Australia and New Zealand Banks Will Not Be Victims of ‘Bank Runs’

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After the recent collapse of the Signature Bank, First Republic, Silicon Valley Bank and Crypto Bank Silvergate in the US and the acquisition of Credit Suisse, the banking crisis left financial institutions and regulators worldwide in great fear.

“Some of these bank failures were related to rising interest rates on government bonds,” financial experts claimed.

When interest rates increase, the value of existing bonds declines, as the yield on these bonds becomes less attractive compared to newly issued bonds with higher yields. This can lead to losses for banks holding significant government bonds.

During the early months of the COVID pandemic, central banks decided to lower interest rates to help the struggling economy. These reductions caused the already low-interest rates paid on government bonds to occasionally fall even more, and in certain circumstances, bond yields even turned negative.

Banks continued to be drawn to government bonds despite the low-interest rates because they carried a lesser risk of default than lending money to struggling companies.

Yet inflation suddenly rose in 2022 as economies started to recover and Russia’s conflict with Ukraine intensified. Central banks swiftly started raising interest rates in response.

It was when the interest rate increased to 4 per cent from November 2021’s ten-year US Treasury bond around 1.5 per cent.

These occurrences led to the current global banking crisis, where several international banks experienced ‘bank runs’ where many customers withdraw their deposits simultaneously over fears about the bank’s financial health or solvency.

To avoid bank runs, the Reserve Bank of New Zealand (RBNZ) and the Australian Prudential Regulation Authority (APRA) set minimal thresholds for liquid assets or those that can be easily transformed into cash to ensure that banks hold enough liquid assets to cover their obligations.

“APRA and RBNZ intend to implement Basel II in Australia and New Zealand in a manner that recognises a home supervisor’s rights to set minimum levels of capital on a consolidated basis for banking groups with operations in several jurisdictions,” stated on Terms of Engagement NZ APRA.

Overall, the financial regulatory measures and conservative banking practices make it unlikely that Australia and New Zealand will experience a ‘bank run’ contagion.

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