This record is a partial extract of the original cable. The full text of the original cable is not available.

C O N F I D E N T I A L SECTION 01 OF 02 RANGOON 000213 
 
SIPDIS 
 
STATE FOR EAP AND EB 
TREASURY FOR OASIA 
CDR PACOM FOR FPA 
 
E.O. 12958: DECL: 02/18/2013 
TAGS: EFIN BM
SUBJECT: BURMA'S BANKS CRASH 
 
REF: A. RANGOON 0030 
     ¶B. 02 RANGOON 0938 
     ¶C. 02 RANGOON 0554 
 
Classified By: CDA, a.i. Ron McMullen.  Reason: 1.5 (d). 
 
¶1. (C) Summary: Burma's expected banking crisis is no longer 
pending; it's here.  According to bankers in Rangoon, 
depositors withdrew more than one-quarter of their deposits 
with Burma's private banks during the week ending February 
14, following revelations of connections between the private 
banks and a set of unofficial financial institutions which 
collapsed en masse at the end of January.  The banks have 
imposed restrictions on withdrawals and appealed to the 
government through Secretary 1 for support.  Indications are 
that the government will step in with the supply of needed 
liquidity, but, as of close of business February 19, no plan 
commensurate with the problem had yet been announced.  End 
Summary. 
 
¶2. (C) The long expected crisis in the Burmese banking sector 
(reftels) hit last week.   Martin Pun, the General Manager of 
one of Burma's largest private banks (Yoma Bank), told the 
DCM on February 16 that depositors had withdrawn more than a 
quarter of their deposits with Burma's private banks during 
the week ending February 14.  According to Pun, a total of 
some 70 billion kyat (about USD 70 million) was withdrawn, 
with 19 billion kyat going out the doors on February 14 
alone.  Hardest hit was Asia Wealth Bank (AWB), the largest 
of Burma's private banks.  Over the weekend, private banks 
met and agreed to place concerted limits on all withdrawals. 
Starting February 17, all private banks will allow 
withdrawals of only 500,000 kyat/week from checking and 
savings accounts.  They also appealed to Secretary 1 for 
central bank support and an effective government guarantee of 
all deposits in the private banks.  Reportedly, the 
government has agreed to provide support, but has not yet 
issued a public announcement regarding its plans.  Meanwhile, 
concerns remain as to whether banks will be able to meet the 
public's demand for cash as the week goes on. 
 
¶3. (C) Behind all of these developments was the collapse at 
the end of January of several unofficial financial 
institutions (Arrow, Aye Yar Myay, Ngwe Zone, Kahing Marlar, 
and others) who took loans and deposits against promises of 
returns of 5 to 10 percent/month.  These institutions had 
flourished by investing in real assets during the high 
inflation days of 2001 and 2002, but had been caught out by 
tighter government enforcement of banking rules, the 
stabilization of the kyat over the past 6 months at a rate of 
about 1,100 kyat/dollar, and a flattening out of the asset 
price inflation which had carried them to profits during the 
previous two years.  No longer able to deliver the returns 
they promised, these institutions either folded or, in the 
case of the few that still remain standing, unilaterally 
placed restrictions on payments out. 
 
¶4.  (C) Unfortunately for the private banks, several of these 
unofficial financial institutions were their clients.  In 
particular, Arrow was affiliated with AWB, and its collapse 
precipitated the run, first on AWB, then on all the private 
banks.  The run started slowly at the beginning of February, 
but rapidly gained momentum, cresting on February 14.  Even 
now there are signs that the panic is not over.  On February 
17 and 18, there were crowds at several banks and others (AWB 
and Myanmar Universal Bank) had effectively closed to the 
public and gone to an appointment system for depositors 
seeking funds.  While there has been no serious violence as 
yet, public frustration is building.  On February 18 and 19, 
in fact, there were reports of stone-throwing at several 
locations. 
 
¶5. (C) As yet, however, it is still not clear who the public 
will hold responsible for this fiasco.  In some ways, of 
course, the government is obviously to blame.  It created the 
repressed financial system and rip-roaring inflation that set 
the conditions for the growth of the unofficial financial 
institutions that have now collapsed.  It also licensed many 
of those companies, albeit not for banking operations.   In 
addition, it was obviously lax in its supervision of the 
banks, who were allowed to lend freely (and imprudently) to 
companies involved in blatantly illegal operations.  Finally, 
its response to the crisis has left a lot to be desired. 
Even as of close of business on February 18; i.e., three 
weeks after the start of the run, the government had still 
not issued any public statement re-assuring depositors or 
guaranteeing financial support for the banks. 
 
¶6. (C) That said, the private banks will not escape blame. 
When all is said and done, they did the dirty work.  They 
were the ones who took deposits in good faith and then lent 
those deposits on to companies whose operations were not even 
legal, much less viable in the long term.  They may also be 
the ones who pay the highest price for this fiasco.  If they 
survive at all, they will end up propped up by government 
money and dependent on the government for their continued 
survival.  They may also be obliged to endure much closer 
government supervision of their management of funds, which 
could be embarrassing for many of the private bank managers. 
 
¶7. (C) It also remains to be seen what impact this crisis 
will have on real output and prices in Burma.  Restricted 
credit should hit both, but if the government steps in to 
meet the liquidity needs of the private banks, we could see a 
sharp fall in the exchange rate (as cash holders move their 
withdrawn funds offshore) and a spike in the inflation rate, 
depending on how quickly and completely the government makes 
up for the banks' lost deposits.  However, even that effect 
may be muted, if the government trails the rate of 
withdrawals (as it should), forces some banks out of business 
(like AWB) and encourages the rest to clean up their lending 
acts.  Added to this will be the impact of the collapse of 
the unofficial financial institutions whose operations 
assumed huge proportions over the past three years. 
Reportedly, those institutions ran up assets and liabilities 
totaling over 200 billion kyat over the past three years. 
Now, with their collapse, that whole unofficial credit 
creation system will be wiped away.  That alone will have an 
impact on prices and output in Burma, regardless of how well 
or badly the government handles the banking crisis. 
McMullen