Will the SVB collapse trigger a global financial crisis?

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FRIDAY March 17, 2023

OPINION The Jakarta Post

T

he short answer to the titular question is most probably no. And that answer is not an invita- tion for complacency or careless- ness. Investors can get too emo- tional and act irrationally and thus change the trajectory mov- ing forward.

Still, there are many tidbits and lessons Indonesian regulators can take from the abrupt closure of Silicon Valley Bank (SVB).

The closure of SVB, with US$206 billion in assets, will hardly start a global fi nancial crisis like in 2008 in the aftermath of Lehman Brothers’ collapse.

In fact, SVB is rather a typical case of run on a bank that initial- ly faced liquidity issues that rap- idly became an issue of solvency, meaning that regulators are facing a “known known” and most likely have standard operating proce- dures in place to deal with it.

SVB was indeed the 16^th biggest bank before it was transferred to the United States Federal Deposit Insurance Corporation (FDIC) for

“burial”. But unlike in 2008, when regulators had to engage in some maneuvers to deal with failing shadow banks, the FDIC arguably has all the tools it needs now to arrange on orderly liquidation of a conventional bank like SVB.

Moreover, the systemic risk determination for SVB and Sig- nature Bank, another bank that failed last week, has gained su- permajority approval from the FDIC board. This means that the normal limit of $250 per customer notwithstanding, all deposits at SVB and Signature are now fully insured. Thus, depositors in other banks have fewer reasons to panic.

Although SVB’s closure does not raise signifi cant risk of a global crisis, Indonesian regulators can take some lessons from the headline-worthy event.

First, a bank should have a suffi ciently diversifi ed portfolio and customer base. At a glance, SVB actually had very conserva- tive asset placement. Most of its portfolios were in US Treasury bonds, a safe haven by almost all standards.

But as the Fed has been aggres- sively raising interest rates since last year, the value of SVB’s assets had consequently fallen sharply.

Additionally, its credit was fairly limited for traditional activities like mortgage and business loans. So it had virtually no automatic counterbalance or off- set for a decrease in a particular asset class.

On the other hand, the bank was facing increased competi- tion from other banks in retain- ing deposits in an environment of rising interest rates. More customers were leaving SVB to fi nd a

better deal.

Day by day, more people rec- ognized that vulnerability. And to make things worse, SVB’s customers were mostly tech start- ups or venture capitalists with tight-knit relationships, so infor- mation propagated rather quickly across their network.

Hence, bad news about the bank destroyed customers’ trust rather quickly, leading to massive withdrawals and fi nally, forced SVB to sell its fi nancial assets at a markdown.

In Indonesia, we do not have banks like SVB serving a marked- ly limited segment of customers and have highly concentrated asset placements. Our banks might have a specifi c focus, but their customer bases are quite diverse.

Some might focus on micro, small and medium enterprises but still have substantial expo- sure to big corporations. Several others focus on retail businesses, yet their wholesale portfolios are not small.

Second, bank closures are not inherently a bad thing. US regulators have shown that bank liquidation is a normal measure to ensure the system is not hiding a zombie bank, and that this an ef- fective tool to swiftly remove risks associated with the failing institu- tion from the broader ecosystem.

As a result, the general public does not need to guess which bank is safer and will therefore have full confi dence in the sound- ness of their fi nancial system.

Our collective memory from the 1997-1998 monetary and fi - nancial crises might suggest that bank closures should be avoided to prevent crisis. But upon fur- ther refl ection, bank closures at that time resulted in catastro- phe only because the closures were conducted hastily and with- out clear public communication about their terms and follow-up actions.

Also, the institutions tasked with liquidating banks in 1998 did not have core competencies in handling matters related to

“gone concerns”. Today, Indone- sia’s Deposit Insurance Corpora- tion (LPS) already has plenty of experience with liquidation.

From a rural bank to a high- profi le case, the LPS has many case studies in its vault. Manag- ing proper liquidation should not be too big a task for it.

The LPS might have some challenges to avoid a “split per- sonality” problem since now it must also assess “going concern”, while its traditional role and ex- pertise have always been “gone concern” matters.

To borrow an analogy from

another fi eld, in addition to per- forming proper burials, the LPS is also expected to perform emer- gency room triage, albeit only sometimes.

Lastly, SVB’s collapse has made the intertwined relation- ship between monetary policy and fi nancial stability more pro- nounced. It is not diffi cult to fi nd experts who will point out that ultra-low interest rates over more than a decade and rapid hikes in recent months had contributed to the abrupt deterioration of SVB’s performance.

The impact of interest rates on asset prices is not just theoreti- cal abstraction. It has clearer and greater real-life implications.

Hence, central banks cannot focus exclusively on infl ation.

They cannot afford the luxury of becoming a single-issue policy- maker. In fact, most analysts be- lieve that the Fed interest rate hikes will stop or at least contin- ue at a slower pace due to fi nancial stability concerns stemming from the fallout of SVB and Sig- nature Bank’s failure.

On that note, I would like to conclude this article by rephras- ing my initial answer so I sound more like an economist: Ceter- is paribus. All other things re- maining the same, there is a low probability that the SVB bust will trigger a 2008-style global fi nancial crisis, but central banks should nonetheless remain vigilant in maintaining the economy and safeguarding fi nancial stability.

Will the SVB collapse trigger a global fi nancial crisis?

China the peacemaker?

I t must have been a terrible week for United States Presi- dent Joe Biden.

In the same week that the US fi nancial authorities had again to fend off a potential crisis from the collapse of Silicon Valley Bank and reports that tension has risen between President Biden and Ukraine’s President Volodymyr Zelensky, especially over the sabotage of the Nord Stream II pipeline, China scored a massive political victory in the Mid- dle East.

No one thought that it would take less than three years for China to make a major strategic inroad into the Middle East since the US abandoned the region through its hasty retreat from Afghanistan.

The deal that China brokered to stage a rapprochement be- tween Saudi Arabia and Iran, which seemingly came out of no- where, certainly caught everyone by surprise.

Even if we can discount the strategic and probably geopo- litical gains, a truce between a major Sunni power and the key Shi’a nation in one of the most volatile regions comes with a major and rich symbolism that could reverberate throughout the Muslim world.

And for idealists who criticized the Iran-Saudi detente as being motivated only by economic pragmatism from every- one involved in making the deal, realists could certainly argue that China’s peacemaking model may be the shape of things to come, that in order to achieve a goal the incentives should be tangible like the access to oil and gas or preferential trade, rather than the lofty ideals that the West at times has imposed on others.

China after all is Saudi Arabia’s largest trading partner, while Saudi Arabia is one of China’s largest suppliers of oil.

As for Iran, after years being on the receiving end of the dev- astating economic sanctions imposed by the US, taking up an offer from China would certainly be a no-brainer. Especially if the proposal to have a truce with Saudi Arabia comes with an offer of US$400 billion in investment.

And if the exchange for the investment is supplies of oil and fuel, then it is a win-win for everyone.

Even for those who are not directly engaged in the deal, the impact could be immense.

The deal certainly can change the game in the confl ict in Yemen, a proxy war between Iran and Saudi Arabia, which has gone on for eight years and has been devastating for the Ye- menis. On Wednesday, the United Nations Security Council began talks on the possible impact of the Iran-Saudi detente toward attaining peace in Yemen.

On the heels of the Iran-Saudi detente, China is now look- ing to do the same in Ukraine, with President Xi Jinping plan- ning to meet Russian President Vladimir Putin next week and preparing an online summit with Zelensky later in the week.

It remains to be seen if Xi can emulate the Middle East suc- cess story in this ongoing war, but the eyes of the world are now certainly on China with its new role as a peacemaker, a manifestation of Xi’s Global Security Initiative outlined last year.

In places where very little progress has been made toward confl ict resolution, such as Myanmar or the Korean Peninsula, China can certainly do more.

The West has always accused China of being a free rider in global political and economic order that it only seeks to ac- crue gains by coercing other countries. The accusation has also been that even when providing help, it in fact operates out of pure self-interest and maximizing gains in the long run.

Hence, the debt trap accusation.

China must prove this accusation wrong, and that it can now also be an adult in the room, that it can be a responsible party in global politics. China should also be willing to take up greater responsibility in solving bigger challenges like global warming, marine debris and food security.

As the cliché goes, with great power comes greater respon- sibility.

Space economy is the future, but how to realize it?

T

he space economy is arising and transforming concur- rently with the expansion and profound transformation of the space sector and the con- tinued incorporation of space into society and the economy.

The space industry is not only a growth sector in its own right, but also a crucial growth enabler for other industries.

Space-for-earth applications rely heavily on satellite technology in space. Utilizing satellite- based internet services that can reach the most outlying areas fa- cilitates the equitable distribu- tion and affordability of internet access for all. Due to underdevel- oped or rural areas, establishing a terrestrial network can be diffi - cult or costly.

By employing satellite-based internet service technology, people in rural and remote areas will enjoy equal internet access pro- vided to those in urban areas.

Satellite technology can also help develop the agricultural sector.

Space-based remote sensors collect images, data on weather patterns, and electromagnetic wave measurements, all of which can be utilized for agricultural purposes.

According to McKinsey’s an- nual digital farmer adoption sur- vey, nearly 29 percent of row-crop farmers and almost 50 percent of specialty-crop farmers rely on or intend to begin using such data.

Farmers will realize the great- est benefi t from satellite sensors when they are able to increase, if not multiply, crop yields.

On top of internet services and farming, satellite technology is badly needed in the mining industry. Satellites can ease the work of mining companies, es-

pecially if they operate in remote areas. The mining industry can use satellite imagery to generate emission maps, track shipments along the supply chain and locate mineral-rich areas.

A big part of the business de- pends on how well satellite technology can send a strong signal uninterrupted.

Mini satellites in Low Earth Or- bit (LEO) are the best way to meet these needs. Placing a mini satellite in LEO will reduce the cost of launching a satellite because it is

small and weighs less than 1,000 kilograms.

The Indonesian government’s masterplan to build a spaceport in Indonesia shall provide an ex- cellent opportunity to create economic value from space activities.

The cost of launching satellites by the state or private companies will be reduced. There will be no need to launch satellites on for- eign soils.

Given Indonesia’s location in the equator, it is advantageous for those wishing to launch rock-

ets and place satellites in Earth orbit, particularly in geostation- ary orbit.

Future launch from Indonesia requires less fuel which will generate an effect on launch costs.

This geographical advantage is defi nitely an asset which could generate substantial additional revenue for the nation, and polit- ically puts Indonesia as a space- faring country.

Obviously, Indonesia’s economic potential in space activities must be accompanied by ef- fective space-related regulations.

Law No. 21/2013 provides the government legally-binding outer space regulations.

However, these regulations are still of a general nature and re- quire a number of implementing regulations to govern specifi c matters.

In accordance with the man- date of the Indonesian Space Law, implementing regulations are necessary for provisions per- taining to the commercialization of space, including the spaceport development plan.

Despite the Indonesian Space Law having been in effect for nearly a decade, the government has yet to fi nalize implementing regulations for these two issues. This must be resolved im- mediately if Indonesia is serious about making outer space a revenue center and the driver of the economy in the future.

Apart from the Space Law, Presidential Regulation No.

45/2017 serves as a master plan in providing a national guideline for space activities. The regulation contains Indonesia’s short, medium and long-term plans for space activities.

Several short-term plans in the

master plan, including the determination of the spaceport’s location in Indonesia, have not been implemented to date. Even though the Indonesian government has justifi cation to conduct space activities, it must be im- proved in terms of realization.

It will be necessary in the future to increase the state budget for space activities. As a result of the integration of the Na- tional Institute of Aeronautics and Space (Lapan) into the Na- tional Research and Innovation Agency (BRIN), the responsibili- ties and authorities associated with national space activities are currently held by BRIN via the Aviation and Space Research Or- ganization (ORPA).

The state budget allocated nearly Rp 6.4 trillion (US$416 million) for BRIN in 2023, up from Rp 5.78 trillion last year.

Nonetheless, it should be not- ed that the budget must be di- vided among the various research organizations that fall under BRIN’s auspices, including ORPA.

The government has to increase the budget for space activities to generate substantial profi ts.

In the end, the government must commit to all of these ini- tiatives to realize a space-based economy in the future.

Accelerating the drafting of a legal framework for this sector is imperative.

Unless the government man- ages to clear all the hurdles, the aim to obtain great benefi ts from future space activities will mate- rialize. It becomes even more im- portant for Indonesia to fi rmly position itself as a space-faring country in the era of space explo- ration, the fi rst ASEAN member country to do so.

EDITORIAL

By Yaries Mahardika Putro and Ridha Aditya Nugraha

Surabaya/Jakarta

By Dedy Swares Sinaga

Jakarta

An economist at Bank Indonesia. The views presented here are personal.

Yaries Mahardika Putro is a lecturer of air and space law at the Faculty of Law in Surabaya University. Ridha Aditya Nugraha teaches Air and Space Law Studies in Prasetiya Mulya University.

AFP/CNES/S.Martin

Into space: A rocket takes off to put the Echo Star XVIII satellite for satellite service provider Dish Network and the BRIsat satellite for state-owned bank BRI into orbit on June 18, 2016, in Kourou, French Guiana.

Reuters/Brittany Hosea-Small

Valley of death: A customer is escorted into the Silicon Valley Bank headquarters in Santa Clara, California, the United States, on Monday.