Don’t panic. That’s the message from one of Australia’s top financial regulators, John Lonsdale of APRA.
At a banking summit hosted by the Australian Financial Review, he said Australians can be confident their money is safe in bank deposits.
“Their banking system is among the strongest and most resilient in the world, with prudential safeguards above and beyond minimum international requirements.”
What APRA is and what it is doing
The Australian Prudential Regulation Authority is tasked with supervising authorised deposit takers (banks, credit unions and building societies), insurers and superannuation funds.
Together these institutions hold $8.6 trillion in assets for Australian depositors, policyholders and fund members.
After the collapse of two US banks and the Swiss government-backed rescue of the giant Credit Suisse, investors are understandably worried about the industry catching a cold — and spreading the disease across the entire globe.
The concept is called ‘contagion’ and it’s one of the factors that propelled the global financial crisis that swept the world in 2008 and 2009.
Chair John Lonsdale appeared at Tuesday’s summit to talk directly to the bosses and senior ranks of Australia’s largest and smallest banks and, through them, their customers.
“Delinquencies are ticking up, we’re watching that,” he said, referring to people falling behind in their mortgage repayments. But the level is still well below that which would be a major concern.
Mr Lonsdale told summit guests that Australia was not infected with the same kinds of issues we’re seeing in the US and Switzerland.
“We might be connected, but their issues and problems are not necessarily ours,” he argued.
“It’s also why, as new challenges present — whether climate, cyber or sharply rising interest rates — you can trust that APRA will act decisively to help keep deposits safe.”
Rate warnings from banks
But after a year in which the Reserve Bank of Australia (RBA) has hiked interest rates at the steepest and quickest pace in history, Australian Banking Association chief executive Anna Bligh sounded a warning of how stretched some borrowers are.
With an up to three-month lag in official interest rate rises hitting the cost of people’s monthly repayments, “a lot of what the RBA has already announced has yet to play out,” she observed.
“People will stretch and stretch and stretch, and it’s maybe when they’ve been paying those ten rate rises for six months that that rubber band starts to snap.”
Westpac boss Peter King knows a bit about mortgages. The bank currently has $467.6 billion in home loans on its books.
He said he is not as concerned about where the Reserve Bank’s cash rate peaks — whether at the current level of 3.6 per cent or potentially just above 4 per cent — but is watching how long rates will stay around those levels.
“The duration is where we’re thinking a lot about now,” he told the summit.
“Because customers will do everything they can, pull in their belt, do extra hours of work to keep the roof over their heads, whether they’re renting or a mortgage holder. But the duration I think will have an implication for how many people need help.
“The economics team are saying a rate cut in the first quarter of 2024 and a couple more later on, so it feels like 2023 is the hard piece we need to help people through.”
He also told the summit he has learned three things about the collapse of US banks Silicon Valley Bank (SVB) and Signature Bank.
One is that the changed interest rate environment — with central banks hiking rates rapidly — had put some institutions under pressure.
The second was about “concentration risk”, having too much of one type of customer — something SBV suffered from.
The third element is a recurring one in banking, that digital technology has sped up transactions and information. That means problems can happen, fast.
“In this digital age information is flowing very quickly, some of it is good, some of it is not, but that will create market risk.”
Overall, most savings customers don’t need to worry. That’s because of an important safety net created during the global financial crisis.
Deposits of up to $250,000 held in Australian banks, building societies or credit unions are guaranteed by the government.
The Financial Claims Scheme protects money held by customers of local authorised deposit-taking institutions (ADIs). You can see the list of institutions that are covered here.
But there’s another form of safety, the ongoing supervision by APRA. Created in the late 1990s, the regulator focuses on the overall stability of the financial system.
“Since the formation of APRA no Australian has ever lost even one cent of their retail deposit,” said Michael Lawrence, chief executive officer of the Customer Owned Banking Association, which represents 58 institutions like credit unions, mutual banks and building societies.
APRA forces banks, credit unions and building societies to constantly report their levels of capital (cash reserves) and debt.
“It has capital requirements, it has liquidity requirements, it looks at risk management, looks at governance, it looks at lending standards,” he explained.
“And that is not a ‘set and forget’, it’s not a ‘point in time’, they look at the banks on an on-going basis, around all parts of their business, because they want to ensure that they are sustainable for the future.”
APRA was criticised in the banking royal commission — and in subsequent reports — for being slow, keeping a low profile and dealing with regulated entities behind the scenes rather than in the public spotlight.
Safe as houses?
Australian banks are heavily reliant on the property market, because the majority of loans are not for cars or business expansion, but the dirt, bricks and mortar of dwellings.
That could mean problems if house prices keep falling — something that has been happening.
But chief macro strategist at investment bank Barrenjoey, Damien Boey, is not concerned.
“Banks are very well capitalised,” he said, meaning they have enough money to cover a large amount of losses from defaulting loans.
“The average home owner does have a significant equity buffer, so I don’t think we’re going to experience solvency issues and deposit runs like what you’re seeing overseas.”
The equity buffer means that if the borrower defaults, then the bank would be able to recover the amount it is owed from selling the house.
Australia’s banks are not as exposed to risky and volatile assets, such as cryptocurrency and start-ups.
They might be boring by writing so many local home loans, but Mr Boey said that and strong regulation makes them safe.
“They’re much better regulated, they’re much better capitalised. At worst, what we’ll see in Australia is a hit to the earnings of the banks,” he argued.
“There’s no substantial concern about solvency or anything like that, like what you’re seeing with the global banks now.”