A calamitous drop in the share price of First Republic Bank is yet another sign of the potentially fatal strain on the US banking sector, triggered by the failure of Silicon Valley Bank. Should we be worried?
In March 2022, New Zealand banks had total assets of just over NZ$667 billion, per Reserve Bank of New Zealand.
New Zealand currently has 27 registered banks, with four large Australian-owned banks (ANZ, ASB, BNZ, and Westpac) responsible for 85% of the banking market.
Most of us will have money with these banks – or at least owe them money (or assets against which a loan is secured, should we fail to repay amounts owed).
First, let’s look at what happened at Silicon Valley Bank (SVB)
In short, the Federal Reserve raised interest rates relatively quickly to combat inflation. That means banks are paying higher rates on their deposits and other liabilities. But they’re not earning much more on their assets – and when many of those assets (outstanding loans) are in the currently wobbly tech sector, people get nervous. Almost overnight, the bank’s major clients – venture capitalists – directed their customers to withdraw deposits, en masse. The contagion spread to large institutional investors, and suddenly the money ran out. It was the largest bank failure since 2008.
Could the same thing happen here?
Unlikely, thanks to local regulations that maintain high levels of capital and liquidity to safeguard the financial stability and resilience of banks operating in New Zealand.
Global ratings agency S&P feels the same way, stating that banks in the Asia-Pacific region have reasonable buffers to cope with contagion risks stemming from the collapse of SVB.
The agency went further, saying that New Zealand, as a notable outlier among the region’s developed banking sectors, was an even lower risk, given our economic risk trends were negative, and that the Reserve Bank (RBNZ) had adjusted interest rates to cool the property market.
RBNZ gives vote of confidence
RBNZ tweeted recently that it had been monitoring the US banking situation.
“We are aware of the current financial stability issues with a small number of banks internationally. We are monitoring the situation closely, and are in regular contact with other regional regulators and regulated entities,” it said.
“We are confident that the banks we are responsible for supervising have sound liquidity and funding positions. In New Zealand, all registered banks are required to have systems in place to monitor and control their material risks, and this includes interest rate risks.
“Our banks operate different business models that mean that they are not as exposed to the risks that have led to recent events. Our rigorous stress testing has shown that they are well-placed to deal with far more adverse situations than what we are currently experiencing… and operate above minimum regulatory requirements.”
As you were
There’s no need to eye your bank with greater suspicion. But keep following the US story – there’s more to play out.
A bad balance sheet killed SVB, and other banks have similar balance sheets – like the Federal Reserve, the world’s largest and most influential central bank.
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