So we think

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<v Speaker 1>that by coming in very quickly to resolve the issues,

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<v Speaker 1>the risk of contagion or systemic risk that could lead

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<v Speaker 1>to a banking crisis, that rate is very low now.

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<v Speaker 1>So what kind of an impact will there be on

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<v Speaker 1>the global economy? Samuel?

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<v Speaker 2>The global economy was already slowing whether it was because

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<v Speaker 2>of China because of COVID and the US because of

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<v Speaker 2>the interest rate policies. But whether we enter a recession

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<v Speaker 2>or not, I think is debatable because global recession is questionable.

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<v Speaker 2>The market is expecting a US recession during the course

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<v Speaker 2>of this year or

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<v Speaker 2>beginning of next year. But we think that it will

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<v Speaker 2>be probably a mild recession, it won't be a steep

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<v Speaker 2>recession and it will be a recession marked by very

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<v Speaker 2>peculiar factors like unemployment remaining relatively low, the consumer balance

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<v Speaker 2>sheet remaining relatively healthy, but the probability of a recession

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<v Speaker 2>is very real.

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<v Speaker 1>I think these are issues that are unique to the

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<v Speaker 1>banks themselves and not representative of the general situation. So

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<v Speaker 1>I really don't think that we are in a crisis mode.

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<v Speaker 1>That's it, there could actually be an indirect impact on

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<v Speaker 1>the economy itself even before the

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<v Speaker 1>issues at signature bank or at the S V B

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<v Speaker 1>or credit suisse consensus numbers is already expecting Europe to

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<v Speaker 1>have a contraction, economic contraction for 2023. And for us

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<v Speaker 1>to probably be flat, maybe 0% to 1% GDP growth rate.

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<v Speaker 1>So with this issue itself, you could actually expect the

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<v Speaker 1>lending rates to be tightened, meaning there will be less

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<v Speaker 1>credit in the system itself and that could actually drag

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<v Speaker 1>on the economic growth rate. So I would say that

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<v Speaker 1>there's a fair chance that we could see a economic

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<v Speaker 1>contraction for the developed markets in this year.

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<v Speaker 1>But that's it. For Asia is a different story altogether

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<v Speaker 1>because for Asia, you have the counter cyclical growth of China,

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<v Speaker 1>the Chinese government is very committed to the 5% GDP

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<v Speaker 1>growth target that they have set March of this year

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<v Speaker 1>and they are just opening up after three years of lockdown.

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<v Speaker 1>So our expectation is that the

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<v Speaker 1>the opening of China would also have a carry-on impact

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<v Speaker 1>a boost to the economy in Asia. So for example,

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<v Speaker 1>if you look at Singapore, I think M E s

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<v Speaker 1>has projected a GDP growth rate of around 0.5-2.5%, which

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<v Speaker 1>is still a fairly healthy range. So you shouldn't look

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<v Speaker 1>at things in totality, developed markets like us and and

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<v Speaker 1>Europe probably runs a risk of a recession maybe end

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<v Speaker 1>of this year or next year. But for Asia, the

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<v Speaker 1>risk of that is fairly low.

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<v Speaker 1>So within this landscape, how should investors be positioned to

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<v Speaker 1>navigate the road ahead?

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<v Speaker 2>One of the biggest lessons that we can learn from

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<v Speaker 2>the whole experience and this cycle is that we really

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<v Speaker 2>should take more advantage of the benefits of diversification.

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<v Speaker 2>So that could mean that you diversify across different banks

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<v Speaker 2>for your deposits or diversify into money market funds or

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<v Speaker 2>cash management solutions that are attractive. The other diversification is

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<v Speaker 2>that you don't just place your money in deposits but

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<v Speaker 2>invest in maybe fixed income because fixed income is quite

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<v Speaker 2>attractive right now.

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<v Speaker 2>And then if you're looking at financial investments in financial

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<v Speaker 2>markets and not investing in a single company or a

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<v Speaker 2>single country or a single sector, but really trying to

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<v Speaker 2>be more diversified across global markets so that you know,

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<v Speaker 2>you have one blow up Silicon Valley Bank

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<v Speaker 2>if you're a passive global investor, then it wouldn't have

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<v Speaker 2>made even a dent, even credit suisse wouldn't have made

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<v Speaker 2>a dent. But if you just invested in European banks

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<v Speaker 2>or if you invested in US banks, or if you

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<v Speaker 2>invested in a single stock like Silicon Valley or credit suisse,

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<v Speaker 2>you would have lost a lot of money and lost

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<v Speaker 2>a lot of money to a degree where you may

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<v Speaker 2>not be able to recover. Whereas diversification allows you to

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<v Speaker 2>take those losses and still be able to continue to

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<v Speaker 2>compound your returns over time.

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<v Speaker 2>Because the market naturally does what it does, which is

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<v Speaker 2>it sees out the bad players and overweight those companies

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<v Speaker 2>that are delivering and growing and a higher quality. So

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<v Speaker 2>being exposed to market and generating that beta return is

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<v Speaker 2>still an attractive proposition for an individual who's saving for

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<v Speaker 2>the long term and trying to compound their wealth over

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<v Speaker 2>the long

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<v Speaker 1>term. I think for all investors, one thing that you

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<v Speaker 1>have to remember is diversification.

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<v Speaker 1>So especially in this environment, cash is also king. So

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<v Speaker 1>I think investors will do well if they remember these

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<v Speaker 1>broad guidelines, meaning you should have a certain amount of

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<v Speaker 1>your money in cash, cash equivalent, you could consider even

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<v Speaker 1>the T bills that the Singapore government is issuing. Second

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<v Speaker 1>thing to have equities. So within equities, you could actually

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<v Speaker 1>look at both growth and also quality.

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<v Speaker 1>And lastly in case there's a recession, you should actually

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<v Speaker 1>have also investment grade bonds. Because when you do have

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<v Speaker 1>a significant economic slowdown, central banks would likely cut interest

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<v Speaker 1>rates and that will be positive for bond prices. So

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<v Speaker 1>the key is basically to have a diversified portfolio. So

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<v Speaker 1>you could have some cash, some equities for equity should

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<v Speaker 1>be quality and some growth in it. And lastly, you

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<v Speaker 1>should actually have bonds also

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<v Speaker 1>a quick recap of what we've talked about. So far,

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<v Speaker 1>the issues appear to be specific to the banks themselves

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<v Speaker 1>and not representative of the larger financial system. But there

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<v Speaker 1>could be knock on effects as banks tighten lending standards,

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<v Speaker 1>this will make loans harder to get and more costly.

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<v Speaker 1>If you're investing both Samuel and lien suggest having money

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<v Speaker 1>in different banks as well as different financial products and markets.

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<v Speaker 1>So the big question is our money safe in banks,

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<v Speaker 1>I would think so after 2008, most of the banks

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<v Speaker 1>are actually regulated properly for the large banks. There's this

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<v Speaker 1>extra capital requirements stipulated by Bale three and most of

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<v Speaker 1>the banks are in compliance with Bale three especially in Singapore.

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<v Speaker 1>So you're referring there to battle three, a set of

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<v Speaker 1>international banking reforms introduced following the 2008 global financial crisis

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<v Speaker 1>to improve regulation and promote stability in the international financial system.

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<v Speaker 1>Yeah, well, banks these days are very well capitalized and secondly,

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<v Speaker 1>there's ample regulatory oversight at the banks. So we feel

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<v Speaker 1>that the banks are basically safe as a start. There's

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<v Speaker 1>this insurance scheme over here in Singapore. So up to

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<v Speaker 1>$75,000 per person would actually be insured at the banks

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<v Speaker 1>in Singapore in the States. It is around 250,000. So

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<v Speaker 1>there's a little bit of disparity over there, but you

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<v Speaker 1>are sure at least for $75,000 that you will be

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<v Speaker 1>insured

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<v Speaker 1>the banks over here in Singapore, regardless of whether it's

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<v Speaker 1>a local bank or it's a foreign bank, the regulations

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<v Speaker 1>actually applies to them. So we are confident that the

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<v Speaker 1>banks in Singapore are basically safe.

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<v Speaker 2>Well, the Singapore government also only insures up to $75,000.

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<v Speaker 2>And so if there is a bank run on a bank,

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<v Speaker 2>then obviously that's still a risk. I think generally the

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<v Speaker 2>banks are safe. But in the US, for example, money

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<v Speaker 2>market funds have become very popular and we saw a

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<v Speaker 2>big inflow into money market funds which are day to

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<v Speaker 2>day matched dollar for dollar. So the asset liability mismatch

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<v Speaker 2>that is fundamental to the bank's balance sheet

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<v Speaker 2>because you borrow from depositors in short term money that

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<v Speaker 2>people can take out at any time without a gate.

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<v Speaker 2>But you lend that money to mortgages and companies that

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<v Speaker 2>you can't pull immediately or they are invested in investments

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<v Speaker 2>that often lose money and you can't get out immediately

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<v Speaker 2>and repay the depositors that fundamental mismatch is still there

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<v Speaker 2>for every single bank.

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<v Speaker 2>So if you're worried about that, then you know, maybe

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<v Speaker 2>the money market fund is a good alternative for you

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<v Speaker 2>to invest in because money market funds obviously are mark

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<v Speaker 2>to market every day has daily liquidity, no lock up.

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<v Speaker 2>Um So those are um you know, attractive like liquidity

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<v Speaker 2>management, cash management solutions and they represent almost 20% of

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<v Speaker 2>bank deposits in the US. So it's a very popular

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<v Speaker 2>common way to manage your liquidity if you're concerned about

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<v Speaker 2>bank deposits. What

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<v Speaker 1>is one key lesson to be learned from this episode

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<v Speaker 1>of bank shutdowns?

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<v Speaker 2>I think the lesson from credit suisse is that obviously

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<v Speaker 2>you need to do your homework when it comes to

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<v Speaker 2>investing in these banks and companies because it may look

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<v Speaker 2>the same, but each bank is managed differently. They have

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<v Speaker 2>exposure to different segments of the financial service business at

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<v Speaker 2>different points in the cycle. They will do better or worse.

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<v Speaker 2>And so I think credit suisse is all about mismanagement

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<v Speaker 2>and

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<v Speaker 2>a lack of risk control, risk, risk management and controls.

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<v Speaker 2>Whereas the US is very different. I think us the

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<v Speaker 2>biggest lesson that we can learn is that we should

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<v Speaker 2>actually diversify our risk, whether it's deposits at banks or

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<v Speaker 2>investments in financial markets. There is great benefits to be

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<v Speaker 2>had from diversification. The guy who invented diversification won a

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<v Speaker 2>Nobel Prize

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<v Speaker 2>for a reason.

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<v Speaker 1>The regulators could also consider new K P I S

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<v Speaker 1>to look at banks. So for example, one thing that

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<v Speaker 1>we learned this time around was that not only the

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<v Speaker 1>capital structure is important, but the depositor base is also

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<v Speaker 1>the makeup of the depositor base is also very important.

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<v Speaker 1>So for banks with very narrow depositor base and where

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<v Speaker 1>the depositor base is not sticky, I guess regulators may

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<v Speaker 1>see that as a great flag

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<v Speaker 1>by and large, I don't think there will be major

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<v Speaker 1>changes to the regulatory framework, but I think that there

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<v Speaker 1>could actually be additional conditions that regulators will look at

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<v Speaker 1>a lot to consider this episode, teaching us to look

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<v Speaker 1>at the depositor base of banks, not just the capital structure.

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<v Speaker 1>The banking crisis also put the spotlight on the importance

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<v Speaker 1>of risk management and the need for companies to have

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<v Speaker 1>a risk and compliance culture.

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<v Speaker 1>But the issues appear to be specific to these banks

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<v Speaker 1>themselves and not representative of the larger financial system. The

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<v Speaker 1>bank failures have raised concerns among customers about their deposits

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<v Speaker 1>in Singapore funds up to $75,000 are covered by deposit

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<v Speaker 1>insurance but the banking turmoil could hit our pockets as

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<v Speaker 1>banks tighten lending, it will make it more expensive to

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<v Speaker 1>take out loans. It's also heightened fears of recession.

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<v Speaker 1>It's more important than ever to have a diversified portfolio

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<v Speaker 1>and that means different banks sectors and markets. You should

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<v Speaker 1>also aim for a mix of cash or cash equivalents,

0:14:02.260 --> 0:14:05.858
<v Speaker 1>equities and bonds and that's the five things you need

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<v Speaker 1>to know about the ongoing banking crisis. My guests were Samuel,

0:14:09.840 --> 0:14:13.659
<v Speaker 1>re chairman and chief investment officer of fintech startup and

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<v Speaker 1>and lien chief investment strategist of lion. Global investors

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<v Speaker 1>catch money Mind on C N A and online at me,

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<v Speaker 1>watch C N A dot Asia and youtube.