What’s with all the bank runs and bank failures hitting the
news these days?
Why are all these banks in trouble? Are we by extension in trouble
too?
How should I protect my money?
I've decided to join the bandwagon. More importantly, relate this to our situation in Singapore.
Banking logic
When we place deposits with banks, they “reward” us with interest.
With our deposits, Banks are allowed to loan out a significant % of the deposit for profit.
This % can range from 80-90%.
This has always generally been fine as it's extremely unlikely for us to withdraw all our money at once.
To provide some form of confidence, the deposits are insured up to a certain amount.
The liquidity situation in the US
With the painful effect of inflation, people are literally seeing their savings eroding away.
FED has tried to battle this by raising interest rates, which
makes it costlier to borrow and incentivises saving.
Clients would compare their options and gravitate towards better rates.
Eventually, clients start withdrawing their deposits and subscribe short-term
treasury bills instead.
Another push factor is that their deposits are insured up to USD 250K and anything more is “uninsured”. Although there are new rules in place, these measures only apply to banks that pose systemic risk.
In the shoes of the client, Treasury
bills provide a better return with no default risk.
The problem arises as:
- Banks have loaned out/ invested most of the deposits.
- As clients go for a better deal, they need to process the withdrawals.
- After a certain period, Banks would run out of cash and are forced to sell their assets.
Like all quick deals done over Carousell, there will be lowballers.
As more people learn about such deals, clients will
question if the bank’s situation is indeed that dire. Their worries will evolve into fear and eventually join the team “Withdrawal”
Hence, a giant headache.
What I see in Singapore
We have been through the Asian financial crisis which boiled
down to the following:
- Maturity mismatch – borrow short-term and loan out long term
- Currency mismatch – borrow USD and loan out in local currency.
The liquidity issue today is essentially a maturity mismatch that we have learnt from. I’m not sure if proper controls are in place since then but these are my observations:
-
Raising interest rates by all banks to secure deposits
o
This is evident in UOB One Account, OCBC 360 and
DBS multiplier
o
Fixed deposit rates are also attractive even for
short periods.
OCBC offered 4.08% for 8 Mths / 3.88% for 8 Mths for
CPF OA deposits.
- T-Bill Rates
o
The prevailing rates are not compelling enough for
us to ditch our savings accounts or fixed deposits.
o
I do not know why there is always an overwhelming
demand for treasury bills but this is a blessing in disguise.
-
Reduction in Fixed deposit rates:
o
In March, across the board there is a reduction
in fixed deposit rates
o
OCBC’s promotion rates have vanished and they
are only offering 3.55% for 5 Mths. Implying they do not wish to outprice Treasury
bills.
Looking at these observations, it’s a clear sign our banks are aware and know the importance of capitalisation. They will signal when they are in need.
This is a heartening sight and I’m very grateful for
this.
What’s next?
Being a KIASU yet greedy Singaporean, I definitely need to ask
myself the following:
- Are my deposits insured?
Yes, the Singapore Deposit Insurance Corporation (SDIC) insures your deposits up to $75K - Should I need to move the uninsured Amount?
If you have zero tolerance for risk, yes you might want to move this over to Treasury bills or have another deposit with another bank at the expense of returns.
I've also compiled a summary of what's available up to $75K below. - Will MAS step in if the bank fails like US
Treasury/Fed and Swiss National Bank?
I have no answer to this, but I certainly hope that they have some tools in their arsenal to restore confidence in our financial hub.
Bonus: Bank Savings/Fixed deposit rates as of 18 Mar 23
|
Options |
Duration |
Interest Rate |
Criteria |
|
6 Mth |
3.65% |
|
|
|
Nil |
4.07% |
Spend $500 + Credit
salary of $1.6K |
|
|
Nil |
3.80% |
Spend $500 + Credit salary of $1.8K + Increase Avg daily Bal by
$500 |
|
|
Nil |
4.13% |
Spend $500 + Credit
salary of $3K + Make 3 bill payments online |
|
|
Nil |
4.20% |
Spend $500 + Credit salary of $6K + Make 3 bill payments |
|
|
6/9 Mth |
3.80% |
Min 5K |
|
|
6 Mth |
3.70% |
Min 20K |
|
|
6 Mth |
3.70% |
Min 20K |
|
|
6/10 Mth |
3.85% |
Min 50K |
|
|
7 Mth |
3.90% |
Min 30K |
|
|
9 Mth |
3.80% |
Min 20K |
|
|
12 Mth |
3.85% |
Min 50K |
|
|
12 Mth |
3.90% |
Min 20K |
|
|
12 Mth |
3.90% |
Min 20K |
|
|
12 Mth |
3.90% |
Min 20K |
|
|
12 Mth |
3.85% |
Min 20K |
I hope these will help to sort out your concerns too.
Please like and follow us:
