Helping hand for sinking banks

BANK failures can be like earthquakes – you often don’t see them coming but the damage to life and property can be substantial.

In early 2023, amid rising interest rates by the US Federal Reserve, investor sentiment on global markets was rocked by the collapse of three US banks.

In March that year, Silicon Valley Bank (SVB) failed after a bank run. It was the third-largest bank failure in US history. No one had anticipated it. SVB was followed shortly by Silvergate Bank and Signature Bank.

With no bailout help, the Federal Deposit Insurance Corp (FDIC) was named as receiver for the assets of the banks.

Across the Atlantic, global investment bank Credit Suisse Group AG was acquired by UBS Group AG in March last year in a rescue arranged by the Swiss government and Swiss Financial Market Supervisory Authority with the Swiss National Bank providing more than 100 billion francs (US$104bil) in liquidity support.

The three American banks were not too big to fail but Credit Suisse was a systemically important bank globally resulting in the differing responses.

Financial institutions continue to fail from time to time. This year saw the failure of Republic First Bank of Philadelphia in April but this didn’t make the headlines and the spillover impact on the real economy was zero, judging from the strong growth of the US economy.

Can banks in Malaysia fail? The answer is yes. A deep prolonged recession accompanied by an avalanche of defaults, a sharp drop in asset prices and major corporate failures and run on deposits could leave any bank’s balance sheet vulnerable.

For instance, state-owned Sabah Development Bank Bhd’s non-performing loans stood at RM5bil or 75% of its total loan portfolio of RM6.6bil as at end-May.

How you deal with such a scenario is key. While many in the public continue to have a perception that the government will step in to ensure their money is safe in the banks and insurance companies, the local financial system has actually evolved much since the Asian Financial Crisis in 1997.

In Malaysia’s financial scene, the safety net system now includes Bank Negara, Finance Ministry and new player Perbadanan Insurans Deposit Malaysia (PIDM).

If a financial institution runs into trouble, whether it is a bank, insurance company, or takaful provider, the central bank will be on the frontlines.

PIDM will step up and take over if the financial institution is deemed bankrupt or non-viable and act much like the FDIC did, although its ability has not yet been tested.

At this stage, the patient is pretty much on life support. PIDM could attempt to keep the entity as a going concern if there is some chance of saving it; however, if it is beyond commercial viability, the entity will have to be liquidated.

This move may not be popular with the public but is necessary to manage the moral hazard level in the banking sector. It will require careful communication with the public as you don’t want a panic situation where people rush to withdraw funds.

That said, PIDM’s growth since its establishment in 2005 has been impressive.

It guarantees deposits to the tune of RM250,000 per depositor per member bank (it has 45 member banks) and all takaful certificates and insurance policies (of its 48 members) from the loss of their eligible takaful or insurance benefits to the limit of RM500,000.

According to PIDM’s 2023 annual report, its deposit coverage protects 97% of bank depositors in full and an equal percentage of insurance policies and takaful certificates.

Its protection fund was worth RM6.6bil last year and it made a total comprehensive income of RM730.6mil (versus RM646mil in 2022).

In 2024, it projects to collect about RM645mil in premiums and levy revenue from member banks and insurance/takaful companies respectively with some 80% of the amount coming from the banking sector.

Much of the money is then invested in low-risk government bonds (conventional and Islamic) or money markets, its annual report notes.

It is forecast to make RM232mil from its investment income and returns which will take its total revenue for the year to about RM877mil.

Such consistent growth would see its protection fund exceed RM10bil by the end of 2030.

The protection fund scale is important as it allows PIDM to have the financial muscle to protect depositors and resolve a failed member institution in a prompt and orderly manner, with minimal loss and impact to the financial system.

Even smaller banks like MBSB Bank Bhd or Affin Bank Bhd have over RM40bil in deposits according to their quarterly filings with the local exchange.

That said, local banks, post the Asian financial crisis in 1997, are in a much healthier financial position with strong capital buffers built over the years under the hawkish supervision of Bank Negara.

The sector, in fact, has welcomed three new local entrants recently in the form of digital banks – GX Bank Bhd, Boost Bank Bhd and AEON Bank (M) Bhd. Two more could join them soon, all of which will contribute premiums to PIDM.

One of the country’s first foreign Islamic bank, Kuwait Finance House (M) Bhd, is exiting for strategic reasons after almost two decades here. Its depositors can rest assured their deposits are covered to some extent by PIDM.