Banks in most of Asia-Pacific are well placed to absorb potential contagion effects from the collapse of Silicon Valley Bank, or SVB, though it would raise funding costs for lenders in the region, according to S&P Global Ratings.
The failure has no immediate impact on the ratings of banks in Asia-Pacific. Still, stresses that banks can comfortably handle could morph into bigger problems and combine with other negative developments that could test buffers in the region, Ratings said in a March 16 report.
"This is the nature of contagion," Ratings said. "Foreseeable secondary effects could include increasing risk aversion by investors. This ultimately could result in higher funding costs or other negative consequences."
Funding has been considered a relative strength across many banking jurisdictions in the region, Ratings said, adding that its current assessment shows systemwide funding remains at low risk in 10 of the 18 banking systems the rating agency covers in the Asia-Pacific.
Crisis of confidence
The failure of California-based SVB, caused by losses in bond portfolios due to rising interest rates and a subsequent bank run, has sparked a crisis of confidence in the global banking sector, despite U.S. authorities taking swift measures to prevent a contagion. Direct exposures of Asia-Pacific banks to SVB are negligible, though the large holdings of U.S. government bonds by several Japanese banks would expose them to the weakening sentiment.
Japanese banks have sustained fair value losses on their foreign bond holdings, said Ryoji Yoshizawa, senior director and sector lead for Japan at Ratings. Unlike lenders in most global economies, Japanese lenders did not enjoy an interest rate-driven boost to net interest margins as the central bank maintains its ultraloose monetary policy.
In China, the issue will prompt greater attention by the regulators on the banking system, said Ming Tan, Ratings' director and lead analyst for China. There could be more frequent ad-hoc stress testing of the banking sector's portfolios, Tan said.
China is on a different declining interest rate cycle, and many of the problems that banks in the rest of the world face have not been an issue in the world's second-largest economy. The deposit base of Chinese bank is quite diverse, and so an SVB-like event is quite unlikely, Tan added.
