Local players have learnt the lessons of the global financial crisis and put considerable effort into change. But it would be naive to give them the all clear.
The collapse of Silicon Valley Bank – the largest banking failure in the US since 2008, when the sub-prime crisis brought down Washington Mutual – hit the ASX hard. Understandably, it has also led some in the market to questions whether Australian banks could buckle under the same strains that undid SVB.
As we’ve heard before, bank runs are irrational but once they start it’s rational to take part. Is it rational to worry about Australia’s banks?If there’s one aspect of the SVB situation that has infected the banking system, it’s a concern that others may be sitting on large multi-billion dollar losses on their bond portfolios that would deem them technically insolvent.
The next stress point is whether Australia’s banks can face a short-term run on deposits that forces it to liquidate assets at a loss. The existing stress tests – known as liquidity coverage ratios – should provide comfort as the banks are required to hold a large pool of high quality liquid assets to cover a run on the bank scenario.
One unfortunate facet of the SVB collapse is that the vast majority of their deposits were greater than the $US250,000 limit in the US covered by a federal government insurance.
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