‘Crisis of confidence’ in global banking system weighs on markets

Investors are bracing for more sharemarket turmoil this week as global regulators scramble to address a crisis in confidence in banking markets amid news of the emergency takeover of Credit Suisse.

Following weekend talks to calm jittery markets, Swiss banking giant UBS overnight agreed to buy Credit Suisse in a historic, government-brokered $US2 billion ($3 billion) deal aimed at containing a crisis of confidence that threatened to spread across global financial markets. It will be the first merger of two globally systemically important banks since the 2008 Global Financial Crisis.

UBS has agreed to acquire Credit Suisse.Credit: Bloomberg

The past month has also witnessed the failure or bail-out of three mid-size US banks, which has left investors fretting over which institutions may be next. Last week, US banks borrowed a combined $US164 billion from two Federal Reserve backstop facilities, a sign of funding stress, escalating fears about how widespread and serious the liquidity issues are in its banking system.

“On the one hand, the authorities have put a backstop in place in the US, which should avert a worst-case scenario. By the same token, investors are still nervous that other banks might run into trouble,” AMP chief economist Shane Oliver said on the weekend as the Credit Suisse deal was brokered.

In Australia, regulators have acted to bolster confidence in the nation’s banks by emphasising the local lenders high liquidity and capital strength.

Still, the effect on the Australian market from the turmoil in the banking sector could be higher wholesale funding costs for the nation’s largest banks, and a tightening in lending, which would be negative for economic growth, said AMP’s Oliver.

This has prompted some traders to slash their bets of further interest rate rises from the Reserve Bank.

Australian shares are set to open weaker with the futures market overnight pointing to a 1.4 per cent slide in the benchmark S&P/ASX200 index.

Veteran fund manager Anton Tagliaferro, the founder of Investors Mutual, said on the weekend there was a “crisis of confidence in the international banking sector”. “The banking system operates on trust, so when people start getting worried about counterparty risk, it’s a real issue.” Counterparty risk exists when there is a concern that the bank you trade with can’t meet its obligations, or is about to go bust.

The collapse of Silicon Valley Bank earlier this month occurred after the rapid rise in interest rates led it to incur hefty losses on its bond portfolio, forcing it to raise capital, which spooked investors and customers, triggering a run on its deposits.

AMP’s Oliver said last week’s surge in US bank borrowing from the Fed was a result of banks sitting on paper losses on their bond portfolios and not wanting to sell at a loss if they had to meet growing deposit withdrawals.

The Fed meets this week, and some economists predict the uncertainty hanging over the banking system may prompt the central bank to keep interest rates on hold. However, Oliver expects the Fed to hike by another 0.25 percentage points to a range of 4.75-5 per cent.

Investors Mutual’s Tagliaferro said while central banks would stand behind the regulated banking system, his greater concern was with non-bank lenders that have expanded their activities in areas such as car and building financing substantially since the GFC.

According to the Reserve Bank, non-bank lenders account for about $600 billion in credit, or roughly 5 per cent of the Australian financial system’s assets.

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