Asian Crisis Watch: Myanmar Central Bank Denies Bank Run. When there’s Smoke…

When there’s smoke there’s fire? 

Myanmar’s central bank goes on air to deny a bank run.

From Myanmar Times:

Rumours of a run on several major banks are untrue, said the Central Bank of Myanmar in a television statement late on August 17.

Rumours had spread on social media that Asia Green Development (AGD) Bank, part of Htoo Group of Companies, and Kanbawza Bank (KBZ) would close.

The reports started after Htoo Group’s airline Air Bagan temporarily suspended flights at the weekend. A company spokesperson has said flights will resume in October.

Throughout August 17, comments on social media suggested that depositors were withdrawing funds from accounts at several banks including AGD Bank, AYA Bank, CB Bank and KBZ.

Frequent bank run tremors (or the boy who cried wolf?): 

The Central Bank has helped financial institutions in times of need since the 2003 banking crisis – a major run on the country’s private banks, said U Thura, former manager of Myanma Economic Bank (MEB). At that time, the Central Bank assigned state-owned MEB to provide funding to commercial banks, he said.

U Thura is now chief Yangon representative for South Korea’s Woori Bank, which has had a representative office in Yangon since 2012.

“The Central Bank must respond quickly and transparently in this sort of situation. In the past, suspicions were resolved when U Aung Ko Win [chair of KBZ] communicated directly with the public,” he said.

In 2012 depositors withdrew funds from KBZ after reports spread that the chair had been arrested, he said, adding that rumours can trigger bank runs anywhere in the world and the issue is not specific to Myanmar.

In Myanmar however, reports of bank runs are frequent. Once or twice a year, stories emerge about the reputation of bank shareholders or related businesses.

Last year for example, depositors at AGD Bank withdrew funds after Htoo Group’s chair U Tay Za reportedly sold a majority stake in the bank to a number of shareholders.

Myanmar currency the kyat has been under pressure. Like the rest of Asia, the USD kyat has been soaring. It’s a sign of the shrinking US Dollar liquidity being aggravated by domestic factors.

Myanmar balance of trade deficit has been ballooning

This has contributed to her deteriorating current account balance

Add to this Myanmar’s government budget deficit

Curiously government debt has been shrinking.

So what has funded those deficits? My guess: subsidies from zero bound rates via banking credit expansion.

I have no updated data although a credit boom could have been manifested via signs of a property bubble

Anyway, Myanmar has been no stranger to a banking crisis. In 2003, bank credit growth soared to only 8% of GDP enough to trigger a crisis.

Here is how Wikipedia explains of the Myanmar 2003 Banking crisis: The 2003 banking crisis of Myanmar was a major bank run in private banking that hit Myanmar (Burma) in February 2003. It started with a decline in the trust for private financial institutions following the collapse of small financial enterprises and proliferating rumors about the liquidity of major private banks. Leading to a bank run on the Asia Wealth Bank, the crisis quickly spread to all major private banks in the country. It led to severe liquidity problems for private banks and scarcity of the kyat. Though exact data is not available, it is believed that the crisis caused major economic hardship for many in Myanmar

Why are banks prone to bank run?

The great dean of the Austrian school of economics Murray N. Rothbard explained:

But in what sense is a bank "sound" when one whisper of doom, one faltering of public confidence, should quickly bring the bank down? In what other industry does a mere rumor or hint of doubt swiftly bring down a mighty and seemingly solid firm? What is there about banking that public confidence should play such a decisive and overwhelmingly important role?

The answer lies in the nature of our banking system, in the fact that both commercial banks and thrift banks (mutual-savings and savings-and-loan) have been systematically engaging in fractional-reserve banking: that is, they have far less cash on hand than there are demand claims to cash outstanding.

“Less cash on hand than there are demand claims to cash outstanding” equated to “severe liquidity problems for private banks and scarcity of the kyat” That’s in 2003.

Again, when there’s smoke, there’s fire?