ANZ chief Shayne Elliott warns turbulence that toppled Silcon Valley Bank has further to play out

It could take a year for the turbulence that toppled Silicon Valley Bank and Credit Suisse to play out, ANZ chief executive Shayne Elliott says.

Wednesday 4th May 2022. ANZ chief executive Shayne Elliott. Photograph by Arsineh Houspian

ANZ chief executive Shayne Elliott has warned households and businesses will have to pay more to access bank credit, as a perfect storm of higher interest rates and overseas banking turmoil hits money markets.

And the turbulence that toppled Silicon Valley Bank and Credit Suisse had further to play out, he said.

“It’s clearly not over,” Mr Elliot said. “I don’t think you can sit here and say, ‘Well, that’s all done, Silicon Valley Bank and Credit ­Suisse and, you know, life will go back to normal’.

“These things tend to roll through over a long period of time … history says it’ll take many, many months, if not a year, for these things to roll through the economy.”

The chief executive’s comments were made as a slide in Deutsche Bank’s share price on Friday night forced German Chancellor Olaf Scholz to reject suggestions the solvency of the country’s biggest bank was at risk.

Deutsche shares closed down 8.5 per cent at €8.54, after falling 14 per cent during the day, in its third day of sharp losses. The cost to insure against its default using credit default swaps soared to the highest levels since 2020.

The ripples spread through European banking stocks,re­igniting fears about the potential for a widening banking crisis.

Mr Elliott said while the crises that hit SVB, Signature Bank and Credit Suisse were a shock, “we shouldn’t be surprised”.

“It’s too early to call it – I mean, it’s a crisis for some, obviously – but is it a financial crisis? Who knows,” he told ANZ’s bluenotes.

“Does it have the potential to be one? Yes, it does have the potential to be one.”

Meanwhile, in the US, the cost of short-term funds had risen between 1 and 2 per cent as higher Federal Reserve interest rates also tightened liquidity, he said.

“Call it 1.5 per cent,” he said. “It’s the equivalent of not having a 4.75 per cent (Federal funds) target rate, but actually six and a quarter. That gives you a sense, the dimension of what’s happened here.”

Liquidity constraints that initially affected the banking sector would ultimately flow through to the real economy, the chief executive added.

“And what that will mean is that businesses, households – small and big businesses – will have to pay more to access funding, and potentially that funding will get rationed and not everybody will be able to have some. And so that’ll have real impacts.

“Historically it’s really those people who are over-geared, who have too much debt, or have a business model where when the cost of goods go up, the cost of money goes up, they’re unable to pass it on to their own customers. And those are the people that are most at risk in this environment.”

On Friday night European banking stocks finished another turbulent week sharply lower.

Shares of Germany’s Commerzbank tumbled 6.5 per cent, while Britain’s Barclays and France’s largest bank BNP Paribas slid 5.8 per cent.

Analysts have attributed the fall in markets to the reluctance of risk-averse investors to be left holding banking stocks over the weekend.

Meanwhile the price of Brent crude fell 1.9 per cent on global growth fears.

Wall Street’s three main indices opened lower but shook off gloomy banking news from Europe by day’s end. The benchmark S&P 500 closed up 0.6 per cent, while the broader Dow Jones index lifted 0.4 per cent and the technology-heavy Nasdaq Composite rose 0.3 per cent. NAB chief economist Alan Oster told The Australian that panic – rather than fundamentals – was driving the carnage on bank stocks, and it was not setting the scene for a repeat of the 2008 financial crisis.

“You don’t want to be the weakest bank in the current environment. That’s been an issue for many of these banks,” Mr Oster said on Sunday.

“Some of the banks in the US were pretty incompetent interest rate managers, which is very different to what we’ve got here.”

Mr Oster said central banks making decisions about interest rate hikes were likely to largely look through the Deutsche sell-off and other banking troubles in the US and Europe.

“If the Reserve Bank wants to sit (and hold rates) they’ve got an excuse. But just about every other central bank around the world has not sat. The Fed went 25bps, the Bank of England 25bps, the Swiss National Bank 25bps and the Norwegian bank also went 25bps – all last week,” Mr Oster said.

Financial markets were on the weekend pricing in little change to the Reserve Bank’s cash rate in April, and a cut of 10 basis points by June.

But AMP Capital chief economist Shane Oliver said central banks weren’t ignoring the banking crisis, despite lifting their policy rates.

“The Federal Reserve was widely expected to hike interest rates by 50bps last week. Instead it opted for a 25bps rise,” Dr Oliver said. Dr Oliver said the RBA board was already contemplating a pause before the banking crisis.

“It ultimately will come down to the RBA’s assessment of the checklist of indicators that they refer to in their minutes, which is obviously jobs figures, business conditions, retail sales and inflation numbers.

The Australian Bureau of Statistics is due to release February retail sales figures on Tuesday, and inflation data on Wednesday.

Dr Oliver forecast retail sales for February to be relatively flat, with inflation growth to slow further – coming in at about 7 per cent, down from January’s 7.4 per cent, and signalling that it has peaked.

“That should open the door for the RBA to pause, but it’s a pretty close call,” Dr Oliver said. “And we’ve got a fair way to go in seeing what happens regarding the banking turmoil. We thought it was under control with the UBS takeover of Credit Suisse, and then it waxed and waned right through the last week, with Deutsche Bank on Friday.”

Meanwhile, Mr Elliott said banks and their customers would have to adjust to higher funding costs.

“We need to adapt, just like we had to adapt to working from home, we have to adapt to this new world of capital markets.”

Originally published as ANZ chief Shayne Elliott warns turbulence that toppled Silcon Valley Bank has further to play out