US / Europe Banking Collapse : Bank Negara Should Reassure Our Market Is In No Danger

 Spreading from the US the banking collapse has reached Europe. 

Long sickly and troubled Credit Suisse (of Switzerland) has had to be bailed out for 45 Billion Pounds (US$55 Billion or RM246 BILLION) !! Credit Suisse is the 45th largest bank in the world.  Too late. Their share price has still collapsed 30%.

 

The wits and wags have already come up with this:

 Swiss flag after Credit Suisse implodes. Now called Debit Suisse.

 

And now here is a quick video which says that France's BNP Paribas Bank has also been hit by the bank collapse.  

BNP Paribas is the NINTH largest bank in the world !!

 

My Comments :

Relax folks. This banking collapse in the US and Europe has nothing to do with our Malaysian banking system.  I will explain a little here and I hope Bank Negara Malaysia will release a statement to reassure our market that our banking system is ok. 

No need to take out your money from our Malaysian banks. 

But to be safe do take out your money from American and European banks. 

The US Banks and also these European banks are collapsing because these banks keep some of their bank funds (customers deposits, their own reserve funds, equity funds, statutory reserve funds etc) in US Dollar Bonds. Especially US Govt issued Treasury Bills.

The US Govt Treasury Bills could be old ones that the banks have accumulated over years which pay a certain amount of interest rate per annum. (Also known as the Coupon rate).

You can see in the chart above that since the Ukraine War (Feb 2022) and the sanctions imposed by the US and UK against Russia the "yield" on US Govt Treasury Bills has shot up - significantly. This is because the US Govt (well the US Federal Reserve Bank) has deliberately increased their interest rates.

To kill Russia they imposed all sorts of sanctions. But Russia is the worlds largest exporter of chemical fertilisers, largest exporter of animal feed, largest exporter of natural gas plus a million other products to Europe and the world. All these product prices went up. So egg prices went up, food prices went up, air travel went up etc.

When inflation went crazy (because of the sanctions against Russia) the Federal Reserve Bank's automatic knee jerk reaction kicked in. The US Federal Reserve has a written down commitment to fight inflation. They do this by increasing interest rates. By playing with the coupon rate for the US Govt T Bills. Hence that steep curve above. 

When interest rates are forced to go up, they dampen consumption (because bank borrowings become more expensive). This will reduce consumption in the economy and help to control price inflation. Mission accomplished.

HOWEVER when interest rates go up, the value of the US Dollar Bonds held by all those American and European banks will decrease (US$ Bonds they accumulated before 2022 in the chart above). Because new US Govt bonds are being issued at coupon rates of 4%, 4.5% etc the older US$ bonds kept in the banks vaults that were paying say 1% or 2% coupon per annum suddenly drop in value. Drastically. 

And the banking rules say that the "paper loss" must be quickly accounted for. Plus in their normal course of business the US / European banks also  sell these US$ bonds  to meet their customers US$ withdrawals.

But because the value of the US$ bonds have dropped (triggered by higher interest rates, triggered by the higher price inflation, triggered by the sanctions against Russia)  this means their banks may not have enough US$ to meet all their customers US$ withdrawals. This is actually what has happened. 

So there is a panic in the US and Europe. 

Bank customers line up and demand to withdraw their US Dollars. 

Shareholders and stock traders in the Stock Markets (Wall Street, London FTSE, Frankfurt, Tokyo Nikkei) start panicking and dumping US / European bank shares. This is also happening.

Our Ringgit based Malaysian banking system does not hold US$ Bonds as part of their reserve management system. I dont think so. So we should not have anything to worry about.  You can easily withdraw your Ringgits from our Malaysian banks anytime.

(I dont know about Bank Negara Malaysia though. Some of our Forex reserves may be held in US$ T Bills. Maybe not much.)

Professor Joseph Stiglitz, Nobel Laureatte in Economics says that the high inflation in the US and Europe has NOT been caused by a higher aggregate demand in the US economy.  It has been triggered by the really unthinking sanctions against Russia. It is an artificial economic situation. Once the Ukraine War ends this situation will hopefully disappear. Interest rates will come down again.

But Professor Stiglitz says the US Federal Reserve should have taken cognisance of this artificial "sanctions against Russia" situation and NOT PUSHED UP interest rates. Thus avoiding all this trouble. 

Too late. American and European banks are crashing. 

I believe that Soros fellow knows exactly what is going on.

If you are a bond trader you should pick up some of those high yielding US$ T Bills now, especially those new ones at 4.5% coupons. They will be worth plenty when the Ukraine War is over.  (This is a similar situation as those 1MDB Bonds issued at an insane 5.99% - so that those thieves could make a killing selling such high priced Malaysian government guaranteed 1MDB bonds).

The Ukraine War will end soon if Chinese Foreign Minister Wang Yi can convince both Ukraine and Russia to come to terms. Wang Yi controls the fate of many US and European banks. Soros knows that as well.

The views expressed are those of the writer and do not necessarily reflect those of MMKtT.