The Council of Financial Regulators (CFR) — made up of Treasury, the Reserve Bank of Australia (RBA), the Australian Prudential Regulation Authority (APRA), and the Australian Securities and Investments Commission (ASIC) — has released its quarterly statement, assuring markets of the stability of the financial system.
Notably, the statement includes commentary on the recent collapse of three US banks — Silvergate Bank, Signature Bank, and Silicon Valley Bank (SVB) — with the council holding a special meeting on Friday, 10 March, to discuss potential implications.
The bank failures have been attributed to aggressive monetary policy tightening, poor capital management, and weak deposit inflows.
The regional bank collapses have sent tremors across financial markets, stoking fears of a repeat of the global financial crisis (GFC).
But according to the CFR, the Australian banking system is “well positioned” to withstand a global crisis, given high levels of liquidity and funding resilience supported by strict capital requirements imposed following the GFC.
“APRA, in consultation with CFR agencies, will continue to closely monitor the situation through its intensive supervision of the Australian banking system, which remains strongly capitalised and highly liquid,” the council noted.
The council also stressed credit quality remained high, with “prudent” lending standards, “strong labour market conditions”, and “high levels of accumulated savings” offsetting risks posed by elevated inflation and aggressive monetary policy tightening.
“At the same time, mortgage payments have increased substantially,” the council added.
“The council recognised that there is significant variation in experience across borrowers, with a small share of households with high levels of debt relative to their income and low savings and equity buffers experiencing debt-servicing challenges.”
The CFR acknowledged looming risks associated with the expiry of approximately 800,000 fixed rate mortgages but said many of these borrowers have “accumulated material savings buffers” ahead of the transition.
“Council will continue its close monitoring of housing market developments, including lenders’ approaches to supporting customers experiencing hardship or other changes in financial circumstances,” the council added.
As regulators move to shore-up confidence, analysts are debating the significance of developments in the United States.
According to Innes McFee, chief global economist at Oxford Economics, the recent fallout has little resemblance to the pre-GFC meltdown.
Referencing SVB’s failure, McFee said it seems to be the result of a “confluence of a concentrated and flighty depositor base”, and “mismanagement of its liquid asset portfolio”.
“Other banks may have similar flaws, but it seems unlikely that these particular problems are widespread,” McFee said.
The US Federal Reserve’s $25 billion Bank Term Funding Program, designed to boost liquidity in the banking sector, should “limit contagion to other financial institutions”.
But the economist conceded solvency concerns could result in the further tightening of financial conditions, prompting market to price in “some degree of contagion”.
McFee continued: “Regional US bank share prices have already fallen by more than 19 per cent since the start of last week — a comparable drop to that seen in the early days of both the Bear Sterns and Lehman Brothers crises,” he added.
“Although we have not yet seen a significant drop in broad equity indices, it’s worth remembering that in both of those episodes, bank share prices were a leading indicator.”
