Most people have heard of the ‘butterfly effect’. This is the idea that the world is so interconnected, a seemingly insignificant event can eventually result in a much bigger impact in an apparently unrelated way down the line.
So a butterfly flapping its wings could start a chain of events that ultimately ends with a hurricane on the other side of the world
The butterfly effect has played out several times in global financial markets, most notably with the collapse of Lehman Brothers which led to the 2008 Global Financial Crisis.
As a result, the recent overseas banking turmoil which saw US lenders Silicon Valley Bank and Signature Bank fall and the subsequent takeover of global investment bank Credit Suisse may be understandably making you nervous.
Is this the start of another financial crisis? And, if so, are Australian banks at risk?
To answer both questions, while further turbulence may play out globally, it’s extremely unlikely there’ll be a significant impact on Australian banks for two big reasons.
Australian banks largely insulated from market turmoil
Australian banks, which invest primarily in customer mortgages and corporate debt, have very different business models from their US counterparts that collapsed. These account for 68% of the total reported assets of the four major banks, according to S&P Global Ratings.
Conversely, cash, bank balances and other forms of debt securities form only about a quarter of the four major banks’ reported total assets.
S&P also notes that most of these debt securities are at low risk of changes in value and are “readily convertible to known amounts of cash within three months.”
That’s important because it means that the conditions that caused SVB’s and Signature Bank’s downfall don’t exist here.
SVB collapsed when it invested heavily in US government bonds. When the US government started raising interest rates, the value of these bonds fell. Meanwhile, SVB’s tech industry customers began to withdraw their savings, forcing the bank to sell its bonds at a loss. This prompted customer concerns and sparked a bank run (when too many depositors withdraw their funds from a bank at the same time).
Within two days, SVB fell which, in turn, spooked Signature Bank’s customers who withdrew more than $10 billion in deposits as the contagion spread.
What about Credit Suisse?
The Swiss banking giant had been struggling in recent years, thanks to a series of scandals, management changes and multi-billion dollar losses. So its takeover wasn’t directly connected to the SVB collapse, except that this had frightened global investors who then lost confidence in Credit Suisse’s turnaround plans.
Australian banks well-placed to withstand major financial crisis: APRA
When SVB collapsed, Treasurer Jim Chalmers reassured Australians that “our institutions are solid, our banking sector is well-capitalised, and we’re in a better position than most other nations to deal with the challenges we face in the global economy.”
He could say this with confidence because, in Australia, banks are regulated by APRA. The banking watchdog’s primary role is to ensure a safe, stable and resilient financial system in which:
As part of this, APRA enforces legally binding standards for minimum capital, governance and risk management requirements, and regularly ‘stress tests’ Australia’s banking system’s ability to withstand adverse economic conditions.
At the recent Australian Financial Review Banking Summit, John Lonsdale, APRA’s chair, revealed the results of the regulator’s latest stress test of the 10 largest Australian banks.
In this stress test, APRA modelled an extreme scenario in which:
This resulted in sovereign and bank debt ratings downgrades, a temporary closure of offshore funding markets, a sell-off in the Australian dollar and a widening in credit spreads.
Each of the 10 banks was then hit with a “major and costly cyber attack”, with APRA assuming no mitigating actions to absorb the shock.
While all banks experienced significant credit losses under this “dire scenario”, the banks remained above minimum capital requirements, kept sound funding and liquidity positions, and kept deposits safe.
“We hope the day never arrives when the type of dire scenario used for our banking stress test eventuates,” Mr Lonsdale said.
“But should it do so, Australians can be confident of two things: their banking system is among the strongest and most resilient in the world, with prudential safeguards above and beyond minimum international requirements.”
Your money is safe
Finally, in the highly unlikely event that an Australian bank, building society or credit union collapses, bank deposits of up to $250,000 are guaranteed by the federal government’s Financial Claims Scheme (FCS).
The FCS was brought in following the Global Financial Crisis and protects money held by customers of local authorised deposit-taking institutions (ADI) in case a lender collapses. It covers a wide range of deposit accounts including savings and cheque accounts, term deposits and mortgage offset accounts.
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