Monthly Update – March 2023

ByRussell Lees, Senior Adviser

Key Points

  • The past fortnight has seen the demise of several banks, following liquidity/credit runs on them.
  • This has caused two responses – an increase in risk aversion and a softening in liquidity.
  • Central banks in Europe and the US have been quick to ease the liquidity issues.
  • Global regulators have been aggressive in closing them down.
  • Central banks will see these events as a sign that collateral damage is being felt within the banking sector following rapid increases in interest rates over the last year.
  • Major banks globally, including here in Australia, remain well capitalised, ensuring another GFC is unlikely.
  • Central banks will now review any further rate rises, as these adjustments are starting to take a toll on the real economy.

Mission Accomplished? 

Banking crisis will result in central banks hitting the pause button on further rate rises

The tremors within global banks over the past fortnight have seen the demise of two niche US banks, following liquidity/credit runs on them. The European investment bank Credit Suisse also collapsed after several years of problematic internal issues.

A period of banking crisis typically prompts two responses:

  • an increase in risk aversion – where banks evaluate the credit quality of each other, limiting exposure to weaker banks, and
  • a softening in liquidity – the volume of credit turning over in the global banking sector drops substantially, resulting in difficulty in raising cash.
Liquidity issues within the two US banks operating in the tech/startup and crypto space caused classic bank runs, where depositors all withdraw their deposits at the same time.
In the past, customers desperately banged on the doors of their local bank branch, demanding their money, whereas modern technology now allows them to log into their banking apps to withdraw their funds. Yet, just as customers once found their bank doors shut, today they are locked out of their accounts by technology that allows banks to respond even more quickly. 
Central banks in Europe and the US have been quick to ease the liquidity issues within the banking sector by quickly establishing improved credit facilities within the banks, thereby increasing the sector’s access to cash. 
Global regulators have also been aggressive in dealing with the troubled banks by swiftly closing them down or merging them into other financial institutions. Notably, Credit Suisse was liquidated and UBS investment bank allowed to subsume its remaining assets.

These actions alone should ensure that the tremors are contained. Major banks globally, including here in Australia, remain well capitalised, with the quality of their balance sheets ensuring another GFC is unlikely.

The prevailing view now is that central banks will see these events as a sign that collateral damage is being felt within the global banking sector following rapid increases in interest rates over the last year.

This outcome is not what the regulators were hoping to achieve! Their aim was to cool the level of global inflation by slowing down economic activity, reducing the demand for labour, and making the cost of capital more restrictive. Sending panic through the global banking sector or creating a Lehman Brothers-style crisis was definitely not on their agenda.
 

Central banks will now review any further rate rises, as these adjustments are starting to take a toll on the real economy.

Overall, I expect central banks will continue to respond rapidly to any new risks that emerge. Time will tell over the next six months if they have tamed inflation. For now, it’s a wait and see scenario.

Kauri Wealth Investment Portfolio remains underweight in bank equities, after a lowering of the portfolio’s exposure over the last year. The sole core bank holding in the portfolio is Westpac Bank.

Please don’t hesitate to contact me should you have any questions.

Kauri Wealth Management is a Fee for Service investment advisory business and as such my advice is built around ongoing personal relationships with my client base. Personalised independent advice is backed up by a breadth of industry knowledge.

I accept a limited number of new clients each year and would be happy to discuss this further with you. Please don’t hesitate to contact me.

Russell Lees
Senior Adviser
Phone: +61 439 852 963
Email: russell@kauriwealth.com.au

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