Is your money safe? You may have been wondering about your deposits after a series of bank runs in the US and the emergency rescue of credit suisse. So what do you need to know about this crisis? That's been unfolding in the banking sector? I'm Jonathan Piris from the money mind team. And my guests today are Samuel, re chairman and chief investment officer of fintech startup in DAAs and lien, chief investment strategist of lion global investors.
Now guys, let's start with the two major episodes in the past weeks, the bailout of credit suisse and the bank runs in the US. Samuel. Are we in a global banking crisis?
Yeah, we are in a kind of a mini banking crisis. I wouldn't call it a full blown banking crisis. What we've experienced in the US and what we experienced, the creditors are very fundamentally different things. So in the US, it's because the fixed income market has created a loss. There's a mismatch of asset and liability for the banks had a run on their deposits, any bank at any point in time, if they have a massive run where depositors ask for all of their money back.
There's no bank that will survive. What that results in is the flight to quality that we are seeing. So the money that people are fearful of not getting back unless the government guarantees it, they will fly to the quality and bigger banks like Chase or Bank of America where they have seen massive inflows of deposits which makes them even stronger. That's I think very different from credit suisse where I think credit suisse was really a result of risk management,
not really being there. Credit Suisse is traditionally known as a bigger risk taker than its competitor like U BS. If you take those risks, then you blow up, then you're going to face the consequences of that. Credit Suisse was a very company specific problem that was exacerbated by a crisis of confidence. And so when there's a crisis of confidence in financial markets, they attack the weakest link and in Europe, that was credit Suse
le me. And do you agree not at this moment, the current issues that we face in the States or in, in crisis, these are unique issues that are present at the banks themselves. After 2008, the global financial crisis, banks are now very well capitalized and fairly well regulated. Second thing this time around the regulators have come in very
quickly to address the issues with confidence. So if you look at the US financial regulators, they have come in with two policies, one which is they have in a way assured that the uninsured deposits at Central bank and also at Silicon Valley Bank will be made whole. What this means is that banks that are larger than central bank or S V B, your deposits will definitely be safe, you know, in a
way that's an implicit guarantee. Secondly, the regulators will also come in to help out with the liquidity of the banks themselves. For Silicon Valley Bank, when depositors flee, they are forced to sell their portfolio of bonds by doing so, they realize losses. But in this case, what the regulators allow is that the banks could now pledge their assets to the government on par, meaning there's no haircut so that
resolves the liquidity issue at the banks. So the really quick actions by the central bankers and the regulators have actually addressed the confidence issue. So we think that by coming in very quickly to resolve the issues, the risk of contagion or systemic risk that could lead to a banking crisis, that rate is very low now. So what kind of an impact will there be on the global economy? Samuel?
The global economy was already slowing whether it was because of China because of COVID and the US because of the interest rate policies. But whether we enter a recession or not, I think is debatable because global recession is questionable. The market is expecting a US recession during the course of this year or
beginning of next year. But we think that it will be probably a mild recession, it won't be a steep recession and it will be a recession marked by very peculiar factors like unemployment remaining relatively low, the consumer balance sheet remaining relatively healthy, but the probability of a recession is very real.
I think these are issues that are unique to the banks themselves and not representative of the general situation. So I really don't think that we are in a crisis mode. That's it, there could actually be an indirect impact on the economy itself even before the issues at signature bank or at the S V B or credit suisse consensus numbers is already expecting Europe to have a contraction, economic contraction for 2023. And for us to probably be flat, maybe 0% to 1% GDP growth rate.
So with this issue itself, you could actually expect the lending rates to be tightened, meaning there will be less credit in the system itself and that could actually drag on the economic growth rate. So I would say that there's a fair chance that we could see a economic contraction for the developed markets in this year.
But that's it. For Asia is a different story altogether because for Asia, you have the counter cyclical growth of China, the Chinese government is very committed to the 5% GDP growth target that they have set March of this year and they are just opening up after three years of lockdown. So our expectation is that the the opening of China would also have a carry-on impact
a boost to the economy in Asia. So for example, if you look at Singapore, I think M E s has projected a GDP growth rate of around 0.5-2.5%, which is still a fairly healthy range. So you shouldn't look at things in totality, developed markets like us and and Europe probably runs a risk of a recession maybe end of this year or next year. But for Asia, the risk of that is fairly low. So within this landscape, how should investors be positioned to navigate the road ahead?
One of the biggest lessons that we can learn from the whole experience and this cycle is that we really should take more advantage of the benefits of diversification. So that could mean that you diversify across different banks for your deposits or diversify into money market funds or cash management solutions that are attractive. The other diversification is that you don't just place your money in deposits but invest in maybe fixed income because fixed income is quite attractive right now.
And then if you're looking at financial investments in financial markets and not investing in a single company or a single country or a single sector, but really trying to be more diversified across global markets so that you know, you have one blow up Silicon Valley Bank if you're a passive global investor, then it wouldn't have made even a dent, even credit suisse wouldn't have made
a dent. But if you just invested in European banks or if you invested in US banks, or if you invested in a single stock like Silicon Valley or credit suisse, you would have lost a lot of money and lost a lot of money to a degree where you may not be able to recover. Whereas diversification allows you to take those losses and still be able to continue to compound your returns over time.
Because the market naturally does what it does, which is it sees out the bad players and overweight those companies that are delivering and growing and a higher quality. So being exposed to market and generating that beta return is still an attractive proposition for an individual who's saving for the long term and trying to compound their wealth over the long
term. I think for all investors, one thing that you have to remember is diversification. So especially in this environment, cash is also king. So I think investors will do well if they remember these broad guidelines, meaning you should have a certain amount of your money in cash, cash equivalent, you could consider even the T bills that the Singapore government is issuing. Second thing to have equities. So within equities, you could actually look at both growth and also quality.
And lastly in case there's a recession, you should actually have also investment grade bonds. Because when you do have a significant economic slowdown, central banks would likely cut interest rates and that will be positive for bond prices. So the key is basically to have a diversified portfolio. So you could have some cash, some equities for equity should be quality and some growth in it. And lastly, you should actually have bonds also
a quick recap of what we've talked about. So far, the issues appear to be specific to the banks themselves and not representative of the larger financial system. But there could be knock on effects as banks tighten lending standards, this will make loans harder to get and more costly. If you're investing both Samuel and lien suggest having money in different banks as well as different financial products and markets.
So the big question is our money safe in banks, I would think so after 2008, most of the banks are actually regulated properly for the large banks. There's this extra capital requirements stipulated by Bale three and most of the banks are in compliance with Bale three especially in Singapore.
So you're referring there to battle three, a set of international banking reforms introduced following the 2008 global financial crisis to improve regulation and promote stability in the international financial system. Yeah, well, banks these days are very well capitalized and secondly, there's ample regulatory oversight at the banks. So we feel that the banks are basically safe as a start. There's
this insurance scheme over here in Singapore. So up to $75,000 per person would actually be insured at the banks in Singapore in the States. It is around 250,000. So there's a little bit of disparity over there, but you are sure at least for $75,000 that you will be insured the banks over here in Singapore, regardless of whether it's a local bank or it's a foreign bank, the regulations actually applies to them. So we are confident that the banks in Singapore are basically safe.
Well, the Singapore government also only insures up to $75,000. And so if there is a bank run on a bank, then obviously that's still a risk. I think generally the banks are safe. But in the US, for example, money market funds have become very popular and we saw a big inflow into money market funds which are day to
day matched dollar for dollar. So the asset liability mismatch that is fundamental to the bank's balance sheet because you borrow from depositors in short term money that people can take out at any time without a gate. But you lend that money to mortgages and companies that you can't pull immediately or they are invested in investments that often lose money and you can't get out immediately and repay the depositors that fundamental mismatch is still there for every single bank.
So if you're worried about that, then you know, maybe the money market fund is a good alternative for you to invest in because money market funds obviously are mark to market every day has daily liquidity, no lock up. Um So those are um you know, attractive like liquidity management, cash management solutions and they represent almost 20% of bank deposits in the US. So it's a very popular common way to manage your liquidity if you're concerned about bank deposits. What
is one key lesson to be learned from this episode of bank shutdowns?
I think the lesson from credit suisse is that obviously you need to do your homework when it comes to investing in these banks and companies because it may look the same, but each bank is managed differently. They have exposure to different segments of the financial service business at different points in the cycle. They will do better or worse. And so I think credit suisse is all about mismanagement and a lack of risk control, risk, risk management and controls.
Whereas the US is very different. I think us the biggest lesson that we can learn is that we should actually diversify our risk, whether it's deposits at banks or investments in financial markets. There is great benefits to be had from diversification. The guy who invented diversification won a Nobel Prize for a reason.
The regulators could also consider new K P I S to look at banks. So for example, one thing that we learned this time around was that not only the capital structure is important, but the depositor base is also the makeup of the depositor base is also very important.
So for banks with very narrow depositor base and where the depositor base is not sticky, I guess regulators may see that as a great flag by and large, I don't think there will be major changes to the regulatory framework, but I think that there could actually be additional conditions that regulators will look at a lot to consider this episode, teaching us to look at the depositor base of banks, not just the capital structure.
The banking crisis also put the spotlight on the importance of risk management and the need for companies to have a risk and compliance culture. But the issues appear to be specific to these banks
themselves and not representative of the larger financial system. The bank failures have raised concerns among customers about their deposits in Singapore funds up to $75,000 are covered by deposit insurance but the banking turmoil could hit our pockets as banks tighten lending, it will make it more expensive to take out loans. It's also heightened fears of recession. It's more important than ever to have a diversified portfolio
and that means different banks sectors and markets. You should also aim for a mix of cash or cash equivalents, equities and bonds and that's the five things you need to know about the ongoing banking crisis. My guests were Samuel, re chairman and chief investment officer of fintech startup and and lien chief investment strategist of lion. Global investors catch money Mind on C N A and online at me, watch C N A dot Asia and youtube.