Regulators vow to watch Aussie banks closely amid hopes worst is over

The country’s top financial regulators have sought to highlight the strength of Australia’s banks and vowed to keep a close eye on the sector, as investors took comfort from the US government’s emergency measures to stop further bank runs.

Australian bank shares edged higher on Wednesday after a rebound on Wall Street overnight, in a sign that a sweeping US government support package following the collapse of Silicon Valley Bank has stabilised investor confidence.

The US government’s sweeping support for banks appears to have stabilised market confidence.Credit:AP Photo/ Benjamin Fanjoy

The Council of Financial Regulators, which includes the Reserve Bank, the Australian Prudential Regulation Authority (APRA), the Australian Securities and Investments Commission and the federal Treasury, also underlined the local industry’s strength. The comments came after the regulators met to discuss SVB’s sudden failure at the end of last week.

“APRA, in consultation with CFR agencies, will continue to closely monitor the situation through its intensive supervision of the Australian banking system, which remains strongly capitalised and highly liquid,” the Council said in a statement on Wednesday.

Regulators said they were also watching long-running domestic risks, in particular how mortgage customers were coping with the sharp rise in interest rates. They said a small share of highly indebted households were experiencing “debt-servicing challenges”, and acknowledged the jump in repayments awaiting many fixed-rate borrowers.

“In the period ahead, a large share of fixed-rate borrowers will experience a significant increase to their loan repayments as their loans reset at higher interest rates. Many of these households have accumulated material savings buffers ahead of this transition, but some are better prepared than others to withstand higher borrowing costs,” it said.

Global sharemarkets were spooked this week by the collapse of Silicon Valley Bank, which failed after the lender was forced to liquidate parts of its bond portfolio at a loss because customers were rushing to withdraw billions in deposits.

The US government responded by guaranteeing all deposits held by the bank, and those of Signature Bank, which also collapsed.

While the collapses hit Australian bank share prices in recent days, the sector made up some lost ground on Wednesday. Regional bank shares made the strongest recovery after being hit earlier in the week. Bendigo and Adelaide Bank shares rose 2.1 per cent to $9.09 and Bank of Queensland rose 2.3 per cent to $6.62.

‘It would not be surprising if people do start to move deposits at the edges out of the regionals to the majors.’

Portfolio manager at Regal Funds Management, Mark Nathan, said the US government action appeared to have been enough to head off a wider banking crisis.

“You can’t be certain of anything, but it looks like we’ve turned the corner. For the US to come out and guarantee all deposits of the two affected banks – that’s quite a decisive step and it would probably lead to them doing whatever it takes in the short term,” Nathan said.

Opal Capital portfolio manager Omkar Joshi stressed that Australia’s regional banks did not have the same problems as the US regional banks that failed because Australian lenders were generally better diversified.

However, he said regional banks in Australia could be forced to pay more for deposits relative to major banks as an indirect result of the recent US turmoil.

“We don’t have the same problems here. Having said that, it would not be surprising if people do start to move deposits at the edges out of the regionals to the majors,” he said.

“It just puts a bit more pressure on the margin. Maybe they have to pay up a bit more to keep deposits there.”

The rescue package from the US Federal Reserve has also sparked debate about whether central banks may pause in their interest rate rises to contain inflation, with markets scaling back expectations for further Reserve Bank increases.

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