TSE Pods
TSE Pods
Economics To The Rescue ep 2: Banking Dominoes: Unraveling Western Collapse and Asia's Ripple Effect - Part 2
In this episode, we delve deeper into the global banking crisis and its ramifications on Asian economies, featuring insights from Dr. Chao-Hi Huang, Dean of the Taipei School of Economics and Political Science. Leveraging his expertise and experience in the financial sector, Dr. Huang offers a comprehensive analysis of the 2023 US banking crisis, elucidating its causative factors, repercussions, and prospective trajectories. Through scholarly discourse, this episode endeavors to illuminate the intricate dynamics underpinning contemporary financial upheavals, fostering a nuanced understanding of their implications on both domestic and international economic landscapes.
Stephanie
Hi everyone, welcome to TSE pods. This is our second episode of the series, ECON to the rescue and this episode we will continue our discussion about the 2023 U.S. banking crisis. We invited our current Dean, doctor Chao Shi Huang, who also serves on the board of directors at the Central Bank. Of the Republic of China in Taiwan. Welcome Professor Wong. To start, what do you think caused the 2023 U.S. banking crisis?
Prof. Huang
So for the US banking crisis during the COVID-19 period, I think it's related to the COVID-19 pandemics. OK, because in the early stage of the COVID-19 like in year 2000.
Prof. Huang
20 and 2020. 1. Actually, there are some sector of the economy was booming in that time, especially those it related sectors. The high tech industry because the the lockdown people have to stay at home to work at home, so they need those. Those IT equipment, those audio video equipment, those online conference equipment, et cetera. So the there's a boom in the high tech industry in that time. Also in that time the the US government give a few rounds of so-called relief checks so people got extra money from the government. So they have more money to spend. And so like in that period, those cryptocurrency. Also had a boom. OK, so these two booms make those cryptocurrency and the high tech related bank got a lot of deposit. Like SVB, those venture capital high tech related company their major customers. So they deposit a lot of money in that can because there's a bond, they earn quite a lot during those periods. And when this maybe got those deposits and they have to invest in someplace. And so they bought. They purchased a large amount of U.S. government bonds. At that time, the interest rate was quite low. Because due to the COVID-19, the US Central Bank, the Fed, they used the so-called accommodative monetary policy, so they. Make the interest rate decline for quite a few almost close to 0%. Very, very low policy rates. So at that time the government bounce rate is was also quite low. OK. And what? The problem happened in the year 2022. Was due to the inflation pressure. OK. And the the Fed started raising the policy rate? And when the market rate increase? The bond price declines. OK, so also in the. 22 or 23. The boom of the high tech industry. Was becoming fast. OK, so those high tech company, now they need some cash. They start withdrawing their deposit. Also, they observed that the the asset held by a SVB. The price market price start declining. So they were becoming panic, especially most depositor of the SVB are those large customers. They deposit quite a lot of money in the bank. Way beyond the those covered by the Deposit Insurance that, that that was 250,000 U.S. dollar. So their deposits is much larger than that. And also those social media, they just spread the news because those high tech industry, they got the news very fast. So every company come to withdraw the deposit. Had no enough liquidity. So they have to sell. Those bounds. So the the the loss is realized was realized because they have to sell those bonds. So this is a vicious cycle, right? They sell those bonds. They lost money. So then then the depositor lose more confidence. So they withdraw more, so there's a vicious cycle. So finally there's a bankruptcy there. Yeah. For the silver gate. Or what is the name of that other one? The signature? Yeah, they're major customer, those cryptocurrency. And also during the later stage of COVID-19 when the the Central bank raising the interest rate. Those cryptocurrency market. Also. Fast. And the these are exchange called the FTX. Got bankrupt. So people lose confidence on. Those banks relate to cryptocurrency sectors, the Signature Bank and the silver gate to most related banks there, so they lose confidence. They also start withdrawing deposit from those. Yeah. So I think the whole things relate to the boom and the bust of some sectors of the US economy during the COVID-19 also relate to the the central banks policy.
演講者
Let's see.
Prof. Huang
In that period. Yeah. Yeah. Reducing the interest rate first, then increase that later later stage.
Stephanie
Do you think the crisis is over and is there no current risk?
Prof. Huang
I think the reason is just finished in the US because there. Was no big bubble. In the US economy, it was not like the in the financial tsunami of the 2007 and eight because at that time there was a huge bubble in the real estate market, OK. And the real estate is related to. Almost all the banks, OK, all the banks, they're asset has. Huge part or great part of loans or the so-called the mortgage-backed securities holding those kind of assets which are related to the real estate. So when there's a bust. In the real estate market then, it will affect almost all the commercial banks. So that's a very serious crisis at that time. Yeah, but this time we don't observe any. This kind of kind of bubble like related to similar to those we observed in the financial tsunami.
Stephanie
Could the crisis have a ripple effect on Asia?
Prof. Huang
I don't see much correlations here because they are. From different source, OK and in other Asian countries there. There is no big issues right now. There's no. Clear bubble in any sectors of the economy. Except what happened in China? Yeah, that that was a huge bubble in the real estate.
Stephanie
Most of the blame for the 2008 financial crisis was attributed to regulators.
Prof. Huang
Regulator. Also, they blame the central bank. They keep the interest rate too low for too long. So the become the source for those real estate bubble, yeah.
Stephanie
Who can we blame for this crisis?
Prof. Huang
Who can we learn from this crisis COVID-19? Also, we can blame the those banks. They are too concentrated on. Some specific sector of the economy, like the SVB, there are major customers. Those Silicon Valley high tech stops. So if you are too concentrated on. Very, very narrowly defined, the sector of the economy that. You will face. Higher risk. The. The banks should diversify more to some other sectors. Also, those silver gate and the signature. They are to concentrate on those crypto currency business. So.
Stephanie
Silicon Valley Bank invested mostly in U.S. government bonds. Could they have mitigated the crisis if they had diversified their investment portfolio?
Prof. Huang
At that time, there may not have good choice because. They got too much deposit. There's no. Way to go. They think that the US government bond is the one of the safest asset to purchase. Yeah, but there's an interest rate risk they didn't consider when the interest rate go up then their price will come down. If there is no background, they don't have to sell. Those bounds then there will be no problem. But they didn't expect the banking, the bank wrong.
演講者 3
Well, we, we've heard from the United States and the issues there, we've gone from very.
Prof. Huang
Yes. Uh.
演講者 3
Leading technologies and. Investment portfolio like crypto to concentrate the banks like SVG and how that compares to the Chinese.
Prof. Huang
Yeah. Uh-huh.
演講者 3
Evergrande and and that type of situations and drawn A comparative study on Japan and Taiwan in this instance, and there seems to be a bigger picture on how banking relates to the whole.
Prof. Huang
Uh-huh. Uh, huh. No. Uh-huh.
演講者 3
Economy and.
Prof. Huang
OK.
演講者 3
Well, well, thank you for explaining the intricacies and some of the very.
Prof. Huang
Oh.
演講者 3
Nuanced or or a very, very academic.
Prof. Huang
Uh.
演講者 3
Mechanisms of how these works. Thank you very much.
Prof. Huang
You're welcome. Thank you.
演講者 3
Thank you Professor Huang.
Stephanie
Thank you for listening to TSE pods. See you again on our next episode for the next installment of the series, ECON to the rescue.
