Shortcuts / 30 March 2023

The banking crisis

In the space of just a few weeks, a handful of big banks have collapsed around the world and many others have got the wobbles. So in this episode of Squiz Shortcuts, we take a look at why these banks fell over, if any Aussie institutions have problems, and why there’s so much talk about this sparking a global recession.

Take me back to how this whole bank collapse thing began…
So back on 10 March, customers of Silicon Valley Bank (SVB) – which does business largely in California’s tech sector – withdrew a staggering $42 billion, leaving it with a negative balance sheet.

What had its customers so panicked?
A couple of days before it collapsed, SVB went to the market to try to raise more capital and that got analysts worried it had an unexpected hole to plug. All of a sudden there was this rush of concern spreading on Twitter and customers began withdrawing their money.

Don’t governments protect bank deposits?
You’re right up to a point. There were a lot of new laws put in place after the global financial crisis in 2008 that saw lots of banks fail. Since then, up to US$250,000 is insured for each US depositor’s bank account. That’s the same amount in Oz too. Now for most people, that covers what you’ve got in the bank, so if there’s a collapse you know you’ll get your money back.

But most people aren’t everyone…
That’s right, and in the case of Silicon Valley pretty much everyone who had money in that bank had more – in some cases a lot more – than $250,000. So that’s why customers were so worried they wouldn’t get their money back if the bank was going under.

Yeah, can’t relate…
Sure, but even though it’s since been announced that SVB has been bought by another bank, it’s collapse really marked the start of this whole banking crisis.

So the panic is catching?
Yep – the US markets reacted pretty swiftly and started punishing banks it thought might be vulnerable. So a week after SVB, a second US regional bank called Signature Bank also collapsed, and a 3rd called First Republic Bank was propped up by the US Government.

Propped up?
Well, to try to stop the whole crisis spiralling across the whole banking sector, the feds tried to reassure investors by guaranteeing customers of those banks would get back all their deposits – even above that $250,000 mark.

Has this affected any banks in the rest of the world?
So in the days after the SVB collapse, the share price of a significant global player, Credit Suisse, dived by 30%. Switzerland’s largest bank then bought them out with help from the Swiss Government.

So like the US, the Swiss Government bailed out the bank?
Yep, but the question is whether it’s enough to stop any more collapses – no one’s particularly confident that’s the end of it. If you’re a glass-half-full kind of person, you’d say Credit Suisse had issues with management and risk-taking and investors were expecting a day of reckoning.

What if I’m a glass-half-empty person?
Then you’d look at the strain on the financial sector at the moment and the creeping fear of a recession and say it’s likely there’s more trouble ahead.

Where’s that likely to hit?
So Germany’s largest lender Deutsche Bank experienced a big slide in the share market before it recovered last week. And some other big European banks like Barclays and BNP Paribas also got hit by a case of investor’s nerves.

What about Aussie banks?
It’s important to note that even during the GFC, none of our banks went bust. According to the Reserve Bank, that’s because we had much tougher regulations for banks than the US – so less exposure to risky loans – and the federal government quickly intervened to guarantee deposits up to that $250,000 mark, so we avoided customer panic.

How are things looking for us now?
So the economic conditions right now are so different to what happened with the GFC, which was triggered by a lot of dodgy banking products and the collapse of the US housing market. But now the whole world is battling inflation and there’s just stress on economies and financial systems everywhere, including here in Oz.

What do the experts say?
ANZ boss Shane Elliott says we aren’t out of the woods and “history says it’ll take many, many months, if not a year, for these things to roll through the economy.” But at the same time, he’s also trying to talk up the Australian banking sector – saying it’s got more stringent controls and processes than anywhere else in the world.

What makes us so special?
So while US banks guarantee deposits up to that $250,000 threshold, it’s done through an insurance scheme that the banks contribute to, not a broad government guarantee as we have here. So there’s a bit more concern in the US system that the insurance scheme actually couldn’t cover customers if there was a run on banks.

Anything else?
Our banking regulator – the Australian Prudential Regulation Authority (APRA) – has a much tougher approach to risk than other global banks when it comes to how they oversee banks and their balance sheets. It’s likely the banks that went down in the US would have been pulled up much earlier on APRA’s watch.

Good to know…
Sure is, and the Reserve Bank really talks up the powers of APRA as one of the great strengths of our banking system compared to other countries. It can actually give binding directions to any financial institution if it’s worried about any behaviour that could threaten its ability to meet financial obligations to depositors.

So our money is mostly safe here?
It’s impossible to predict but it seems that way. Everyone knows at least one person who stashes their money under a mattress but on the whole, we are a nation of depositors. APRA’s figures from last year show Aussies have at least $1.28 trillion in the bank – or at least $50,000 each for every adult and child.

Is this whole crisis going to spin us into another recession?
That’s what many are wondering… US Treasury Secretary Janet Yellen told a US Senate Committee last week these bank collapses could contribute to a recession. Big investment banker Goldman Sachs says the odds of a US recession within the next 12 months are sitting at about one in 3 in the next 12 months – up from about one in 4 before the first bank collapse.

Those odds aren’t too bad…
It means we can still avoid it – the US Fed is still predicting a 0.4% increase in the country’s GDP in 2023, so that’s just avoiding recession if it hits the target. Oz is facing a slightly better outlook, with growth here forecast to slow to 1.5 % this year – but a lot of uncertainties are yet to play out.

So Australia’s not out of the woods?
That’s what ANZ chief Shane Elliott reckons. And he’s probably wise to be saying that – just 3 weeks ago there were no bank collapses, and the next thing you know, you’ve got German Chancellor Olaf Schulz trying to restore market confidence in Germany’s biggest bank. It’s extraordinary stuff.

Rising inflation probably isn’t helping the situation…
Exactly – they could have the same or more of an effect on the financial markets than another interest rate rise because it has really spooked banks, customers and businesses. Yellen says banks in the US will be more frightened to lend and when they do it will cost consumers more to borrow.

Fingers crossed then…
Yep, we’ll see how it all unfolds.

Squiz recommends:

What happens if your bank goes bust?Money Magazine

Why almost everyone failed to predict Silicon Valley Bank’s collapseCNN

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