For the past year, the most important threat facing the global economy and markets has been the persistence of high inflation and the risk of a sharper-than-expected tightening in monetary policy , according to the findings of Bank of America’s monthly fund manager survey. At the start of this year, a “systemic credit event” – a crisis at the corporate level that triggers severe instability in an entire industry or economy – did not even figure in the top four “tail risks” cited by respondents to the survey and was viewed as only slightly more threatening than a resurgence of the Covid-19 virus. The results of this month’s poll, however, which were published on Tuesday, showed that systemic risk surged to the top of the list of investors’ concerns, while fears about persistently high inflation receded. The sudden loss of confidence that has led to the demise of three mid-sized American banks, precipitated the emergency rescue of a systemically important European bank and left another US lender on the brink of collapse in the space of a fortnight has plunged the global banking system into turmoil. The speed, scale and severity of the crisis have ominous echoes of the 2008 financial crash, even though the causes of today’s bank runs – as well as the economic backdrop – are very different. These differences have encouraged banking analysts to treat the current vulnerabilities as a set of idiosyncratic shocks that limit the scope for widespread contagion. Yet, just because a 2008-style crisis is not on the cards does not mean that the dramatic collapse of start-up lender Silicon Valley Bank (SVB), formerly the US’ 16th largest bank, and the shotgun takeover of troubled Credit Suisse by its stronger domestic rival UBS are not consequential for the global banking system, and broader financial conditions. Indeed, what is striking about the downfall of the two banks is that it had little to do with insufficient equity capital or excessive credit risk, the most common causes of a bank run. The Swiss lender fell prey to a startlingly rapid loss of investor confidence, exacerbated by notoriously poor risk controls, while SVB imploded mainly because of its shockingly bad management of interest rate risk. These unanticipated triggers – to say nothing of the regulatory flaws the crisis has exposed, especially in the US – have focused attention on vulnerabilities elsewhere. Judging by their share prices, Asian banks are more resilient. A gauge of Asian bank stocks excluding Japanese lenders fell less than 1 per cent last week. Credit rating agencies point to underlying strengths in the region’s banking sector. In a report published on Wednesday, S&P Global Ratings noted that Asian banks “typically have diversified deposit bases”, unlike SVB which relied excessively on the volatile technology sector. Fitch Ratings, meanwhile, in a note published on March 16, said “regulators in the region emphasise strong interest rate risk management, led by Australia”. However, over the past two weeks, two things became patently clear. The first was that banking risks were underappreciated, mainly because they surfaced in areas investors least expected. The second was that sentiment can turn on a dime. While the spillover effects in Asia have been negligible, the region’s banks and economies are not immune to the turmoil. First, there is a whiff of SVB’s weaknesses about Japan’s banking system. The demise of the Californian lender was mainly attributable to its ill-fated investment of much of its swollen deposit base in long-term bonds that were held to maturity without any interest rate hedge. When the Federal Reserve tightened policy aggressively, bond prices plunged, saddling the bank with huge losses when its depositors abruptly withdrew their funds en masse. Amid financial volatility, beware hedge funds on the prowl Since SVB plunged into crisis, Japan’s Topix Banks Index has lost 15 per cent. This is because many Japanese banks, particularly smaller ones, have loaded up on long-dated debt – some of it in foreign currencies – due to decades of economic stagnation and rock-bottom rates. These bond holdings have already fallen in value and would need to be marked down much more if the new leadership at the Bank of Japan starts raising borrowing costs. In a report on Japan published on March 17, JPMorgan warned that “the smaller a bank is, the greater the risk unrealised losses likely pose”. Second, contagion can come in different forms. While the direct impact of stresses in the US and European banking sectors on Asia may be of little consequence, the knock-on effects are far more significant. Financial conditions in the US had already tightened before the turmoil. More stringent lending standards will slow loan growth, increasing the risk of a recession. Asia’s economies can withstand a sharp downturn and tighter credit conditions in the US. However, a full-blown recession and much more restrictive financial conditions would be more damaging, especially for economies more reliant on external funding, such as the Philippines and Thailand. Finally, the surprise factor cannot be underestimated. Who was paying attention to SVB a month ago? Who would have thought Switzerland would upend the hierarchy of creditor claims when a bank fails by privileging shareholders over bondholders, shattering confidence in a key market for bank funding the world over? It is these “unknown unknowns” that are the biggest concern right now. Asia’s banks may be more resilient than their US and European peers, but they are by no means a safe haven. Nicholas Spiro is a partner at Lauressa Advisory