The Ripple Effect from Global Banking Turmoil

Silicon Valley Bank (SVB) and Credit Suisse might be just the first of many shocks and cracks from the financial weaknesses that will inevitably feed back into the real economy. The immediate cause of this incident stems from the rapid increase in interest rates in the United States and other major global economies which have significantly weakened the global banking system.

The collapse of SVB has highlighted the interest-rate risk of purchasing long-term securities financed with short-term deposits and the susceptibility to a liquidity run. Higher interest rate will affect interest-sensitive assets such as real estate, non-essential consumer industries and highly leveraged companies, reducing earnings and capital buffers.

The Federal and other central banks are now torn between difficult choices, whether to keep rates high to control inflation or loosen monetary policy to stabilize financial markets. Nevertheless, the recent deal struck by Credit Suisse with UBS for a $3.2 billion rescue deal has somehow calmed the financial market panic at the moment. 

While the abovementioned incidents have no direct impact to the Asia market, they are still significant disruptions and shocks to the global financial system and can have ripple effects on economies and markets around the world.

The concerns over US bank failures have been affecting the global market and we can expect the local market to remain cautious. The spillover effect from this has caused KLCI index performance to be on a declining trend for fourth consecutive week, from 1,464 (22^nd February) to 1,412 (as of 22^nd March), a drop of about 3.5%, as fears of the US banking crisis increased following the collapse of SVB followed by Credit Suisse bail out.

Source: yahoo!fianance

The ripple effect has also manifested in the local stock market with foreign investors being the largest net seller over the past 4 weeks (from 17^th Feb to 17^th March), net selling bank shares i.e. Public Bank and Maybank in fear of the chain reaction that could be dragging down the financial institution in Malaysia too. However, the local market confidence towards local financial strength remains strong with retail investors being the largest net buyer over the same period for both Public Bank and Maybank.

That being said, if the concern over US financial institution collapse were to trigger a broader financial crisis or market downturn, this could potentially impact Malaysia’s economy and stock market in time to come. But, at this time, it is difficult to predict the extent of any such impact and how it will manifest in the local market.