US bank failure triggers Asia’s 2008 PTSD

If anyone at South Korea's National Pension Service has been planning a 2023 vacation, it might be time to cancel. 

The recent collapse of Silicon Valley Bank in California already has staff at the world’s third-largest public pension fund scrambling to limit the damage. For the NPS, losses are management. As of the end of 2022, its 100,000 SVB shares were worth roughly $23 million. 

But the real risks could be indirect as the biggest economy injects a dose of 2008 energy into global markets. The “Lehman shock” era left Korean policymakers and investors with post-traumatic-stress-disorder fallout that lingers to this day. 

For Korea, it was a fresh PTSD flashback on top of the trauma from a decade earlier. Thailand and Indonesia stumbling in 1997 was threat enough. When Korea, a top 12 economy, cratered, too, the Asian financial crisis became a global problem. 

By 1998, Korea was first to dust itself off and stage a recovery. A decade later, when the US subprime meltdown hit world markets, hedge funds buzzed that Korea might be the “next Iceland,” and tumble anew.

Korea held its ground. It did so again in 2013 amid the Federal Reserve “taper tantrum.” Seoul displayed its grit again in August 2021, when the Bank of Korea became the first major monetary authority to hike interest rates in the COVID-19 era.

But the SVB “mess,” as US President Joe Biden put it, could be a serious problem for Asia. A maxim in Silicon Valley circles is that investors reward tech visionaries who “move fast and break things.”

Turns out, it’s the Fed that’s breaking banks. In this case, regional US banks. Fallout from SVB quickly spread to New York-based Signature Bank, which counted a number of crypto companies as customers.

Global investors are now in a 2008-like scramble to connect the dots between investments, asset classes and financial entries to which they might be exposed — directly or just tangentially.

Like the NPS, Korea’s broader economy seems well positioned to navigate the coming storms. But if the poor governance on display at the 16th biggest US bank — SVB — shows up in other peers, things could become “systemic” real quick. 

Then, Korea will be grappling with gyrating bond yields, exchange rates, equity values and sudden Fed moves that have the BOK racing to adjust.

News that officials at the Fed, US Treasury Department and Federal Deposit Insurance Corporation spent the weekend in panic mode is already triggering Asia’s PTSD over 2008.

The good news is that another Wall Street crash doesn’t seem likely. Behemoths like JPMorgan, Bank of America and Citigroup are subject to far more stringent capital adequacy rules and stress tests. The bad news is that the collateral damage from the Fed’s aggressive rate hikes is adding up. 

Asia doesn’t tend to do well in periods of harsh Fed tightening. Case in point: the Fed’s mid-1990s monetary austerity cycle. 

Beginning in 1994, the Fed doubled borrowing costs over a 12-month period. That sent Mexico into crisis. The wealthy California city Orange County went bankrupt. Wall Street bond dealing titan Kidder, Peabody & Co. went bust. 

Then came Asia’s turn in 1997. As the dollar surged, currency pegs in Bangkok and Jakarta became impossible to defend. Next, Korea’s devalued. Market turmoil killed then-100-year-old Yamaichi Securities, one of Japan’s fabled big-four brokerages. 

Not surprisingly, the dollar’s strength over the last two years put Asia in an awkward spot. Weaker currencies from Jakarta to Seoul leave Asia extra vulnerable to surging oil and food prices. They also make foreign debt harder to service. 

None of these risks were on Seoul’s radar screen just a month ago. In mid-February, the betting was that the Fed was nearing the end of its tightening regimen. That, coupled with China’s recovery, suggested better days ahead. 

Now, Finance Minister Choo Kyung-ho finds himself huddling on a Sunday with his economic team discussing the worst US banking shock since 2008. And reassuring markets that Korea can handle any shockwaves from the West.

A day later, on Monday, Korean President Yoon Suk Yeol was urging officials in Seoul to “closely examine” the impact of SVB's failure in domestic markets and real economy.

Korea has some serious vulnerabilities. Household debt at 105.3% of gross domestic product, one of the highest levels globally. 

The SVB collapse adds intensity to the headwinds zooming Korea’s way. Already, higher global rates and slumping exports are taking a toll. In the first 10 days of March, Korean exports plunged 16.2%. 

This is ominous news for the globe. With its sizable and open economy, Korea is often the vanguard of economic inflection points. It points to deteriorating in demand and confidence. Clearly, failing US banks is the last thing Asia needed — or expected — in 2023.

By William Pesek 


William Pesek is an award-winning Tokyo-based journalist and author of Japanization: What the World Can Learn from Japan's Lost Decades. Previously, he was a columnist for Bloomberg and Barron’s.