Tuesday, October 28, 2008

Bank of East Aisa facing problems

Remember not too long ago that I recommended this bank's fixed deposit. Its really high, at 2.125% for 6months. Link at : http://ntuchartist.blogspot.com/2008/10/fixed-deposit-deals-as-of-18th-oct-2008.html

The brief picture:

Apparently the bank is facing problems, because their earnings was inflated by one of its traders and other losses due to their collateralize debt obligations. Though some people have been taking out their deposits from the bank as they worry about the stability of the bank, the bank states that they are are still in a strong position.
Last year, this bank is Hong Kong's fifth largest bank by assets reported a net profit of HK$4.14 billion.

Link: http://www.forbes.com/2008/09/25/bank-east-asia-markets-equity-cx_tw_0925markets01.html

What I feel:

I am not sure whether the fixed deposit promotion is still on or not, but if you have put your money there already, I have confidence that our MAS has the ability to guaranteed your deposits. So that should be the least of your worries.
The only problem is that if BEA(Bank of East Asia) really falls, it will take time for you to get your money back. As the Deposit Insurance Scheme will only apply, after the bank that falls has sold all its assets and is still unable to compensate you. ( This will definitely take lots of time!)
In other words, your money will be stuck there for a while.


ACE said...

This concerns confident and trust of a financial institution (FI). A prolonged and unfounded market rumour can cause liquidity problem to a relatively well-capitalised FI like bank.

MAS, a de-facto central bank of Spore is a regulator of FIs incorporated in Singapore. One of MAS's measures in monitoring banks operating here (via licence) is to ensure banks adhere to capital adequcy ratio (CAR) set up MAS and world wide regulatory (our CARs already higher than the world standard). Hence, well capitalised and regulated banks reduce the risk of bank failure. Btw, MAS does not "guarantee" depositors, but acts as the banker of last resort to banks under its jurisdiction.

Note: Higher CAR means banks need higher capital to carry out lending business, hence it increase its financial cost, thus, become less competitive with its peers in other jurisdiction.

ntuchartist said...

Yup, ace u did a very good explanation..

However being a banker of last resort is the same as being a guarantor for the deposits? In lay man terms..

ACE said...


Banker/lender of last resort is not
quite the same as guaranteeing depostors.

What it means is that during normal situation, it is highly unlikely all banks will face liquidity problem at the sametime(short of cash to meet sudden surge in withdrwals like BEA's recent encounter. So if it does happen, central bank will act as a lender/banker of last resort, by providing cash to the bank that is facing heavy withdrawals.

However,during unusual circumstance like the current financial crisis,central banks world-wide are
resorting to guaranteeing depositors to instil confidence in the banking system. In line with measures taken by other central banks, MAS has put in place a deposit gurantee scheme for all banks operating in Singapore till end of 2010.

ACE said...

..... prior to the MAS guarantee, banks in Singapore have taken out depositor insurance policy, which pays depositor up to SGD20k in case a bank fails.

ntuchartist said...

So it just means that if a bank in Singapore can't pay up due to it winding up..will the MAS still lend money to pay the depositors?
Because if a bank winds up..its not really 'lending' money to the bank already, but MAS would have to 'give' the $$.

Thanks once again for clarifying..

ACE said...

Winding up of a bank, such as a commercial bank that engages in deposit takings would be the very last option. If the bank does fail, what the depositors get back will be S$20k under the current deposit insurance scheme in Singapore. You can see that such insurance scheme aims at protecting the mass retail depositors.

Other options:

1 Resuse via merger and acquisition, Central bank grant approval for another bank to buy over the troubled bank.

2 Nationalisation, i.e. government inject capital into the trouble bank. this is the current situation in the US.

In both options, depositors are fully proctected. While bank shareholders suffer losses in their investments.

Banking institutions (those engage in retail deposit taking business) have implied social responsibilities beyond their normal business entities. Hence, banks are licenced with high capital requirement, on top of the various regulations.

ntuchartist said...

Ok, got it..thanks for the insightful view.
Shall do a post on what you have mentioned for other blog readers, because I think most people do not know what is the implication of this scheme set up by the MAS.