- 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.
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.
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.
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.
Phone: +61 439 852 963
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