Experts comment on domestic landscape
Australian banks are well-capitalised and operate under different regulations to the US, meaning they are unlikely to follow the same path as the two now-defunct US banks, Australian finance industry experts say.
Domestic banks are also well-diversified: any risk is spread across a range of sectors, insulating them if one particular sector runs into financial trouble, they said.
Silicon Valley Bank collapsed on March 10, understood to have been instigated by a fall in the value of fixed income securities (such as US Treasury bonds) and a rushed attempt to raise capital. Increased demand from the bank’s technology-focused depositors to withdraw their funds created a classic bank-run scenario and the bank failed to meet its obligations.
The recent failures of Silicon Valley Bank and Signature Bank, and the bailout of Credit Suisse by UBS, raise the question of whether Australia’s big four banks – and the wider banking sector – are also at risk.
According to a Federal Reserve statistical release for December 2022, Silicon Valley Bank was the 16th largest bank in the US, with $209 billion in consolidated assets.
Australian banks operate under different rules
Australian Banking Association chief executive Anna Bligh (pictured above centre) told MPA that the collapse of Silicon Valley Bank was driven by a particular set of factors, which include high exposure to the tech industry.
“Silicon Valley Bank was not subject to the same liquidity requirements as the large American banks,” Bligh said.
Australia’s banks are “strong” and are subject to a “different set of regulatory frameworks”, she said. Bligh also confirmed that all banks in Australia (regardless of size) were subject to minimum liquidity requirements.
“The Australian Prudential Regulation Authority (APRA) requires banks to maintain liquidity levels to satisfy what is known as the ‘liquidity coverage ratio’ and the ‘net stable funding ratio’,” Bligh said.
“Australian Banking Association members are well diversified and therefore well positioned in the event that one sector experiences challenging financial circumstances.”
Additionally, Bligh said Australian banks were “well-capitalised” and already met APRA’s “unquestionably strong” benchmarks.
“Further to this, Australian banks have this year implemented revised capital requirements, further strengthening financial resilience,” she said.
Fitch Ratings senior director banks - APAC Tim Roche (pictured above left) said that the credit ratings and research agency thought that a collapse of Australian banks similar to their failed US counterparts was an unlikely scenario.
“Our rated universe of Australian banks do not exhibit the industry concentration that Silicon Valley Bank had to the more volatile tech sector (most are mortgage focused banks funded with retail deposits),” Roche said.
Roche said that Australian bank deposits were primarily from the household sector, indicating they were more granular and “sticky”. Additionally, he said loans made up a “larger portion of the balance sheet”, reducing the unrealised loss risk from securities holdings.
“Hedging is used extensively to reduce this risk and the regulatory framework is more onerous around the management of interest rate risk, including through an explicit capital charge for interest rate risk in the banking book for banks that use internal models to calculate capital,” Roche said.
Speaking at an NAB commercial broker economics webinar on Tuesday, NAB chief economist Alan Oster (pictured above right) responded to a participant’s question about what made Australian banks different compared to events overseas.
In response, Oster said that Australian banks had considerable liquidity, a lot of capital and that they were “amongst the strongest in the world”.
“When we look at some of the bank practices, particularly in Silicon Valley, essentially what happened was they had a lot of deposits, they weren’t lending a lot, so they put it all in government bonds, then interest rates go up and the value of the bond goes down, so they’ve made an increasable loss,” Oster said.
“They said they hold till maturity which means they don’t cap the loss, but if they run into liquidity issues, they crystalise the loss … and everybody says, ‘let’s get out’. I don’t think we’re in that situation at all in Australia.”
Oster also pointed out that in the US, deposits were guaranteed up to $250,000 and Silicon Valley Bank’s exposure to the tech sector meant many deposits were significantly higher than this amount, instigating a rush from depositors to withdraw funds.
The US Treasury, the Federal Reserve and the FDIC subsequently confirmed in a statement on March 12 that deposit accounts at Silicon Valley Bank and Signature Bank were guaranteed, stating depositors would have access to all of their funds starting March 13.
Banks may pass on higher funding costs to mortgage borrowers
Roche said that around 70% of funding within the financial system was derived from deposits, with the remainder sourced from wholesale markets, a portion of which came from offshore wholesale markets.
“Recent events are likely to result in higher funding costs, at least in the short-term – it is possible that some of this increase will be passed along to borrowers, including those with mortgages. Ultimately it will be a call for bank management,” Roche said.
