Could US and European bank failures be replicated here?

Are Aussie banks as safe as houses? Given the events of recent weeks in the US and this week in Europe, it’s understandable that many Australians are wondering, just how safe are our banks? And should the government’s $250,000 deposit guarantee be revisited?

First came the liquidation and closure of the US bank Silvergate on 8 March. News of a bank collapse is never good, but the fact that Silvergate was a minor bank that specialised in crypto gave comfort to those who use more traditional banking channels. 

That comfort evaporated a few days later with the collapse of the Silicon Valley Bank (SVB). Most Australians would have put it in the minor player category, but that’s not so. SVB is – or was – America’s 16th largest bank. That might sound minor to us living in a country dominated by ‘the big four’, but SVB’s assets totalled a whopping US$175 billion as recently as the end of 2022. 

For assorted reasons, some SVB investors became concerned that less than $US24 billion of that $US175 billion was insured. That had long been the case, but anxiety about banks has a way of spreading, and many worried investors began to withdraw their funds, leading to the self-fulfilling prophecy known as a ‘bank run’. 

This crisis of financial confidence appeared to be confined to the US until Credit Suisse, a European banking powerhouse, also met its demise. 

The factors that led to its collapse were vastly different to the two US banking collapses, and the investment bank has now been taken over by rival UBS. But three collapses in three weeks raises questions as to whether a similar collapse could occur here. 

According to industry experts, the government and the Reserve Bank of Australia (RBA), the chances of our banks suffering from such a malaise are miniscule.

RBA assistant governor Chris Kent said this week: “Australian banks are unquestionably strong.” 

Speaking at a summit in Sydney, Mr Kent said: “Volatility in Australian financial markets has picked up but markets are still functioning.  

“Importantly,” he continued, “Australian banks are unquestionably strong – the banks’ capital and liquidity positions are well above regulatory requirements.” 

Financial services minister Stephen Jones echoed Mr Kent’s sentiments. While acknowledging concern about the events in the US and Europe, he said the strength of the domestic banking sector would mean that similar liquidity measures were extremely unlikely to be required here. 

Associate Professor Mark Humphery-Jenner, from the school of banking and finance at UNSW Business School, agrees. He says Australian banks “are fundamentally stronger than Credit Suisse or the US regional banks” due to APRA’s strict regulatory requirements and the fact that our banks’ capital and liquidity positions are well above those requirements. 

However, former treasurer Wayne Swan, who led the country through the global financial crisis, told The Australian that the federal government and regulators should reassess the $250,000 deposit guarantee in light of the bank collapses.

“Fifteen years on from the last episode we’ve got the beginnings of an episode, which may or may not be similar in effect, but the only prudent thing to do is to look at those arrangements in light of recent events,” he said.

A spokesman for Treasurer Jim Chalmers said: “Australians should be reassured that our banking sector is well regulated and well capitalised, and we’re in a better position than most other nations to deal with the challenges.”

Have you been keeping abreast of the events in the US and European banking industries? How have they affected your confidence in Australia’s banks? Why not share your thoughts in the comments section below? 

Also read: Why banks should do more for victims of financial scams

Updated March 22, 2023 — 8.34 am first published at 12.01 am