How safe are Australian banks
March 2023 was a month of a collapse of three U.S. banks, which created a major scare for investors in the banking sector and immediately impacted share prices of every bank in the world.
The three banks that started creating global banking crisis were Silvergate Bank, Signature Bank both with a very high exposure to cryptocurrency and Silicon Valley Bank with its clients primarily start-up technology companies.
But then on 19th March we all heard a story of Credit Suisse being in trouble but was immediately purchased by the Swiss bank UBS Group AG.
So why is this is happening? Do those bank failures have any impact on the overall banking system in the world and more importantly for us in Australia, what impact does it have on Australian banking system and how safe are Australian banks really?
Should we trust our banks? Can we keep our money in Australian banks and still sleep without a worry? This is our discussion today.
Before I start our today’s chat, first I would like to thank every single person that either via YouTube channel or email or SMS contacted me while I was sick.
It is very hard to express in words a sense of appreciation and gratitude I feel when all those beautiful messages arrived. So thank you from the bottom of my heart.
And I will continue providing you with all the updates on many financial issues in the form that is easier to digest that you normally see in the financial papers or on TV.
So, let’s start talking about those banking failures.
You see, none of those banks was a typical general commercial bank that dealt with everyday consumer. They all had their specific niche.
And as good as a specialisation could be, if all the clients you have are subject to the same market risk, the bank’s full business is also subject to that risk.
Economic, business and profit risk have not been spread in any way, but rather concentrated on one client type.
Hence when the technology industry suffered after Covid we witnessed collapse of Silicon Valley Bank, when cryptocurrency dropped in value dramatically, we had collapse of Silvergate Bank, Signature Bank, and when bonds have reduced in value greatly there was a collapse of Credit Suisse.
Obviously, the press and TV had a new “hot topic” to sell, scaring people across the globe, which created another panic of selling bank shares, hence the prices dropped, and the circle continues.
Governments across US and Europe announced significant liquidity measures in order to calm down the market. Funny enough the whole story hardly had any impact on banks across Asia.
But what about Australia? After all we have a very close relationship with the USA, as well as some European countries.
So how this international banking turmoil impacts our banking system here in Australia?
Well, I went looking for an answer, and not just an opinion of economists, as they can prove whatever point they want, but rather a solid information that can prove if Australian Banks are a safe place for our money or not.
What do you know, I have not been the only one asking that question. APRA (Australian Prudential Regulation Authority) the government body that supervises banking, insurance and superannuation institutions introduced a stress test for our banks.
The goal of the test was to understand if those banks would survive a major financial crisis.
A fictional scenario of a “deep and prolonged global economic downturn” was created including:
- high inflation rate
- very high energy pricing
- unemployment of 11%
- real estate (so our family homes) value reduction by 43% over the period of 3 years.
- to make things worse, each bank was hit with a costly cyber-attack.
10 Australians banks participated in the test. APRA said that as an outcome of such a test, each bank suffered credit losses and falling profits as well as each bank reduced dividends to investors.
However, each bank tested remained with the required minimum capital, with required liquidity of funds and all our deposits continued to be “safe”.
This test was done as a technical and calculation exercise only, and the outcome did not even take into consideration any steps that each bank could take in a real-life stress scenario.
If such stressful market conditions were really presented to banks, each institution would implement steps to mitigate any financial impact of the above listed scenario.
Mr. John Lonsdale of APRA said:
“The trust Australians feel in their banks’ ability to withstand a crisis is the product of many years of regulatory reforms…..with the regulatory system for banking that has different and often tougher standards and requirements that many peer jurisdictions”
I think this is a very important message to share around, as much as we will always have some issues with our banks, with the way they operate these days, all online, hardly human support, the fact remains that Australian banks appear to be resilient.
Australia is the only jurisdiction that requires banks to have sufficient capital to offset risks of higher interest rates.
So, in conclusion, we can say that although no financial institution will ever be immune to market volatility, Australian banks are well regulated, well capitalised and have a very strong liquidity funding.
But then you have to apply your own safety measure by being selective in
- what financial product you are investing into
- which companies you deal with
- the way you use credit cards.
- what type of domestic deposits and deposit accounts you use
Also, in Australia we still have so called Financial Claims Scheme that provides protection of:
- deposits up to $250,000 per account holder per financial institution,
- most general insurance policies for claims up to $5,000
and that brings an additional security layer of your bank deposits.
I do hope you found this article of interest. It is a bit outside of our usual retirement planning, but general understanding of markets and most certainly of our banking system we use on daily basis is just as important.
Talking about assets and income safety, banking is one thing, but you really need to do your own work. So read the following articles: “Recession Proof your Retirement” and “How to prolong income in retirement without taking any extra investment risk” and then apply the strategy or contact me to find out the best strategy for you.
By: Katherine Isbrandt CFP®
Money Strategist & Retirement Planner
Principal of About Retirement
