Until now, central banks have demonstrated a steely resolve to make fighting inflation their top priority, with a yawning gap between that and other considerations such as risks to employment, the broader economy, the slump in home valuations or the plight of people struggling under the burden of higher rates and a skyrocketing cost of living.
Now they have a different beast to contend with.
But let’s take a step back. It isn’t that any of these individual bank failures by themselves are showstoppers or reflect broader issues within their respective banking systems.
In the US there were peculiarities about each of the banks that found themselves in trouble – issues that are not necessarily mirrored in other banks.
What they all had in common was poor risk-management practices that made them vulnerable to the increases in interest rates that have been imposed by central banks over the past year.
Silicon Valley Bank, for example, had to liquidate billions of dollars in government bonds in order to accommodate depositors wanting to take their cash. The deposit customers were largely venture capital funds and tech start-ups that needed to access cash because they couldn’t find finance anywhere else. Silvergate and Signature bank were also disproportionately exposed to venture tech and crypto clients.
Meanwhile, Credit Suisse had its own particular issues dating back a couple of years. A series of scandals and mounting losses made it particularly vulnerable to any panic in the banking industry.
It just needed a trigger. That was provided when the US Securities and Exchange Commission (SEC) queried its annual report a week before its largest shareholder, the Saudi National Bank, piled on, saying it would not plough in any more equity.
US and Swiss authorities were quick to respond to what has become a trans-Atlantic crisis, with the former protecting deposits and introducing a mechanism to enhance liquidity across the banking system, while in Europe, Credit Suisse has managed to secure as much as 50 billion francs ($81 billion) from the Swiss National Bank.
In theory neither Credit Suisse’s problems nor the collapse of the US banks should have led to contagion in Europe or the US.
But human behaviour can be anything but theoretical. The sell-off in bank shares around the world, including Australia, is testament to that.
The Australian banking sector, its supervision and capital fortifying requirements are as strong as anywhere in the world, yet shares in all banks, big and small, have been pummelled this week.
RBA governor Philip Lowe doesn’t have to contend with systemic instability in the Australian banking system, but Australia will be hit if there is a slowdown in global growth. That alone may give the RBA an excuse to pause tightening monetary policy in April.
But Lowe would need to balance this against the strong employment data that was released on Thursday. The RBA needs unemployment to rise, not fall, which is what the data has shown.
Lowe now has two weeks to decide.
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