It was a volatile month for the Australian share market, with the All-Ordinaries index falling 1.1% for the month and closing at 7,373.3 points. The Australian Dollar was marginally weaker falling by 0.8% for the month, with 1 Australian Dollar buying 66.9 United States cents.
The Reserve Bank of Australia (RBA) Board delivered another 0.25% per annum rate increase in March, taking the official Cash Rate to 3.60% per annum. The RBA Board meet again on Tuesday, with most economists now expecting rates to remain on hold (following 10 consecutive RBA board meetings whereby rates have increased).
Global share markets returns were once gain mixed in March, with the United States Dow Jones Index gaining 1.9%, the London FTSE falling 3.1%, the Japan Nikkei 225 gaining 2.2%, and the Hong Kong Hang Seng Index gaining 3.1% for the month.
Financial markets were shaken in March with the collapse of Silicon Valley Bank and Signature Bank in close succession in the United States, followed by the bail-out by UBS or Swiss rival bank of Credit Suisse (a move intended to “shore up” the global banking system and prevent the latter financial institution from collapsing).
The collapse of Silicon Valley Bank last month, was the second-biggest bank failure in United States history and it took place in less than 48 hours.
Silicon Valley Bank had invested in long-term United States’ Treasury bonds and mortgage bonds, which typically deliver small but reliable returns amid low interest rates. As the interest rates increased rapidly over the past year, those holdings lost significant value.
News of the Silicon Valley Bank capital position spread fast, and customers withdrew US$42 billion in deposits (nearly a quarter of the bank's total deposits) within a single day. Consequently, the bank was unable to meet these withdrawal requests and the United States’ regulators stepped-in to guarantee deposits (a move to provide stability in the banking system).
Nevertheless, the situation with Silicon Valley Bank caused a “run” on bank deposits with other regional United States’ banks, forcing the closure of Signature Bank in quick succession, and reignited long-running concerns about Swiss banking giant Credit Suisse’s capital position.
Following numerous scandals in recent years (including a spying scandal, the collapse of two investment funds in which the banks were heavily involved, and a rotating group of executives) depositors were alarmed that Credit Suisse may be on the brink of collapse.
When Credit Suisse's second largest shareholder, Saudi Arabia’s Saudi National Bank, indicated that they would not provide additional funding support, Swiss regulators orchestrated the buy-out of Credit Suisse by long-term rival UBS.
With the events in the last month, many are questioning the strength of the Australian banking system. While executives of the major Australian banks have been quick to note that their capital position is sound, banks ultimately make their money by taking deposits (generally “at-call”) and lending these funds to borrowers over longer terms (i.e. a 30 year home mortgage).
The charts below show the funding composition of banks in Australia.
As noted in the above charts, domestic deposits account for the majority of Australian bank funding, and this has been increasing as a percentage of total funding over the past decade.
In addition, most deposits are “at-call” (meaning they can be withdrawn at any time) and are provided by Australian businesses and households. Therefore, if all “at-call” deposits were to be withdrawn at once, it is conceivable that a “run” on deposits could occur in Australia. While the likelihood of such an event must be considered very low, investors are right to be vigilant.
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This article is general information only and is not intended to be a recommendation. We strongly recommend you seek advice from your financial adviser as to whether this information is appropriate to your needs, financial situation, and investment objectives.