The current turmoil in US and European banks could have some folks questioning concerning the state of the banks right here in South East Asia. Is the closure of Silicon Valley Bank more likely to spill over in the USA and trigger a banking disaster on this area? It appears unlikely. Whereas US regulators raced to stabilize the banking system in March, Indonesian banks loved increase years, posting huge earnings and paying billions of {dollars} in dividends to shareholders. So what is going on on right here?
Throughout the COVID-19 pandemic, deposits in banks grew quicker than normal. The lockdowns prevented folks and companies from spending their cash as they usually would and far of it remained in financial institution accounts. Because of this, many banks noticed their buyer deposits rise sharply. In banking, deposits are thought of liabilities as a result of the financial institution has to pay curiosity on them and clients can declare the cash again. Loans are thought of property as a result of they generate curiosity earnings.
So a speedy enhance in deposits creates a little bit of an issue as a result of it represents a sudden enhance in liabilities. Deposits have to be transformed into some form of earnings producing asset or else the stability sheet won’t stability. This was a interval when banks had been in all probability additionally reluctant to lend an excessive amount of due to the uncertainty within the world financial system. To make sure that these deposits don’t burden the stability sheet, many banks invested them in securities corresponding to bonds in the course of the pandemic.
If we have a look at Silicon Valley Bank (SVB), for instance, deposits grew from $62 billion in 2019 to $189 billion in 2021, when folks largely sat on money and obtained emergency checks from the federal government. The worth of SVB’s gross mortgage portfolio rose from $33 billion to simply $66 billion over the identical interval. It’s clear that the SVB doesn’t convert most of its new deposits into loans. As an alternative, they invested them, primarily in securities. Their portfolio of funding securities went from $29 billion in 2019 to $128 billion two years later.
The market worth of those investments fell when the Federal Reserve began elevating rates of interest, inflicting a financial institution run for a number of causes. However what uncovered SVB to this threat within the first place is that because the deposit base grew in the course of the pandemic, the financial institution parked most of it in bonds and didn’t adequately hedge rate of interest threat. By 2021, it had way more funding securities on its books than loans.
Indonesian banks confronted the identical puzzle in 2020 and 2021, as deposits additionally grew quickly. There are a number of necessary variations, nevertheless. First, deposits in Indonesia didn’t develop that quick. The Indonesian authorities didn’t ship checks like the USA. As an alternative, a lot of the pandemic aid has been in type – within the type of sponsored electrical energy or meals distribution. So there was not the identical influx of financial savings into the banking system. From 2019 to 2021, deposits in Indonesia’s largest non-state financial institution, Bank Central Asia (BCA), rose 39 p.c. That may be a vital enhance, however it isn’t the 206 p.c enhance that SVB noticed in the identical interval.
Second, Indonesian banks are fairly conservative. The nation has skilled a number of banking crises all through its historical past, and that’s mirrored in the best way the banks function right this moment. With extra deposits in the course of the pandemic, BCA did what SVB did. It could not convert all deposits into loans, so it purchased securities, together with authorities bonds. BCA’s publicity to funding securities went from $11 billion in 2019 to $27 billion in 2022. However even with this uptick, securities made up simply 31 p.c of property in 2022, whereas the mortgage portfolio was equal to 53 p.c. At SVB, funding paper represented 57 p.c of property in 2022 and loans 35 p.c.
Which means that BCA has considerably elevated its funding place in securities from 2019 till now, however it was and nonetheless is especially engaged in lending from deposits (and that is usually true for all main banks of Indonesia). SVB, however, invested most of its new deposits in securities that uncovered them to threat when the Federal Reserve began elevating rates of interest.
Indonesian banks mitigate a few of this threat by working as boring old style banks. They take buyer deposits and lend them out. As deposits rise, they divert a higher portion to investments corresponding to bonds, however to not the purpose the place they turn out to be the biggest asset class on their stability sheets. Usually, it’s loans backed by deposits that dominate the asset aspect of Indonesian financial institution stability sheets. If not, that is in all probability a superb time to fret.
