Unless you’ve been living under a rock, you are likely aware of the turmoil that has been roiling the US banks over the past fortnight.
It all started when Silicon Valley Bank (SVB) collapsed suddenly on 10 March in just 48 hours as the 40-year-old bank suffered a run on its deposits.
Spooked by this event, customers started to rapidly pull funds from Signature Bank too, making it the third-largest bank collapse in US history and the next domino to fall.
Barely a week later, Credit Suisse (NYSE: CS), a 167-year-old Swiss bank, saw itself being bought over by rival UBS Group AG (NYSE: UBS) for US$3.2 billion.
Due to these events, deposits at smaller US banks have plunged by a record as investors remain jittery.
The Federal Reserve Chairman, Jerome Powell, has even gone on record to warn that a credit crunch, triggered by panic, fear and worry, may negatively impact the economy and slow it down for years.
If you’re wondering how you can safely navigate these challenges, two words should pop up immediately in the aftermath of these worrying events.
They are – trust and confidence.
The root of the evolving banking crisis is a lack of trust and confidence.
SVB depositors lost faith and created a self-fulfilling prophecy as increasing numbers yanked their deposits from the bank.
What about Singapore Banks?
In Singapore’s context, tight regulation makes a bank run highly unlikely for the three local banks – DBS Group (SGX: D05), United Overseas Bank Ltd (SGX: U11), or UOB, and OCBC Ltd (SGX: O39).
Sumit Agarwal, Professor of the School of Business at the National University of Singapore, summarises the situation very well when he said that three elements needed to be present for a bank run here.
The first is bad regulation.
Thankfully, the Monetary Authority of Singapore, the country’s central bank, does a great job of monitoring the trio of banks to ensure that they are well-capitalised.
The second is weak macroeconomic conditions, which are out of the control of both the regulator and the banks.
Finally, the third condition is excessive risk-taking by the bank’s management.
A pertinent example will be the buying of bonds with long maturities that produce substantial losses if they need to be sold within a short time as interest rates surge upwards.
Poorly managed banks could also lend to risky customers that fail to honour their debt obligations when the going gets tough.
Having confidence in the system
Investors and depositors have confidence in Singapore’s system of governance and the central bank’s capability.
This confidence translates not only to stability but also allows the banks to attract deposits and earn fee income.
It may not seem obvious, but confidence is a crucial aspect when running a bank.
This concept works not just for banks, but also in other areas of investing where track record and reputation play a large role.
In the REIT arena, investors gravitate towards quality-name REITs such as Mapletree Logistics Trust (SGX: M44U) and Frasers Centrepoint Trust (SGX: J69U).
Not only do these REITs boast strong sponsors, but they also have an enviable track record of distribution per unit increases over the years.
Putting your trust in key men
Not only should a business have a strong track record, but its top management should also engender trust.
For UOB, the bank has been run competently by three generations of the Wee family for close to a century.
This type of track record is not something you can build in a short time, and it also says a lot about the people behind the business.
Others may dislike the head of Tesla (NASDAQ: TSLA) for his brazen antics and outspokenness.
But there’s no denying that he helped to log a record 2022 for the electric car company with a net profit of US$12.6 billion, a far cry from the net loss of US$976 million in 2018.
The above examples show that you should think about “trust and confidence” as two keywords to rely on when selecting suitable investments.
Structure your investments around these attributes and you shouldn’t go too far wrong.
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Disclosure: Royston Yang owns shares of DBS Group.
