Text P for panic

Amid the global storm, a soaking for the biggest Chinese bank in Hong Kong

IN THE West it is not uncommon these days to hear rumours flying around financial markets about troubled banks. But in Hong Kong on September 24th the rumours were disseminated by text messages, and they were not directed at shareholders. They were received by depositors at the Bank of East Asia, Hong Kong’s largest locally owned lender. As the day wore on, people lined the pavements outside the bank branches, quietly determined to withdraw their cash. “No worry, it is our culture,” said one man, explaining the calm. He had been sent by his boss to transfer the money to HSBC, Hong Kong’s historic financial rock.

The 90-year-old Bank of East Asia blamed “malicious rumours” for the incident and said they were false. The text messages had referred to the bank’s losses through exposure to American International Group (AIG), the global insurance giant that was in effect taken over by the American government on September 16th, and Lehman Brothers, the Wall Street bank that collapsed a day earlier. To allay fears, the bank disclosed that it had exposure to AIG and Lehman of HK$473m ($61m), just under 1% of regulatory capital. It extended its opening hours, dispatched guards to ensure queues were orderly and distributed leaflets noting that it was heavily capitalised and liquid, a position endorsed by the local monetary authority.

Hong Kong has experienced bank runs before, most recently in 1997 during the Asian financial crisis. Deposit insurance used to be non-existent and it remains small, covering only the first HK$100,000. But banks in the city are thought to be well capitalised and fairly insulated from the global credit crunch. They are in better shape than others in the region, such as Australian banks, which have seen interbank funding costs soar, leading the Federal Reserve to open a dollar swap line this week with the Reserve Bank of Australia.

The Bank of East Asia is a special case in Hong Kong, however. In February its well-connected boss, David Li, settled American insider-trading charges. More recently, a “rogue trader” cost the bank HK$93m. On September 19th Moody’s, a rating agency, shifted its outlook on the bank’s debt to negative (although it is still investment grade).

In response to the run, the Hong Kong authorities voiced their support for the bank, and a tycoon bought shares. They rose on September 25th as normality returned. But banks everywhere should pay attention. As storms batter global finance, depositors’ fingers are on the panic button. And that button may now be on their mobile phones.

Discussion question:

Hong Kong people are getting more accustomed to sending SMSs and emails to their friends and relatives of the so-called "inside news" ranging from typhoon forecast to financial "tips". Do you think this can create problems? If yes, what are the potential problems?