The disastrous collapse of a major bank in the United States is having unexpected consequences in Australia.
Silicon Valley Bank (SVB) went bust on Friday. It was the second biggest bank failure in recent US history and there are fears of “contagion” spreading across the globe.
But there’s a surprise upside for mortgagors with financial markets now betting strongly that the Reserve Bank of Australia (RBA) will put interest rates rises on hold.
Australian government bonds have rallied after US regulators reassured markets that they would protect customer deposits.
Three-year yields are now on track for their biggest decline since October and ten-year yields have also fallen underneath the RBA’s cash rate.
Money markets are also signalling that investors believe the RBA will put a hold on further interest rates rises, with the probability of a pause now at 74 per cent.
SVB goes bust
SVB had a market capitalisation of around $40 billion, making it only around a fifth smaller than Australia’s ANZ Bank, and it had total assets of more than $300 billion.
Yet, it closed its doors on Friday after the California state government and US federal government stepped in after fears its woes could spread to the rest of the banking sector.
US Treasury Secretary Janet Yellen confirmed on Sunday the US government would not bail out the bank.
Betashares chief economist David Bassanese said unlike in Australia, failures among the thousands of small US banks were not uncommon.
But SVB was the 16th largest in America and it marked the biggest bank failure since the global financial crisis of 2008.
“At heart, SVB exploited a regulatory concession to smaller banks that did not require it to set aside capital for any “mark-to-market” paper losses … Perhaps given this concession, it also did not feel the need to hedge against the risk of these paper losses in the first place,’ he said.
“So, when an initial fall in deposits – due to growing financial problems among its major tech industry depositors – forced it to sell some assets and realise some losses, other largely uninsured depositors also in the tech industry got spooked and a classic bank run followed.”
But Mr Bassanese said “it’s hard to believe there’s not a few more SVBs out there somewhere”.
“Regulators may offer some relief in the form of financing to any uninsured depositors needing more money more quickly. Accordingly, this seems more like a liquidity issue than a solvency one for most in the local or US tech industry, so a major implosion seems unlikely,” he said.
“Will this be enough? Unless there’s a blanket guarantee on all US uninsured depositors in smaller banks, this may still not be enough to prevent other bank runs and wider contagion.
‘Genie out of the bottle’
The next few days will be critical as regulators and the Fed try to calm the markets.”
However, problems have already started to emerge with US regulators shutting down another bank on Monday – New York based Signature Bank which is mainly used by the cryptocurrency industry.
On Friday Australian time, Californian-based Silvergate Capital also announced it had gone into voluntary liquidation, after racking up $1 billion (A$1.5 billion) losses in the past quarter, as well as its shares being down 67 per cent.
But in the US, with the “genie out of the bottle”, Mr Bassanese said the issue won’t be “cleared up quickly” meaning the US Federal Reserve will need to push through rising interest rates again.
The US Federal Reserve has already raised interest rates faster and higher than in Australia in an effort to dampen the economy to between 4.5 per cent and 4.75 per cent, the highest level since September 2007.
But surprisingly there’s good news for Australians.
“Depending on the fallout in the next few days, moreover, the mayhem will likely be enough to encourage the RBA to pause at the April meeting also,” he predicted.
Economists are also hedging their bets that the Reserve Bank of Australia will be forced to pause rising interest rates – which have gone from a record low of 0.1 per cent to 3.6 per cent since May last year.
Job figures are due to be released on Thursday, which are expected to reveal that 50,000 people found work in February, but if the outcome is far softer it could raise the chances of RBA pausing the pain its currently inflicting on homeowners.
RBA governor Philip Lowe said data on inflation, jobs, business sentiment and consumer spending would influence the board’s decision on whether to raise rates for the 11th consecutive time.
Westpac chief economist Bill Evans said the outlook was “uncertain” and if there was a big jump in jobs without a pullback in the unemployment rate than that might encourage the RBA to press pause.
NAB economist Taylor Nugent said he expected 60,000 jobs added to the Australian economy and the unemployment rate to fall to 3.6 per cent.
But CBA senior economist Belinda Allen only predicts a 45,000 lift in jobs and the unemployment rate to remain at 3.7 per cent.
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