Is Australia insulated from the SVB and Credit Suisse crises?

International banks have been occupying the headlines in recent weeks, with the collapse of some of America’s biggest banks, and the industry-bail out of a European one.

This financial chaos has, understandably, sounded alarm bells in Australia because, as we’ve learnt from the GFC, global events can have significant ripple effects that affect us here. But is there a genuine need to worry that there’ll be a repeat of the past? 

What happened with SVB and Credit Suisse?

Before we get into whether these financial crises could affect Australia, let’s run through what happened:

On 10 March, Silicon Valley Bank (SVB) - a Californian commercial bank and the 16th largest bank in the US - collapsed, in what was the country’s biggest bank failure since the GFC. SVB went down after its badly timed investments in longer dated government bonds left it with significant losses, resulting in customers scrambling to withdraw their money.

Not long after SVB, other US banks began to experience issues, such as when crypto-oriented lender Signature Bank collapsed two days later, and when California’s First Republic Bank had to be bailed out by Wall Street.

Over in Europe, Credit Suisse, a 167-year-old Swiss investment bank with systemic global importance, was the next firm to land in hot water. Long-standing financial weakness, paired with its largest shareholder, Saudi National Bank, saying it couldn’t provide them further support by buying more shares, resulted in their shares crashing to a record low. Down and almost out, rival bank UBS swooped in and bought embattled Credit Suisse in a historic deal, with the aim being to contain a crisis of confidence that had started spreading across global financial markets.

While SVB and Credit Suisse’s downfalls weren’t directly connected, there was sort of a knock-on effect between the two. When SVB collapsed, investor sentiment changed and people began scrutinising other banks more carefully. Credit Suisse was seen as the weakest link, so all eyes were suddenly on them.

Ultimately, these consecutive financial fallouts have left other countries wondering if they’ll be hit with any collateral damage.

How Australian banking is different from the US and Europe

Australia’s banking landscape differs from that of the US and Europe in two major ways:

Firstly, our bank deposits are insured and guaranteed by the government. Under the Financial Claims Scheme (FCS), deposits of up to $250,000 for each account holder at each licenced bank, building society or credit union incorporated in Australia, are protected. Introduced during the GFC to protect Australians in case a lender collapsed, the FCS covers a wide range of deposit accounts, including savings and cheque accounts, term deposits and mortgage offset accounts.

Secondly, our regulators, like the Australian Prudential Regulation Authority (APRA) and the Australian Securities and Investments Commission (ASIC), are watching everything. They keep a close eye on the soundness and stability of the financial sector, preserving market integrity, conduct and investor protection. Their continuous oversight means they can jump on any issues before they become a problem.

Part of this regulation is issuing licences to Authorised Deposit-taking Institutions or ADIs. To conduct banking operations in Australia, you need to be licensed as an ADI. To be licensed as an ADI, you need to fulfil a strict set of eligibility criteria, including:

• Holding a minimum amount of capital
• Maintaining a minimum amount of liquidity
• Having a maximum deposit limit
• Having an exit plan in case of financial stress

By fulfilling these requirements, ADIs in Australia can ensure that even if the worst was to happen, they should still be able to safely return money to their depositors. As for their mortgage and similar loans, these debts would most likely be acquired by another bank.

Could the same crisis happen here?

When a string of financial downfalls happens overseas, it’s fair to wonder if Australia could experience a similar situation.

Federal Treasurer Jim Chalmers says initial advice from regulators is that any fallout for Australia's broader financial system is unlikely to be significant. "Australians should be reassured that our institutions are solid, our banking sector is well-capitalised, and we're in a better position than most other nations to deal with the challenges we face in the global economy,” he says.

Economic analysts have agreed with the Treasurer, saying that further tightening banking regulations in Australia could mean slowing down economic growth.  

It’s important to remember though, that while there’s minimal risk of any Australian banks collapsing, it’s never impossible. We're not immune because there are a lot of moving parts to consider that could interact in different ways, but we are at least starting from a relatively stable position.

Whether or not Australia is affected by this catastrophic collapse also depends on if what we’re seeing in the markets is systemic among banks, or if it’s just a one-off occurrence for individual banks.

Also, while financial experts aren’t too worried about the direct implications of what’s happening overseas, they are worried about the indirect effects. Those indirect effects could include banks potentially becoming less trusting of one another and demanding a premium for borrowing and lending, which would, consequently, lift global funding costs and impact the private sector. The instability could even potentially affect the Reserve Bank of Australia’s (RBA’s) decision on whether to raise the national cash rate next month or keep it on hold.

Is our money safe?

The FCS protects Australians' money up to $250,000, keeping your money secure up to this point.

If, however, you have money in your account over the $250,000 limit and a lender collapses, you'll have to claim that back through the lender's liquidation process which, unfortunately, doesn’t have the same guarantee that you’ll get it all back. To limit this risk, you could consider splitting your deposits between different ADIs so that no one bank hold more than $250,000. Keep in mind that some banks own other banks (e.g. Westpac owns St.George, BankSA, and Bank of Melbourne) and the group all counts as a single ADI. 

Also, the FCS relies upon the government, which could hypothetically abolish the scheme at any time, leaving your money unprotected.

Finally, Australian banks have the option to have a “bail in” if they risk collapse. As opposed to a bail out, where external governments or investors step in to prop up a bank with cash, a bail in is where the bank takes money from the deposits made by its customers to stay afloat in a crisis. While a bail in is technically possible, it would be such a controversial move that it is unlikely APRA would allow one to occur.

What should we do with our money?

In the 20th century, if you wanted to withdraw money in a bank run, you had to visit a branch, wait in a queue to be issued with a bank cheque, then take it to another bank’s branch to deposit. If you lost that cheque, you lost your money.

Now, funds transfer is practically frictionless, thanks to online banking and digital money transfers. Many people already have more than one banking relationship, making it even easier for them to transfer funds between lenders, because their information is already on file.

This is a worry for some economists and financial commentators, who are concerned that the ease and speed of transferring money could accelerate bank runs and quickly spread negative sentiment. With swift money moving at their fingertips, customers may conclude that there’s no point keeping their money in a bank that they don’t have 100 per cent confidence in.

But for everyday Australians, efficient bank transfers and can be a convenience. If you’re ever concerned about your bank’s stability, or are simply after a better deal at a time when savings interest rates are on the rise, it’s fairly simple to switch banks and transfer your money.

Remember to compare your options before you open a new account. Different banks offer different financial products, features and benefits, and charge different fees, so always do your research first. 

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