The collapse of Silicon Valley Bank and Signature Bank in the US and the takeover of Credit Suisse has sent waves through global financial markets over the past month but Australian banks are well‑capitalised, well‑regulated and well‑placed to deal with this new source of volatility in the global economy.
We are confident but not complacent in the face of these pressures.
Again this week I convened the Council of Financial Regulators, including the Australian Prudential Regulation Authority (APRA), Australian Securities and Investments Commission (ASIC), the Reserve Bank and the Treasury, to ensure we are closely monitoring and regularly keeping across market developments, as regulators in the US and Europe act to boost liquidity and stabilise their financial systems.
As part of our efforts, APRA has intensified supervision of the Australian banking system and is closely monitoring liquidity movements.
Since the onset of greater market volatility early this month, I have received daily briefings on developments from Treasury and APRA.
Our regulators are confident Australia is well placed, they are in regular contact with their international counterparts and alert to the fact that the global financial system is a dynamic environment.
Earlier this week, I also spoke with US Treasury Secretary Janet Yellen and European Central Bank President Christine Lagarde about volatility in the global financial system and the impact of higher interest rates.
I’ll get another important opportunity to take stock of global developments in the lead‑up to the May Budget when I attend the G20, World Bank and IMF spring meetings in Washington DC in mid‑April.
It’s clear from my conversations this week that international authorities are prepared to take appropriate steps where necessary to reassure markets at a time of uncertainty and volatility.
While we’ve seen stresses and strains in global markets, Australian markets have been a lot more stable, with regulators reporting that markets here at home continue to function well.
Our financial institutions are in a better position than they were in 2008 to deal with volatility in global markets.
In the wake of the Global Financial Crisis, countries including Australia came together to put in place a framework to strengthen financial sector buffers.
They devised Basel III – an international regulatory accord to strengthen the regulation, supervision and risk management of banks.
Australian banks have substantially increased their capital holdings since the GFC, which sit well above regulatory minimum requirements. The total capital ratio of the Australian banking system is currently 17.7 per cent, up from 11.5 per cent in 2008.
The quality of banks' capital has also improved. Australian banks have increased their holdings of Common Equity Tier 1 capital – the highest quality form of capital – from around $136 billion in 2013 to over $274 billion in 2022.
The industry’s weighted average liquidity coverage ratio is currently around 130 per cent, comfortably above regulatory buffers, with the total value of high quality liquid assets held currently over $950 billion.
And from 1 January 2023, APRA’s ‘unquestionably strong’ framework for bank capital further strengthened capital requirements for Australian banks, ensuring that Australian regulations not only align with, but in many cases exceed, global standards.
For example, APRA’s prudential rules now exceed global standards for interest rate risk, housing and liquidity.
The Global Financial Crisis a decade and a half ago was very different to what we’re seeing around the world right now.
The GFC was a financial shock that became a demand shock.
The world is now in the grips of an inflation shock with the risk of a hard landing brought about by the blunt and brutal tightening of monetary policy.
But the lessons from 2008 about building resilience in our financial markets could prove vital in safeguarding our economy from the worst of the volatility impacting international markets currently.
One of the points that shone through from the Australian Financial Review’s Banking Summit this week is the resilience of Australia’s banks and the importance of our strong banking sector in shielding Australians from volatility in global markets.
The reassurances given repeatedly throughout the Summit from the likes of APRA chairman John Lonsdale, Commonwealth Bank chief executive Matt Comyn along with this masthead’s editor Michael Stutchbury in the AFR View editorial this week are backed up by the data we have referred to today.
There’s no doubt that strong banks and institutions are among our greatest defences against the global challenges we face.
While we’ve got a lot coming at us from around the world, we’ve got a lot going for us here at home – including low unemployment, the beginnings of wages growth and good prices for the things we sell to the world.
And as this data has revealed today and as our regulators have confirmed – our financial institutions are in a good position to help us manage these global challenges.
We’re not immune from the volatility we’re seeing in global financial markets but Australians should be reassured that our banks are well‑regulated, well capitalised and highly liquid and are in a better position than most to deal with these disruptions.