First Test On Asia’s Banking System? Hong Kong’s Foiled BEA Bank Run

It was bound to happen.

The most recent spike in of LIBOR rates (courtesy of Bloomberg) in the international money markets (IHT) sparked rumors through a barrage of panicky text messages that suggested of a Hong Kong bank that had become vulnerable due to the recent losses in Lehman Brothers.

Depositors then thronged to the branches of the Bank of East Asia-founded in 1918, which makes it the oldest bank in the city-triggering a 2 day bank run.

Courtesy of BBC

But unlike the counterparts in the US or in UK, newswires reported that a combination of massive injection of funds to its system- about HK$3.9bn/$500m/£269m (BBC) by the Hong Kong Central Bank, plus domestic tycoon Li Ka-shing’s reported massive buying of the bank’s shares, which earned him the moniker of the “superman” by the local media (NYT), eased depositors’ concerns.

The overall damage, according to Timesonline, ``Total withdrawals from BEA on Wednesday were estimated at HK$2 billion by analysts at DBS Vickers Securities – a manageable 0.7 per-cent of the bank’s HK$300 billion deposit base.

``Some of those queueing to withdraw their money cited fears that BEA had not properly assessed its exposure to the unwinding of Lehman Brothers’ huge positions, which the bank puts at about $54 million. Many savers took to the streets in protest after discovering that HK$13 billion of minibonds guaranteed by Lehman Brothers that they had bought were rendered worthless after the bank’s collapse. Some pointed to the suddenness of Lehman’s demise, saying that in the days before the Wall Street giant went bankrupt it was issuing assurances of its stability, in similar terms to those used on Wednesday by BEA.”

From our understanding, the strongest possible reason why BEA survived the ordeal was PROBABLY because it wasn’t insolvent unlike its contemporaries in the US (IndyMac) or UK (Northern Rock). Liquidity injections can do some temporal patch up work, but can’t hide the company’s structural infirmities. The equity support provided by tycoon Li Ka-Shing signified as a vote of confidence or opportunity to profit than from altruism.

Second, in a world where people are anxious about the stability of the world’s financial system, the flow of information has been real time and powerful enough to trigger an unwarranted stress or panic.

Lastly, while this will NOT be the last of the systemic tests for Asian banks, they are likely to be better conditioned to weather the storm of panics.

The differences in the outcome of how an Asian bank and US banks reacted to Bank Runs clearly demonstrates signs of brewing divergences.