3 US Banks Collapse: Indonesian Banking Needs to Anticipate the Domino Effect?

Currently, global banking is being shocked by the news that several banks in the United States are experiencing bankruptcy. It started with the collapse of Silicon Valley Bank (SVB) on Friday (10/3/2023) morning, United States time. The collapse of this bank shocked the public because it happened only 48 hours after announcing the capital crisis. Not only that, within two days, news emerged of the collapse of banks in the United States, namely Signature Bank and Silvergate Bank.According to several sources, one of the main causes of the collapse of Silicon Valley Bank (SVB) was the policy of the United States Central Bank, in which the Federal Reserve has raised interest rates from their lowest record since 2022 in an effort to suppress inflation. This is what then causes investors to be afraid to take risks where the available cash currency becomes expensive due to high interest rates.Silicon Valley Bank (SVB) itself was declared to have collapsed after experiencing bank runs, where its customers withdrew their deposits on a large scale on Friday (10/3/2023) and ultimately failed to get capital injections and also withdraw funds from customers and investors. Apart from that, one of the causes of the collapse of Silicon Valley Bank (SVB) was giving too many loans or credit to startup companies whose performance had been deteriorating in recent times. As a result this Silicon Valley Bank (SVB) went bankrupt within 48 hours of planning to raise funds ofUS$ 2.25 billion or equivalent to Rp. 34.75 trillion to increase capital on Wednesday (8/3/2023).

Meanwhile, Signature Bank and Silvergate Bank, both of which are known to be the main banks in the United States for the crypto industry, in fact, almost half of all startup businesses supported in the United States keep their funds in Silicon Valley Bank. This includes crypto-friendly venture capital funds as well as several digital asset companies. Signature Bank was impounded on Sunday night by banking regulators in the United States while Silvergate said on Wednesday last week that they would cease operations and liquidate the bank. The government finally intervened to guarantee all deposits for depositors of Silicon Valley Bank (SVB), Signature Bank and also Silvergate. This was done by the federal government in order to increase trust and trigger the small unity that exists in the crypto market.

However, this instability begins to show the vulnerability of stablecoins, which are a type of crypto asset which are designed to be protected from price volatility that occurs. Stablecoins should be pegged to the value of a real-world asset, like a flat currency like the US dollar or a commodity like gold. However, it was this unbiased financial condition that later caused them to fall below the pegged value.

Silicon Valley Bank (SVB), which is located in California, was previously ranked 20th on the Forbes list of the best banks in Uncle Sam's country with total assets of US$ 213 billion or equivalent to Rp. 3,302.04 trillion. Meanwhile, Signature Bank, which is a commercial bank leased by the state of New York and guaranteed by the FDIC, has total assets of around US$ 110.36 billion and total deposits of around US$ 88.59 billion as of December 31, 2022. Silvergate itself has estimated total assets compared to the previous two banks, which are only around US$ 11 billion.

Then what is the impact of the collapse of the SVB on the Indonesian banking industry? Based on the opinions of several Indonesian economists, the Minister of Finance of the Republic of Indonesia and the Chief Executive of the Financial Services Authority (OJK), it can be concluded that since the crisis in 1998, the Indonesian banking industry underwent major overhaul/improvement and made the banking system in Indonesia strong, resilient and stable. This is reflected in the well-maintained banking performance in Indonesia and positive growth amidst both domestic and global economic pressures. Second, banks in Indonesia do not have a direct relationship as an investment holder or direct business relationship with Silicon Valley Bank (SVB). Because most of the clients of Silicon Valley Bank (SVB) are tech startups. Third,the average banking liquidity in Indonesia is very good. In September 2022, the ratio of liquid assets to third party funds (AL/DPK) was still high at 27.35%. Banking assets are also maintained at a proportional composition with the composition of Third Party Funds (DPK) dominated by current accounts and saving accounts (CASA) or low-cost funds which are increasing so that they are not sensitive to movements in interest rates.

The results of monitoring the development of indicators related to domestic, regional and global economic and financial conditions according to the Economic and Financial Report for the period 6 to 12 February 2023 prepared by the Head of the Fiscal Policy Office of the Ministry of Finance can be presented in stock indices in the United States, Europe and Asia, the majority move weak. Fear of recession is the main sentiment in global stock markets; US Dollar Index and US Treasury yields strengthened amid hawkish signals delivered by Fed; Crude oil and CPO commodity prices strengthened. On the other hand, coal prices have weakened in a week, amidst still weak demand and forecasts of warmer weather in Europe;

On the domestic financial market, the JCI weakened 0.45 percent with the benchmark series SUN yields rising between 9 bps to 15 bps compared to the previous week. Meanwhile, the rupiah exchange rate weakened by 1.62 percent; From the global economy, the development of economic growth in 2022 varies in various countries with various risks that still need to be watched out for. Domestically, the domestic economy continued its strengthening trend as reflected in a number of positive public consumption indicators. In addition, Indonesia's foreign exchange reserves for the January 2023 period are increasing.

Based on the foregoing, the authors provide views on handling the impact of the collapse of Silicon Valley Bank (SVB) on the economy or the Indonesian banking industry as follows: Indonesia must remain vigilant and careful about the impact of the collapse of Silicon Valley Bank (SVB) on the economy and finance Indonesia. In general, this will not cause a weakening of Indonesia's GDP unless the banking crisis triggers the continuation of the global crisis like in 2008. Policy makers (regulators) must act quickly to mitigate the impact of volatility risk due to the collapse of Silicon Valley Bank (SVB).

The collapse of Silicon Valley Bank (SVB) can make investors more careful and selective in funding start-ups in the country. There will be a potential decline in the funding value of start-up companies in Indonesia due to negative sentiment from the Silicon Valley Bank (SVB) bankruptcy incident. The good news is that US regulators will cover depositors' funds. Where the rupiah tends to strengthen to the level of IDR 15,300. The Silicon Valley Bank (SVB) case can be an important lesson regarding the concentration of risk and the risk of bond ownership in the banking sector which, if not managed properly, has the potential to trigger a banking liquidity crisis. What happened to the SVB can at least serve as a case study for monetary and financial policy makers in the country. So that bank capital should not be focused on sources originating from just one sector.

Thus the collapse of Silicon Valley Bank (SVB) can be a useful lesson in mitigating the risk of a possible banking liquidity crisis in Indonesia so that the banking industry in Indonesia becomes strong and healthy as a motor for financing Indonesia's economic progress.