Hong Kong’s Bank of East Asia faces a run, libor rising, CDS sees first ever decline in volume

September 25, 2008

From NewyorkTimes:

“Depositors who lined up outside the Bank of East Asia’s headquarters in the city center said that after the failure of Lehman Brothers, they no longer fully trusted any financial institution. “If a business as big as Lehman can go down, then we’re scared,” said Ann Chan, an off-duty nurse, whose husband had called her Wednesday afternoon and sent her to wait in line to withdraw their money.”

The run appears to have been sparked by a move by Standard & Poor’s to reduce the credit outlook for six Asian banks and six Asian insurers to stable, from positive, late last week, on slowing growth. Standard & Poor’s and Moody’s also lowered their credit outlooks for Bank of East Asia to negative, from stable, after it restated its earnings for the first half of this year, announcing that it had discovered an unauthorized “manipulation” of how it valued equity derivatives.

Bank of East Asia’s exposure to bankrupt Lehman and AIG is about $54 million — or 0.1 percent. That is not an amount that should cause the failure of a large institution, however, expectations and rumours are more relevant in this environment, and even anonymous email messages can lead to panic, as we observe in this event. Asians have a conservative attitude to finance, and maybe rightly so, as the structured products that brough the downfall of Wall Street was never in vogue among them.

The run on this bank, along with the Congress’ negative attitude to Mr. Paulson’s deal, have added to a global spike in short term libor across the world today. The most pronounced rises were in Asia, as Hong Kong’s three-month interbank offered rate rose 13 basis points, advancing for a third day to 3.80 percent at the 11:15 a.m. fixing today, the highest since December 2007. Singapore’s three-month dollar loan rate rose 29 basis points, the most since Lehman’s collapse, to 3.684 percent at today’s fixing while the cost in local-currency loan increased for a ninth day to 1.758 percent. Both are at the highest since Jan. 22. In Australia, the one-month bank bill swap rate, used to determine yields on variable-rate loans, was 7.458 percent, the highest since Aug. 5, reports Bloomberg.

Finally, as I predicted here days ago, the volume of outstanding CDS trades fell to $54.6 trillion as of June 30th, from $62 trillion in the first half, the first ever decline since ISDA started surveying traders in 2001. The market has likely shrunk even more since ISDA’s most recent poll after Lehman Brothers filed for bankruptcy. ISDA’s survey records trading as of June 30.

From Bloomberg:

“This decrease primarily reflects the industry’s efforts to reduce risk by tearing up economically offsetting transactions and demonstrates the industry’s ongoing commitment to reduce risk and enhance operational efficiency,” ISDA Chief Executive Officer Robert Pickel said in the statement. “We expect to see more effects of this over time.”


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