Will NZ be affected by the 'serious crisis' in global banking?

Wed, Mar 22

The largest US bank failure in over a decade, alongside a speedy fire-sale of Credit Suisse, is raising fears of a "serious crisis" brewing in global banking, but Kiwis look to be safe for now, according to an economic historian.

At the direction of government regulators, Swiss bank Credit Suisse was sold to competitor UBS for 60% less than its market value on Monday.

The 167-year-old bank was deemed one of the world's systemically important financial institutions – of which only a couple dozen exist – considered "too big to fail".

It comes after the failure of Silicon Valley Bank in the US, which saw confidence dip in the banking system and regulators intervene to cover uninsured depositors.

Meanwhile, another US bank, First Republic, is still hanging in the balance as executives on Wall Street rush to raise capital to improve the institution's stability.

Princeton University history and international affairs professor Harold James says that New Zealand is mostly shielded as compared to some other small economies – for now.

"I think that you're really much, much better off," he said. "You haven't had the kind of hedged exposure to big international markets that some small economies have had.

"This was Ireland in the [2008 global] financial crisis, it's Switzerland today. But to me, at least, from a big distance at the other end of the world. You look really much sounder."

The economic historian said that current banking woes were still more contained and limited than the global financial crisis.

But James added that there were echoes of the US' subprime mortgage and liquidity crisis that drove the 2008 global recession.

"I don't think it's like the global financial crisis yet, but it is a serious crisis.

"Like 2008, it's going to erupt in unexpected places," he told Breakfast.

"It started with the subprime mortgages in the US. Then suddenly, small German banks were affected, and Irish banks were affected.

"You never quite know where the next dominoes are going to fall."

James said bankers were now beginning to see an international contagion with Switzerland "at the epicentre". Both UBS and Credit Suisse are based in the small country.

He said it was a "mixture" of systemic issues in certain banks coming to light as well as a fear and a "strong psychological element" that drove the uncertainty.

"If we look at the Silicon Valley Bank — that's a story where there were inadequate risk provisions. Credit Suisse is a different story. It's fundamentally a miscalculated business strategy.

Piggy bank with plasters applied (file).

"And that could have blown up at any time. But it blows up at the moment that international markets are volatile and nervous," he said.

"There is something fundamentally going on — which is higher inflation in the United States and elsewhere.

"The central banks are tightening the interest rate, which… pushes bond prices down. And since many banks hold long-term bonds as part of their assets, their portfolios look weak. But this is the kind of thing that they should have hedged against."

Meanwhile, the Reserve Bank has said it is confident that there was stability in local banks.

"We are confident that the banks we are responsible for supervising have sound liquidity and funding positions," a RBNZ tweet said.

"In New Zealand all registered banks are required to have systems in place to monitor and control their material risks, and this includes interest rate risks.

"Our banks operate different business models that mean that they are not as exposed to the risks that have led to recent events."

It said stress testing had shown institutions to be "well-placed to deal with far more adverse situations than what we are currently experiencing".


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