There's a Chinese proverb along the lines of “a fall into a ditch makes you wiser”. Ho Ching, chief executive at Singapore's giant sovereign wealth fund Temasek will know it well. But has she acted on it?

Temasek fell into a veritable quarry at the end of last year when it invested $4.4 billion in Merrill Lynch under the illusion things could only get better for the Wall Street bank under new chief executive John Thain. Since then, Merrill has unveiled a further two quarters of successive losses and last month sought an extra $8.5 billion in capital, only days after Thain told investors the bank was adequately capitalised.

Yet this week, Temasek applied with the Wall Street authorities to raise its stake in Merrill from 9.45% to as much as 14%. This despite its hundreds of millions of dollars of losses.

When asked why, Michael Dee, a senior managing director at Temasek, lavished praise on Thain, saying the increased investment was made because he has “great confidence” in him and the rest of the board, adding that Merrill has a “great franchise”. This sounds more Jack Dee than Michael Dee until you take a closer look at Temasek's deal with Merrill.

Banks are paying steep rates on interest on the money invested by these sovereign wealth funds. At the time of Merrill's new capital-raising last month, it said it was paying Temasek $2.5 billion to compensate it in light of the new capital increase — yes, that's $2.5 billion — with Temasek reinvesting all the money in the new issue along with a further $900 million. On such terms as this, it is not too hard to understand Dee's confidence.

The fact is, sovereign wealth funds have been so badly burnt by their investments in Western banks that only on the most generous terms are they likely to jump back in for more. Between 2007 and April 2008, the funds invested $80 billion in banking — mostly in European and Wall Street lenders hit by subprime mortgage debt. The ditches these funds have fallen into are nearly all deep under water.

In the UK, Barclays has been among the beneficiaries, with Temasek taking a 1.77% stake last July when the shares were 720p. You can bet there have been interesting conversations about that between Ho Ching and her husband, Singapore's Prime Minister. Today, Barclays changes hands at 328p — a loss to Temasek of well over $1 billion.

That didn't stop it investing a further $393 million in the bank in June, according to Dealogic data. On the Continent, the Government of Singapore Investment Corp and Saudi Arabian Monetary Agency put $11.5 billion into UBS, since when the shares have more than halved.

Temasek's bedfellow, The Government of Singapore Investment Corporation, pumped $12.5 billion into Citigroup in January, since when the stock has lost nearly half its value. It is little surprise, then, to find that most funds are now extremely shy of putting more back into the sector.

Who can blame them? Just a day before Temasek was filing its application with Wall Street regulators to up its stake in Merrill this week, South Korea's top financial regulator was warning the country's state-run Korea Development Bank off investing in overseas banks. His comments came after speculation KDB may bid for Lehman Brothers.

It was seen as a pretty heavy-handed slap-down, and it reverberated around Asia and the Middle East. It seems the South Koreans have learnt from the $800 million hit their sovereign fund, Korean Investment Fund, took on an investment in Merrill Lynch last year.

However, many experts believe the funds will come back eventually. State Street bank's regional director of official institutions in Asia, Hon Cheung, says they will be making a small number of highly selective investments in the banking sector.

“Whether the previous appetite can continue with further deterioration [in bank shares] is very difficult to say, but right now you have seen news there are people still interested in participating in these transactions,” says Cheung.

They are not happy with having taken so much financial pain for dismal performances. Cheung adds: “Their purpose is not to support the US taxpayer or the US economy or to ensure stable global markets. If they get a side-benefit that's great, but their principal job is to benefit the stakeholders.”

So they might just steer clear of that ditch this time around.