Bank failures & recession: What does it all mean for me?

Bank failures & recession: What does it all mean for me? new zealand

Australian economist, Chris Richardson, provides context on how these factors will play out across our banks.

No economist ever spread a case of COVID. How do I know that? Because nobody ever stands close enough to breathe the same air that we do. We’re modern-day lepers.

So, I should have guessed something was up when a stranger approached me to chat recently. They wanted to know whether they should take their money out of banks and shares and stuff it under their mattress. That’s a pretty big question for the frozen food aisle at Woolies. But you’ll be glad to know I told the nice man I wasn’t too worried that another financial crisis was brewing.

He asked because a US bank you’ve never heard of failed in California a week or so ago, and then the resultant fears took down another bank in the US too. Still, they were minnows when measured against the huge US banking system, so it wasn’t until rumours began to swirl about a whale – Credit Suisse – that markets began to grow more nervous and horror headlines began to creep onto front pages. After all, if a Swiss bank isn’t seen as safe …

So, is there another GFC brewing, leaving Australian banks at risk?

The world has never jacked up the cost of borrowing this fast, so chances are something would go wrong. As Warren Buffett beautifully put it, you just never know who’s been swimming naked until the tide goes out. The fast-receding tide has revealed that huge increases in interest rates have been a particular problem for some banks. And when banks start to fail, the punters get nervous. Worse still, that can be a self-fulfilling prophecy. In these days of social media and the ability to use your phone to withdraw money from a bank that’s fallen under any sort of cloud, bank runs can move at lightning speed. Credit Suisse shares have plunged to a record low.

So, could Australian banks be the next domino to fall?

That’s really unlikely. First, the US jumped fast to bail out bank depositors there, and deliberately overdid it – the rules said it only had to pay out a max of $US250,000 to any depositor. Instead, it said it’d pay back every dollar to depositors. Or, in other words, the US held up a fistful of dollars and screamed: “Don’t panic!”

Although that wasn’t pretty, it was pretty effective.

Second, and rather more importantly, Australian banks are different. Most of the world’s banking systems sit somewhere on the spectrum ranging from “safe” to “competitive”. Competitive banking systems have many more banks (there are more than 4000 in the US). That means they have to give better deals to their customers, but it also means they’re more likely to fall over if a few things go wrong at the same time.

Safe banking systems have far fewer banks (although there are 97 banks in Australia, the big four effectively make up about 90 per cent of the mortgage and deposit markets used by everyday Australians). That huge market dominance means they can treat their customers, ahem, badly.

And that’s what the banks in Australia do. As central banks like our Reserve Bank have raised interest rates, Australian banks have passed that fast and fully to those who borrow from them, but slowly and partially to those who deposit money with them.

Or, to put that differently, Australian banks aren’t likely to fall over because they’ve been given the quiet nod from Canberra that lets them earn a fortune without the tiresome need to compete for that money.

To be clear, there are big benefits from that Faustian bargain. And you’re seeing the biggest right now. While citizens of some nations need to keep an anxious eye on the finances of their banks, here in Australia you can sleep easily tonight – our big banks are stupendously safe, and our little banks have very strong backing from our authorities and government.

Then again, that hasn’t stopped our share market from dropping back to where it was when 2023 began, and US share markets from dropping even further still. Given just how much of a stake ordinary Australians have in markets thanks to superannuation, my man-in-the-Woolies-aisle wanted to ask about that too.

First up, I had to admit that you shouldn’t rely on the opinions of economists as to where shares may head next. Even when I sacrifice a goat and carefully scatter its entrails, I have difficulties in forecasting financial markets.

But I do know that share markets and economies are two very different beasties. Provided markets don’t massively fall over – and I very much doubt they will – then they won’t really drive much of what happens to the wider Australian economy, let alone what happens to prices, wages and jobs here.

So, dear supermarket shoppers, there are plenty of things to worry about. But, here in Australia, I don’t think you need to worry about our banks – they’re resoundingly robust. And pretty much regardless of what happens to share markets, console yourself that those markets aren’t nearly as important as they think they are.

By Chris Richardson, Independent Economist (Australia)

First Published by Sydney Morning Herald

March 18, 2023 – 5.00am

Disclaimer: Information as at 18 March 2023. This article is sourced from the Sydney Morning Herald. You can read the article online by clicking here. This article is general information and does not consider your financial situation or goals and does not constitute personalised advice. Please contact your financial adviser for advice specific to your situation. There are no warranties, expressed or implied, regarding the accuracy or completeness of any information included as part of this article.

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