Well-publicised struggles at Silicon Valley Bank and Credit Suisse have put a renewed spotlight on the fragility of major banking systems. Is the U.A.E. facing a similar risk?
Silicon Valley Bank, Courtesy ABC News.
Bonds are inversely proportional to interest rates — when one goes low, the other goes high. Silicon Valley Bank (SVB), the United States’ 16th largest bank, put most of its US$212 billion assets into long-term bonds, making the extraordinary bet that interest rates would remain low.
They didn’t. The gamble proved incompatible with rampaging inflation. As the U.S. Federal Reserve repeatedly raised rates, investors could now buy bonds with higher rates at a lower price, so the bank’s bonds declined in value.
To accommodate the subsequently large withdrawals, SVB sold investments that incurred US$1.8 billion in losses. The house of cards finally fell on 10th March. First Citizens Bank acquired most of SVB’s assets, while HSBC took over its British arm for a grand total of £1.
SVB arguably did have enough assets to recoup depositors, but only after a lengthy wait. So, by government mandate, a fund financed by all American banks will trump up the spare change — thereby penalising the entire American banking system.
Credit Suisse’s headquarters in Zurich. Courtesy Credit Suisse.
The subsequent Credit Suisse debacle has not helped dwindling investor confidence. Despite its illustrious history, the bank has in recent years faced a litany of management upheavals, losses and scandals.
A new strategic review in 2022 was scuppered by rumours of the bank’s impending demise — clients withdrew approximately US$119 billion. In early 2023, the Saudi National Bank’s refusal to inject more cash flew in the face of plans to borrow up to US$54 billion.
In the end, the end came quickly. UBS acquired the bank for US$3.3 billion, accepting up to US$5.4 billion in losses in a deal brokered by the Swiss government.
The collapse could have an unprecedented impact on Switzerland’s banking reputation. Investors have lost over US$17 billion worth of Credit Suisse bonds, while the Swiss government itself has to provide a staggering US$108.4 billion.
Already, Asian family offices are mulling moves to Singapore, Hong Kong and Dubai. It is a trend first seen in the immediate aftermath of the Swiss freezing of Russian assets — unsurprisingly, political and banking instability is inducing diversification.
The Central Bank of the U.A.E. Courtesy The National.
Bank collapses, high interest rates, a predicted 3% world economic growth, lingering pandemic effects and the Ukraine conflict will all contribute to further stresses — a claim backed by both the IMF and the European Central Bank (ECB).
S&P has gifted the GCC a more positive outlook. Gulf central banks have matched the U.S. Federal Reserve’s recent policy rate hikes, and U.A.E. businessmen have been advised to remain cautious with their expenditure and wait for rate reductions or hike halts. But, with the majority of GCC banks having less than 5% of their total assets exposed to the U.S., any potential contagion is manageable. This ability is further backed by strong funding and liquidity profiles, as well as necessary government support.
It is a projection bolstered by a strong 2022, where GCC banks recorded a 31% rise in net profits and 10.6% growth in assets, according to KPMG.
Lavish properties like this 6-bedroom abode in Umm Suqeim are expected to attract even higher interest in 2023.
This bodes well for the U.A.E. real estate market. High-net-worth Russians constituted the top buying bracket in 2022 for luxury homes, but 2023 is all set to see investment from China lead the way. Following closely behind are European investors, a direct result of that continent’s inflation struggles, as well as ever-present sources of investment like India.
The net result? A recent report predicts a 14% jump in Dubai’s luxury property segment in 2023. So, in the U.A.E. at least, you can bank on the banks.
