The Rescue of Troubled Banks in America, Prevent Global Crisis
The US financial and monetary authorities’ prompt and appropriate handling of SVB and Signature Bank will not develop into a 2008-like financial crisis with impacts on other banks, but will rather stop and stabilize.
The United States financial and monetary authorities responded quickly to rescue two sizable banks in the US, namely Silicon Valley Bank (SVB) and Signature Bank. The two banks collapsed due to the massive withdrawal of funds by their customer (bank run).
A trio of authorities, Treasury Secretary Janet Yellen, Federal Reserve Chairman Jerome Powell, and Federal Deposit Insurance Corporation (FDIC) President Martin Gruenberg, handled the matter.
The financial and monetary authorities’ fast and precise handling of the two banks makes me confident that this case will not grow and impact other banks. In other words, the panic that has occurred will stop and conditions will restabilize, and not develop into a global financial crisis like in 2008.
SVB, which held US$120 billion in customer deposits, lost $45 billion in two days due to a bank rush. Meanwhile, most of Signature Bank's customers were companies in the crypto (cryptocurrency) trade, which had not been performing recently well. Because of this, both banks experienced problems and needed fast and appropriate handling by the financial and monetary authorities.
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Earlier on 8 March 2023, Silvergate Capital Corporation (SCC), the parent company of Silvergate Bank, decided to voluntarily close the bank's operations and liquidate it. This decision to stop operating and liquidate Silvergate Bank was taken following the massive withdrawal of funds by customers during the fourth quarter of 2022 up to more than $8 billion.
Silvergate Bank, one of the big banks in the crypto industry with assets of $11 billion, struggled for months to get out of the crisis before its parent company finally decided to close and liquidate it. To fulfill the withdrawal of funds by customers, Silvergate Bank was forced to sell its securities at a discounted price, resulting in huge losses reaching $1.05 billion.
Not as bad as 2008, 1997
The US financial and monetary authorities’ prompt and appropriate handling of SVB and Signature Bank makes me think that this case will not develop into a 2008-like financial crisis with impacts on other banks, but will rather stop and stabilize.
The US financial crisis in 2008, which later had a global impact, occurred following the subprime mortgage loans that spread to the Wall Street megabank, Lehman Brothers, and eventually became a global financial crisis.
In my opinion, what is happening in US banking today is also not as bad as what we experienced in 1997, when the Asian financial crisis raged.
Perhaps it can be said that it has been transmitted slightly to banks in Switzerland, such as Credit Suisse. Perhaps because of its exposure to SVB and Signature Bank, the share price of the second largest bank in Switzerland has fallen by up to 24 percent on the capital market.
However, Credit Suisse management immediately took action for a rescue by borrowing $30 billion through the facility of the central bank, the Swiss National Bank, and things returned to normal after that. The Swiss financial authorities rushed to rescue Credit Suisse, given the importance of the bank's position, and to counteract systemic effects to international banking.
Pressure was also experienced by First Republic Bank in Louisville, Kentucky, as a result of the SVB crisis. First Republic Bank received deposit injections worth $30 billion (around Rp 461 trillion at a rate of Rp 15,400 per US dollar) from several banks as a rescue package. They included JPMorgan Chase & Co. (JPM.N), Citigroup Inc. (C.N), Bank of America Corp. (BAC.N), Wells Fargo & Co. (WFC.N), Goldman Sachs Group Inc. (GS.N), Morgan Stanley (MS.N), and other major banks.
I observed that the Yellen-Powell-Gruenberg trio’s bank rescue used a combination of bail-in and bailout techniques simultaneously. The funds used were from the FDIC, as well as funds from bank owners and shareholders.
That is, it is not purely a bailout using the budget. Bank owners and shareholders were left to suffer losses, but deposit holders were saved, even depositors with amounts above the maximum guarantee of $250,000. The very smooth cooperation among authorities needs to be studied by our officials, in case it is needed later.
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In theory, or in the history of saving banks, what is most important here is to restore customer and public trust, so they stop withdrawing their funds from banks and continue to use banking services for their economic activities in purposes of consumption, trade, and investment.
This seems to have been achieved in the cases of SVB and Signature Bank. To complement this, the European Central Bank (ECB) also announced that it was ready to provide liquidity assistance to banks experiencing liquidity problems.
From these rescue efforts and the readiness of central banks, I do not see any contagion like that developed in 2008 in the US or in 1997 in Asia, especially Thailand, Indonesia, Malaysia and South Korea.
Indonesian experience
As someone who has experience in dealing with banking crises with all their drama, I would like to recount a little about what happened in the months leading up to the end of 1997 and early 1998 in Indonesia.
In particular, I would like to return to the rather dark history of our banking journey at that time. In July 1997, a disaster developed in which the Thai currency, the baht, came under tremendous pressure. This pressure was caused by massive purchases of US dollars, which led to bank deposits drying up to finance foreign exchange purchases, and the free-fall of the baht against the US dollar. This then spread through contagion to neighboring countries, such as Singapore, Malaysia, Indonesia, and the Philippines.
In Indonesia, a similar attack on the Thai baht developed in October 1997. Large-scale purchases of US dollars took place, financed by buyers that withdrew their funds from banks. Bank runs occurred against many private banks, mainly to finance purchases of US dollars or to transfer funds to US dollar deposits at domestic banks or accounts abroad to Singapore and Hong Kong.
In financial terms, this conversion to US dollars is called flight to quality, while sending funds to banks outside Indonesia is called flight to safety.
At that time, Bank Indonesia (BI), where I served as governor, handled the matter by first dealing with the purchase of US dollars by selling its reserves. And as a lender of last resort (LoLR), BI provided liquidity assistance known as the Bank Indonesia Liquidity Assistance (BLBI) to banks that experienced a drain on funds due to withdrawals of deposits in "congregations" of customers in large amounts.
The government then decided to ask the International Monetary Fund (IMF) for help to strengthen the rupiah, save the banking system and restore macro stability, so the economy could continue and not collapse.
In a $10 billion loan agreement with the IMF, we were asked to reform the banking system, meaning to provide liquidity to banks that could be saved and liquidate unhealthy banks.
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BI decided to liquidate 16 insolvent banks and carry out restructuring by establishing the Indonesian Bank Restructuring Agency (IBRA).
The program ran, but not everything was smooth. The bank closures went smoothly, but it led to an uncomfortable situation, including the premature dismissal of almost all BI directors under me.
In the midst of the banking crisis, during which BI was the responsible monetary authority as an LoLR and banking supervisor (there was no Financial Services Authority at that time), a shock arrived in December 1997. Four of the seven BI directors (deputy governors in the current system) were replaced by President Soeharto without prior discussion with me.
Then on 11 Feb. 1998, it was my turn to be dismissed from my position as BI governor, one and a half months before the end of my term. Officially, I was honorably dismissed through a Presidential Decree (Keppres), but to speak plainly, I was fired because according to the prevailing BI Law, the end of my term of office was still one and a half months away. Three other directors followed, replaced in May 1998.
Many have asked why I was silent. The answer is, because there really was nothing that could be done.
The unanswered puzzle until now is, why was I dismissed in this way? Did I make a mistake? Certainly not, because the Presidential Decree stated that I was honorably discharged.
I don't think there is any other reason except that maybe the Cendana family was mad at me because three of the liquidated banks were theirs. So, by my reasoning, President Soeharto agreed with the proposal to close 16 banks and therefore the decision was not changed. Everything was done well.
However, because what I did was embarrassing to the First Family, I needed to be warned by being fired. None of the reports in the newspapers used the term dismissal, except for foreign newspapers, such as the International Herald Tribune, The New York Times, and The Washington Post, all of which stated that "BI Governor Djiwandono was fired by President Suharto due to differences in policy".
Many have asked why I was silent. The answer is, because there really was nothing that could be done. BI did not have independent status at that time. The governor was given the position of a state minister as a member of the cabinet. In a presidential system, ministers are assistants to the president and can be dismissed at any time. So, I had no legal weapons to object to the president's decision regarding my dismissal.
J. Soedradjad Djiwandono
J. Soedradjad Djiwandono
Emeritus professor of economics at the University of Indonesia business schools (FEB UI); visiting professor of international economics at the S. Rajaratnam School of International Studies (RSIS) at Nanyang Technological University,Singapore
This article was translated by Kurnia Siswo.
