Limited impact on APAC financial institutions from US banks' closure -- Moody's

image-20230320095741-1

 

The closure of two banks in the United States (US) will have a limited impact on most rated financial institutions in Asia-Pacific (APAC), said Moody’s Investors Services.

 

US regulators closed Signature Bank,  two days after shutting down Silicon Valley Bank following mass deposit withdrawals from these regional banks, which are likely to result in a tightening of liquidity in debt markets globally as investors grow wary.

 

“The impact will be limited because of structural factors. Most APAC institutions are not exposed to the failed US banks, and only a handful of institutions have immaterial exposures.

 

“Finally, most institutions are not as susceptible to large losses from debt security holdings as Silicon Valley Bank was. The second-order impact of the US bank failures is still developing and bears close watching,” Moody’s said in a note on 14th March.

 

The research firm said that structurally, APAC’s rated banks have stable funding and ample liquidity, and are mostly funded with customer deposits with modest borrowings at about 16% of their total assets on average.

Their business depositors are also well diversified across different sectors, with no rated bank in the region having big exposure to technology companies. Besides, APAC banks' deposits are generally not heavily concentrated on single clients.

 

“Most banks in the region are subject to liquidity coverage ratio requirements aimed at ensuring that banks hold ample high-quality liquid assets to get through stressed funding conditions, such as deposit runs,” it said.

 

Moody’s said in most systems in APAC, bank investments in held-to-maturity (HTM) instruments are generally not substantial relative to tangible common equity, unlike Silicon Valley Bank’s case, which suffered substantial unrealised losses from its large HTM investments.

 

“These investments are not marked to market but are measured in such ways as when a bank decides to sell them due to a liquidity crunch. This means that banks incur losses when they sell HTM securities amid rising interest rates. Most HTM securities are liquid because they can be repo'ed with central banks,” it explained.

 

Fair value losses on HTM securities would be modest for most APAC banks even in unlikely scenarios where banks need to sell parts of their HTM portfolios because APAC interest rate rises have been less significant and less rapid versus those in the US, the research firm noted.

 

“China cut rates in 2022, while Japan maintains ultra-low rates. Banks in Taiwan, China and India have larger HTM books relative to capital than regional peers. 

 

“For Chinese banks, policy rate cuts will boost the fair value of their HTM securities if they are marked to market as interest rates in China have declined while for banks in Taiwan, the difference between the carrying value and fair value of their HTM investments are modest,” it said.

 

If Indian banks were to mark their HTM investments to market, their estimated losses may be between five and 10 % of the par value of the bonds, or 12 and 25 % of their common equity tier 1 (CET1) capital.

 

That said, banks are unlikely to realise such losses because their funding and liquidity are strong, allowing them to hold onto their HTM securities.

 

Indian banks faced strenuous solvency challenges in the past decade. However, their strong funding and liquidity were key to supporting their overall credit strength with average liquidity coverage ratio at a healthy 133 % at the end of March 2022.

 

On another note, Moody’s said some large Japanese banks have US treasury holdings. Hence, they have unrealised losses because of the higher US rates. They also have large amounts of Japanese government bonds.

 

“However, their unrealised losses on domestic and foreign bonds are small relative to capital, and most of such securities are measured at fair value through other comprehensive income.

 

“In addition, they generally have unrealised gains from their equity portfolios, which help balance unrealised losses on bonds. There are no signs of large outflows from deposits, and liquidity remains ample in the system,” it said.

 

As for rated life insurers in APAC, they generally have sufficient liquidity due to their diversified liabilities, are long-dated and are mainly backed by policies sold to retail customers, enabling them to withstand short-term liquidity shortages, said Moody’s.

 

Due to their diversified bond and equity portfolios, their investments in the failed US banks are expected to be modest, if any. 

 

It said surrender rates also tend to be lower within agency channels because agents’ relationships with policyholders are likely to make policies sold by them stickier. However, insurers that rely on short-term savings products, for which surrenders are more sensitive to changes in interest rates, will face challenges if liquidity further tightens.

 

Furthermore, some insurers in Taiwan and South Korea may raise short-term debt, instead of disposing of their loss-making bond holdings, to make lapsed payments or claims for coronavirus-related policies. 

 

Impact on non-bank financial institutions (NBFIs) will also be limited because they neither have exposure nor deposits with the failed banks.

 

However, securities firms and asset managers, except for Chinese securities firms, can be vulnerable because they rely on wholesale funding for liquidity and hold relatively large amounts of mark-to-market securities, Moody’s said.

 

They may have clients with accounts with Silicon Valley Bank. Although the amount may be small, if these clients have liquidity issues, the firms may be indirectly affected.

 

As for finance companies, the amount of marked-to-market securities is insignificant. They also have a small exposure to technology or cryptocurrency companies. Most of their assets are customer loans, fixed assets or leasing receivables.

 

“While some Chinese distressed asset management companies or investment holding companies have a material amount of marked-to-market securities, they have suffered limited valuation losses as interest rates in China have been declining,” Moody’s added.