Apr 07, 2023  | Tags: banking

Our insights

The collapse of three US banks including the takeover of Credit Suisse by UBS have spooked investors around the world and prompted questions about the safety of people’s savings.

US-based Siicon Valley Bank (SVB), Silvergate Bank and Signature Bank all folded in March 2023 and many smallers banks are hanging on for dear life.

SVB gained the most publicity.

It directly served the technology industry and venture capital-backed companies.

Because of this, it had high exposure to cryptocurrencies but its biggest mistake was its heavy investment in US government bonds which fell in value as interest rates rose.

Rumours of its vulnerability spread quickly prompting a run on the bank from savers trying to withdraw their cash and the rest is history.

Credit Suisse is one of the world’s biggest and oldest financial institutions but has had questionable dealings for the past decade.

Its issues multiplied when its biggest backer, the Saudi National Bank, refused to further underwrite it.

This triggered a crash in the bank’s share price of 30%.

These overseas banking disasters in quick succession have sparked fears about how far the ripple effect will be felt.

And it has raised questions about the vulnerability and sustainability of the banking industry in Australia as well as the safety of the money of Mum and Dad investors.

So what is the outlook for the banks in Australia?

Australia’s response to the global banking crisis

Financial regulators in Australia have moved quickly to hose down fears that the banking woes in the northern hemisphere could be repeated down under.

The Council of Financial Regulators (CFR) is a coordinating body for APRA, ASIC, the Treasury and the Reserve Bank of Australia.

It held its quarterly meeting in March just days after the banking collapses in the US and Switzerland and said it is closely monitoring the situation overseas, as well as micro-managing Australia’s financial institutions.

The CFR moved to reassure investors that their money was safe but admitted it would maintain “intensive supervision of the Australian banking system, which remains strongly capitalised and highly liquid”.

Federal Treasurer Dr Jim Chalmers called for calm saying, “Australians should be reassured that we have a resilient, well-capitalised banking system that has strong liquidity coverage”.

Australian banks are required to hold a minimum level of assets which can be quickly converted into cash.

This “liquidity coverage ratio” as well as the “net stable funding ratio” for longer term funding meant “the Australian banking system is well positioned to adjust to evolving economic conditions and other external shocks” according to the CFR.

But how safe is your money really?

The Financial Claims Scheme

The Financial Claims Scheme (FCS) is a scheme set up by the Australian government to protect your money in the event of a banking collapse.

But as a general rule, it only protects the first $250,000.

That figure applies per account holder at each licensed bank, building society or credit union incorporated in Australia.

But there is a clause.

Multiple accounts with the one bank or institution all count towards that $250,000 threshold.

So too do accounts held at smaller banks with different trading names but owned by a larger corporation.

The guaranteed protection of $250,000 applies per banking license.

Hence, if you had $200,000 deposited with Westpac and another $150,000 with Bank SA, which is owned by Westpac, you would only be protected for the first $250,000 of your savings.

That would leave $100,000 unprotected.

Any funds held by joint account holders would be divided equally when calculating someone’s individual level of protection.

The FCS does not guarantee any funds held with foreign banks.

Interest rates

As a side note, for homeowners, there is some speculation that recent developments will likely prompt the end or slow of the relentless rise in interest rates.

The RBA increased the cash rate by a further 0.25 points to 3.6% in March 2023.

But an 11th straight rise in April may not happen with inflation easing to 6.8% in February and confidence in business and housing markets deteriorating.

The SVB collapse even has some pundits predicting an easing of rates before the end of the year.

But with it comes a stern warning from Peter Swan, a professor at the University of New South Wales business school.

“We are expecting a lot more disharmony and failures of banks around the world,” he told The Guardian.

How should you respond?

No knee jerk reactions!

Big mistakes are made when reacting in fear, without professional advice tailored to your specific needs.

So it is a good time to take stock of your personal situation, work with an expert to understand any risks and take steps to mitigate them.

It is also an important time to re-visit your wealth strategy. While risks are one thing, there can be huge investment opportunities in this climate.

Get advice today

Seeing banks go under around the world is scary stuff and no-one can be certain just how far and wide the tremors will be felt.

That’s why it is paramount to get some solid financial advice to protect and continue to grow your wealth as well as develop your retirement strategy.

That’s where Calder Wealth Management can help.

We are wealth experts who can help you make the best financial decisions for your long term interests.

There really is no substitute for quality financial advice from someone personally invested in your future.

At CWM, we pride ourselves on leading our clients into the future with structure, financial stability and confidence.

Contact us today to discuss all of your financial needs and concerns.

Written by Ben Calder

The information contained in this article is general in nature and does not take into account your personal situation. You should consider whether the information is appropriate to your needs, and where appropriate, seek professional advice from a financial adviser.

Taxation, legal and other matters referred to on this website are of a general nature only and are based on Calder Wealth Management’s interpretation of laws existing at the time and should not be relied upon in place of appropriate professional advice. Those laws may change from time to time.

CWM specialises in wealth management with a focus on advice, investment, sustainability, insurance and finance.