Experts comment on safety of domestic banks
New Zealand banks remain well insulated from risk and are unlikely to face the same fate as their troubled US counterparts, industry experts say.
While the collapses of Silicon Valley Bank and Signature Bank and the falling share value of Credit Suisse have rippled through financial markets, they don’t expect the Federal Reserve and the RBNZ to hit the pause button on interest rate hikes.
The recent failures of the US banks and the bailout of Credit Suisse by UBS have raised the question of whether the big four Australian-owned banks operating in New Zealand – and Kiwibank – are 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.
Silicon Valley Bank collapsed on March 10, having invested customer deposits in fixed income securities, including US Treasury bonds. As interest rates went up, the value of those securities fell. Coinciding with this, tech customers increasingly withdrew their deposits, forcing Silicon Valley Bank to quickly sell some of those bonds to raise capital, doing so at a loss. The failed capital raise created a rush from depositors to withdraw their funds and the bank was not able to meet its obligations.
Independent economist Tony Alexander (pictured above left) told NZ Adviser that lax regulation and poor risk management by Silicon Valley Bank to remain liquid were key contributors to its collapse.
If the bank had accrued those losses along the way, it would already have gone to market to raise capital, Alexander said. Instead, Silicon Valley Bank was forced to sell and take the full hit of the losses straight away within a panicked environment.
“The rules for banks with less than $250bn worth of assets were frankly unprofessional … they did not have to market their holdings of US Government bonds,” Alexander said.
Alexander said Silicon Valley Bank was also a victim of its deposit base, which was centred on tech start-up firms. Icehouse Ventures chief executive Robbie Paul told NZ Herald that Kiwi firms had around $100m invested in the bank and various reports show they included NZ-founded tech company Rocket Lab, Comvita and Ike-GPS.
Alexander noted that the US bank’s depositors were likely to have a greater tendency to move funds quickly than other banks, where the bulk of deposits are made up from the tens of thousands of customers.
“Almost 90% of the deposits were above the guaranteed $250,000 amount in the United States … therefore less sticky than would be the case for a lot of the institutions in New Zealand,” Alexander said.
US Treasury, Federal Reserve and FDIC confirmed in a statement on March 12 that deposit accounts at Silicon Valley Bank and Signature Bank will be guaranteed, stating depositors would have access to all of their funds starting March 13.
NZ banks not considered to be at risk
In a statement released on Friday, RBNZ deputy governor Christian Hawkesby (pictured above centre) said that the RBNZ is monitoring the financial strength of banks closely, and that the RBNZ is “confident” that the banks it is responsible for supervising have sound liquidity and funding positions.
“In New Zealand, all registered banks are required to have systems in place to monitor and control their material risks, and this includes interest rate risks,” Hawkesby said.
“Our banks also operate different business models that mean that they are not as exposed to the risks that have led to recent events. Our rigorous stress testing has shown that they are well-placed to deal with far more adverse situations than what we are currently experiencing.”
Craigs Investment Partners investment director Mark Lister (pictured above right) told NZ Adviser that the big four Australia-owned banks within New Zealand (ANZ, BNZ, ASB and Westpac) and Kiwibank (owned by Kiwi Group Capital Limited) are “very well regulated, well capitalised and well-run”.
The main banks are more diversified than Silicon Valley Bank and Signature Bank he said, noting these banks were focused on the tech start-ups sector and cryptocurrency, and also the troubled history of Credit Suisse, to be bought out by UBS.
“Our banking sector is in good shape and is extremely safe in terms of the security of deposits,” Lister said.
While tougher times indicate more difficult times ahead for banks as businesses, Lister said that bank share prices may not necessarily perform well. But in terms of safety of money with the main banks, there were no concerns whatsoever.
Lister suggested those investing with second-tier lenders, such as finance companies, exercise caution in the current environment particularly if a recession hits and market turmoil finds its way to NZ shores.
“We always advise that you only go for the big, safe bulletproof banks and you don’t go down the value chain to try to squeeze out a better return for taking a whole lot more risk,” Lister said.
Although some bank stocks had taken a beating, looking across financial markets more broadly, Lister said that on balance, markets had taken the US bank collapses in their stride.
“It has been the bond markets that have been impacted more and moves in interest rates have been much more aggressive and extreme than what we’ve seen in sharemarkets,” Lister said.
Interest rate rises likely to continue
Lister said he expected more volatility ahead, which includes the issue of high inflation and central banks needing to raise interest rates at least a couple more times.
Despite the bank fallouts, he expected the Federal Reserve to raise interest rates on Thursday, and that the RBNZ would lift interest rates on April 5, albeit by a smaller degree.
While short-term changes in market conditions were difficult to pinpoint, Lister said that the bigger picture was to consider the collective impact of interest rate hikes delivered over the last 12 months and whether the country falls into recession.
“Our messaging to our clients is play it safe, be cautious, be sensible, follow tried and tested rules around diversification and sticking to good quality businesses,” Lister said. “We are leaning towards the safe and steady type investments and companies and fixed income as an asset class.”
Alexander said he expected the US Bank collapses to have an effect on RBNZ’s outlook for consumer spending, business employment intentions, and intentions to raise prices.
“In effect this is like a tightening of monetary policy … I still think they’ll increase the cash rate but it’s likely to be 0.25% rather than the 0.50% [as previously forecast],” Alexander said.
