With the recent media coverage of Silicon Valley Bank (SVB) and the overnight coverage of Credit Suisse, we thought it was timely to provide clients with information on how the banking system in Australia differs from that in the US.
In our most recent webinar Campbell Stevens discusses this and other market events so we would encourage you to Watch Van Eck Webinar to get an understanding of why this occurred and the difference between the US and Australian banking systems.
We think it is a good time to take a step back and put things in perspective and by doing that, see there are a lot of reasons to be cautiously optimistic.
In Australia the banking system has a two-pillar approach meaning it is not only regulated by APRA (Australian Prudential Regulation Authority) but also ASIC (Australian Securities and Investments Commission), requiring banks to meet capital adequacy and compliance requirements for both regulators and the global Common Equity Tier 1 (CET1) adequacy ratios.
In layman’s terms, this is the amount of money readily available to be drawn on by depositors at any time.
APRA’s ‘unquestionably strong’ capital framework for Australian banks, which includes larger capital conservation buffers for major banks and a non-zero countercyclical capital buffer for all banks that can be drawn down in periods of stress, has been effective from January 2023.
This increases the CET1 ratio requirement by 2.25 percentage points to 10.25 per cent for the major banks and 9.25 per cent for other advanced banks, and by 1 percentage point to 8 per cent for standardised banks.
Basically, APRA requires the four majors to meet ratios of financial adequacy well above the global level of 4.5% CET1. Australian banks are expected to, and do, have their own capital targets above APRA’s minimum requirement.
At the 2023 half year reporting period the four majors were sitting at:
This is versus Credit Suisse which reported at 4.984% on 13 February 2023.
This reflects not only the conservative nature of our regulators but the engagement of the entire banking community towards maintaining a resilient financial system through periods of global stress.
It is important in these times of market noise that we focus on fundamentals and economic data is still strong, inflation is falling, albeit slowly and investments look reasonably valued, not over or under priced.
Dr David Kelly from J.P Morgan believes that inflation will normalise as the supply side issues resolve and that the collapse of SVB will cause the Fed to reconsider their decision to continue to raise rates, which could be good for the economy.
He feels that we are on the edge of a swamp rather than a cliff and we should not get caught up in short term fear.
In Australia we have billions of dollars a month of fixed term loans reverting to variable rates, and we believe this will deliver the Reserve Banks goal of reducing spending and demand.
Australia continues to be well placed in this environment with the re-opening of China and a strong demand for resources and agricultural products at high prices.
We may well see heightened volatility over the next few weeks as markets react to recent events and anticipate Government responses, but we are retaining our cautious short-term approach with a continued long-term focus.
Please get in touch with Gild Wealth if you need further information.
