Australian markets have plunged again as the bailout of European banking giant Credit Suisse rattles confidence in the global financial system, with authorities now taking emergency steps to bolster liquidity.
Extending its longest stretch of losses since the Global Financial Crisis on Monday, the ASX 200 had fallen 1.2 per cent by mid-afternoon trade.
That embattled bank Credit Suisse will be bought out by rival UBS failed to assuage investor fears about a global credit crunch.
Swiss authorities brokered the ₣3 billion ($4.8 billion) deal over the weekend in a bid to prevent the financial situation at the bank to worsen, and create more financial turmoil across Europe.
It came less than a week after California-based Silicon Valley Bank (SVB) was similarly bailed out by officials amid a run on deposits that sparked speculation about a looming financial crisis in the US.
Other regional banks across the US are also under pressure, with several being handed lifelines over the past week in an effort to stem the ongoing sell-off in financial stocks globally.
RBA urges calm
CommSec senior economist Ryan Felsman said the Credit Suisse deal should help “calm jitters” on Australian markets, which have been falling for more than six weeks in scenes reminiscent of the GFC in 2008.
But investors continued selling local stocks on Monday, with the ASX200 and the All Ordinaries Index both falling more than a percentage point.
Australia’s big four banks were caught up in the plunge, with NAB falling 1 per cent by mid-afternoon trade, ANZ down by 1.1 per cent, Westpac down 0.38 per cent and Commonwealth Bank falling 0.031 per cent.
Authorities in Australia continue to urge calm, with the Reserve Bank’s assistant governor Christopher Kent seeking to bolster confidence in a speech on Monday, saying “strained” financial conditions overseas shouldn’t be causing any panic locally.
“Volatility in Australian financial markets has picked up, but markets are still functioning, and, most importantly, Australian banks are unquestionably strong,” Mr Kent told a financial summit.
“Even if markets remain strained for a time, Australian bank’s issuance will continue to benefit from the strength of their balance sheets.”
The comments come amid growing concern among central bankers globally, including at the Federal Reserve in the US, which on Monday unveiled plans to boost liquidity in US dollars alongside officials in Canada, Switzerland, Japan and Europe.
Why are banks failing?
Government officials in the US have already co-ordinated efforts to bail out several regional banks in recent weeks, the most recent of which was San Francisco-based First Republic Bank.
University of New South Wales associate professor Mark Humphery-Jenner said the string of bank collapses is a “slow-moving train crash” eroding confidence in the global financial system.
He said higher interest rates are pushing banks that were already in dire financial straits – such as Credit Suisse and Silicon Valley Bank – over the edge, sparking fears about cascading pain.
Credit Suisse, in particular, has racked up billions in losses over recent years amid a series of scandals, leaving it vulnerable to a sharp rise in funding costs amid global interest rate hikes.
This situation is unlikely to happen with Australian banks, Dr Humphery-Jenner told TND.
“For better or worse, banks in Australia make a lot of money,” he said.
“As a result they don’t have the same operational problems Credit Suisse had.”
Looming credit crunch key risk
RMIT associate professor Angel Zhong also thinks the risk that financial contagion spreads to Australia from overseas bank collapses remains remote, pointing to tighter local regulations.
“Our banks remain very robust and the Australian Prudential Regulation Authority (APRA) has stricter regulations compared to international banking standards,” Dr Zhong said.
However, Dr Zhong said mounting financial pressure on regional banks in the US is concerning, because a looming credit crunch in the world’s largest financial market could hurt Australians.
She said the rapid acquisition of Credit Suisse brokered by the Swiss government was evidence that authorities fear a “significant loss of confidence” in the system that could spark a new crisis.
“The banking system is really a trust-based system, so this is a strong signal that restoring confidence is urgent,” Dr Zhong said.
Dr Humphery-Jenner said the biggest risk facing Australian banks is getting caught up in a loss of confidence globally as regional US banks come under the pump.
He said the fallout from another spate of bank collapses could stretch all the way to Australia.
“Our local banks are interconnected into the global financial system and that poses risk exposure to the US, which is where the primary problem is with interest rate risks.”
