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Are we heading for another global financial crisis?

By Jacob CoccioloneMarket OverviewMar 27, 2023 17:12
Are we heading for another global financial crisis?
By Jacob Cocciolone   |  Mar 27, 2023 17:12
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This comes as Mr Elliott (pictured above) detailed the causes of current market ructions are considerably different to the factors behind the Global Financial Crisis of 2007-2009.

Key points
  • ANZ Chief Executive Shayne Elliott says the circumstances are different in every way to 2007, yet the potential still exists for a new global financial crisis.
  • The cost of liquidity is having significant impact on global banking, rising somewhere between one and two percent in the past year.
  • Global banking uncertainty paves the way for a pause in the RBA cash rate in April at 3.60%

“It's like that old saying, that history doesn't repeat, but it rhymes,” Mr Elliott said.

“The GFC was fundamentally a crisis around the quality of assets and the loans that banks make, and that's not what the risk is here. This is a different issue.

“This is really to do with the global war on inflation and how central banks are raising rates very quickly in order to combat that, and that has casualties.”

Silicon Valley Bank (SVB), Signature Bank, and Credit Suisse (SIX:CSGN) were the latest casualties, falling in quick succession courtesy of heavy increases by the US Federal Reserve to its own cash rate - which now sits at 4.75% to 5.00%.

As a result, Mr Elliott expects further turbulence to play out.

“I don’t think you can sit here and say, ‘well that’s all done with Silicon Valley Bank and Credit Suisse, life will go back to normal’,” he said.

“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.”

AMP Chief Economist Shane Oliver echoes the views of ANZ’s Shayne Elliott noting that monetary tightening of the past year still has a way to go yet including in terms of the impact on banks

“The situation today is radically different to 2008 when US bank failures reflected systemic issues in their assets," Dr Oliver said.

"This time around the problems in US banks have reflected poorly diversified deposit bases (tech and some crypto in the case of SVB) and large scale withdrawals as depositors needed the cash forcing the banks to sell bonds at a loss.

“Whether it’s the sort of crisis that in the past has ended and then reversed Fed monetary tightening is still unclear.”

With the waters murky, Mr Elliott said regulators and governments are trying to ‘limit the blast radius’ of economic pain, yet some is inevitable.

“When you see such a rapid rise in rates, not everybody can adjust so quickly and those that can’t will typically fall over - whether that be losing their job or potentially not being able to continue their business,” he said.

“The cost of liquidity - the cost of raising short-term money - has risen somewhere between one and two percent. This is the equivalent of the Fed raising another one and a half percent.

“It’s the equivalent of not having a 4.75% target rate, but actually 6.25%. That gives you a sense of the dimension of what’s happened here, so of course there are going to be casualties.”

Last week, CBA economists warned that most of the rate rises made in 2022 are yet to impact borrowers due to the fixed-rate home loan lag.

Global banking uncertainty may be a blessing in disguise for the RBA

With another Reserve Bank decision looming in just over a week, the decision on whether to hike or hold the cash rate may be made easier by recent global unrest in the banking world.

AMP Chief Economist Shane Oliver noted that while hikes by the US Fed and other central banks over the past two weeks complicate things for the RBA, they don’t mean that the RBA is locked-in to doing the same thing.

“Looking at the major central banks, while the ECB [European Central Bank] and Fed hiked again despite the banking turmoil, it should be borne in mind that they dropped or toned-down hawkish guidance on rates,” Dr Oliver said.

“The RBA was already considering the case for a pause before the banking turmoil at a time when these other central banks were all expected to raise rates again.

“After the biggest and fastest rise in interest rates since the late 1980s, increasing evidence that growth is slowing and inflation has peaked and increasing threats to global growth from the global banking turmoil it makes sense for the RBA to have a pause in April.”

Westpac Chief Economist Bill Evans has also flagged an April pause in the cash rate at 3.60% following global developments.

“As markets, regulators and rating agencies restrict the capacity of these smaller banks to support SMEs and small businesses - around 50% of total market coverage - a new drag will emerge for the US economy,” Mr Evans said

“This is also likely to undermine confidence and raise some questions about the stability of the global banking system.”

"Are we heading for another global financial crisis?" was originally published on and was republished with permission.

Are we heading for another global financial crisis?

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Are we heading for another global financial crisis?

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