You may not have heard how a giant Hong Kong bank narrowly avoided a massive bank run earlier this week by acting quickly and effectively to calm down those panicking about the markets. The reason you didn’t hear about it? Because it was successful. Now if only we could learn something from this…
We spoke with a reporter from a Hong Kong news outlet covering the crisis on Wall Street last week. Besides the odd fact that her business card was emblazoned with various unnecessary Beijing 2008 Olympic-logos and she was wearing a pair of black Converse sneakers, she seemed very informed and pleasant. But make no mistake about it, Hong Kong bankers and reporters have their shit together these days.
Back in the day (pre-British handover), Hong Kong’s financial system was a mess. Take for example the case of the ‘accidental’ bank run in 1991. One of the most serious bank runs in the history of that region occurred that year when some passers-by mistook a long line of passengers waiting for a local bus for a line of people waiting outside the Bank of Credit & Commerce International. Rumors quickly spread that the already embattled bank was going under and this was the start of a bank run, where all the bank’s customers quickly tried to remove their money.
Well, the rumor and mistake became reality when people quickly rushed to do just that, and the bank went into a serious ‘for-realsies’ bank run. Can you friggin’ believe that!? Some idiots thought a bus line was a bank run and it caused one of the most disastrous days in Hong Kong banking history.
But the banks of Hong Kong learned from these mistakes, and many other banking mishaps (both purposefully disappointing and unintentionally so).
The NY Times has more details on how exactly they escaped disaster yesterday, when a run on the Bank of East Asia, Hong Kong’s biggest and best-known bank, began:
People involved in the effort said a series of measures were taken within a few hours to protect the bank, each aimed at addressing different potential problems. Banking authorities not only gave full-throated defenses of the bank but also made preemptive cash infusions into money markets, before a crisis of confidence could grip credit markets.
By late Thursday morning, there were no lines at the bank’s stately headquarters in the heart of Hong Kong’s financial district. And two black-and-gold armored trucks were conspicuously parked across the street with their engines running, a reminder that more cash would be available if anyone else wanted to withdraw money.
Soon after lines formed outside the bank on Wednesday, the chief executive of the Hong Kong Monetary Authority, Joseph Yam, and the financial secretary of Hong Kong, John Tsang, issued statements saying that the city stood behind the institution.
Mr. Yam took the unusual step — for the head of what is essentially a central bank — of going on television immediately to discuss the finances of the Bank of East Asia in clear but detailed terms, including how the bank’s capital adequacy and liquidity ratios compared with local and international standards. Mr. Yam writes a weekly column posted on the monetary authority’s Web site and periodically appears on television, so he is a readily recognized figure.
The Hong Kong Monetary Authority preempted a possible problem by immediately injecting 3.88 billion Hong Kong dollars, or $500 million, into money markets.
By late morning on Thursday, interbank lending rates had retreated, and the only crowd outside the Bank of East Asia’s headquarters consisted of reporters and press photographers with no one to interview.
Ya see that? They stepped up, put some cash on the table and came out with a swift and clear response to the rumors. And don’t you just love when people do things ‘full-throatedly’? I know I do.
That’s what you call transparent oversight and clear due diligence. None of this pussy-footing around and being duplicitous about earnings, misguided credit rating agencies, and quarterly results. When they screwed up (whether it’s just a rumor or not), they acknowledged it and were able to back it with some liquidity.
Then again we’re thousands of times larger than Hong Kong and our financial system is a whole lot more complex. But the ideas are there, right?
NYT: Quick Action Stops Run On Hong Kong Bank Giant, September 25, 2008