Banking Fallout: Over-Hyped or Accurate?

The stability of the global banking system is a topic that enters the fray far too often for all the wrong reasons. In 2023 the topic arose with vigour once again, following the collapse of SB, FRB, and SVB, three $100B+ enterprises that all failed because of poor capital management practices. Within a week of these US collapses, the contagion had spread overseas. Switzerland's second-largest bank, Credit Suisse experienced major ramifications. A bank, already marred by various scandals, had reported a loss equal to US$68.7B (5%) of AUM in the first quarter of 2023. The US failures saw Credit Suisse customers further liquidate their deposits, forcing the Swiss government to step in and orchestrate a merger with the country's largest bank, UBS. As reported by CNN Business, these failures forced extreme cash bailouts for each institution, with more than US$400B in direct support to SVB and Signature Bank, while Credit Suisse received a US$54B loan from Swiss National Bank.

With the events of March in the past, we can reflect on the madness that has passed. How did our Australian market take the news of yet another banking fallout?... And was the reaction justified, or by contrast, an over reactionary reflex?

In my brief time studying finance I have become fascinated with how a line graph can tell a story. I know that is the lamest thing you’ve read today but bear with me. The graph that is displayed below is the S&P500, the world’s go to indicator for stock market performance. From the start date (31/07/2013) to 18/02/2020, American corporations enjoyed a period of sublime growth. No inflationary pressure, supported by record low interest rates and fair oil prices helped the S&P500 double at a CAGR of 11.25%, 5.35% greater than the average over the last 200 years. March 2020 followed with short burst of investor uncertainty as the western world shut down. This was short lived, as investors rode the wave of quantitative easing, that resulted in a strong uptick in consumer spending.

The common theme of stock market performance over the past 10-years, is the link between macroeconomic circumstances, and investor sentiment. In periods of macro uncertainty, investors react accordingly, by making judgements on how systemic issues may affect the intrinsic value of public companies. So, to link back to our topic of conversation, what do we make of the reaction to the banking fallout in Australia? We now understand that the failures were a consequence of poor capital management practices, in conjunction with an undiversified clientele base, exposing the banks to sectoral issues.

Australia’s key market metric for financial company performance, the ASX200 Financials Index, fell 7.5% in the two weeks preceding the first bad news day, a relatively small drop in comparison to the S&P500 Financials, which declined 16.44%. As I’ve written before in a previous LinkedIn post, Australia’s banks operate in a different manner to these regional US banks. As written by Tony Boyd of the AFR, "Australian banks do not have a significant amount of deposits in fixed income"..." instead of sitting on deposits, Australian banks actually do what banks are supposed to do - lend money at a profit". Therefore, at a simple, fundamental level, our banks could not have been exposed to issues with bond deterioration, or client outflows at the same level. The fundamental strength of Australian banks is ever present, with our biggest lender CBA, posting a recording net profit in FY23, in a period of extreme economic uncertainty. This begs the question. Why then did Australia’s chief financial equity index drop 7.5 points in two weeks. Overreaction.