Bank turmoil highlights digital age pressures: King

Australia’s top banks are well capitalised and regulated, with diversified deposit bases, making them very different from the institutions caught up in the latest bout of financial sector turmoil, Westpac CEO Peter King said at the Australian Financial Review Banking Summit in Sydney.

Still, the speed at which events have moved since Silicon Valley Bank’s collapse on March 10 has underlined how potentially vulnerable banks can easily get caught up in fast-moving contagion.

“In this digital age, information is flowing very quickly, some of it’s good and some of it’s not, but it will force market reactions,” King said.

“How we deal with information, whether it’s right or wrong, the speed at which you can move money – that’s been the interesting learning for me.”

The root cause of SVB’s failure was twofold: It made a big bet on interest rates and got it wrong, resulting in a liquidity squeeze, while its deposit base was highly concentrated in the tech sector, King noted.

In contrast, Australian banks hold a lot of liquid government assets, which are hedged back to variable interest rates. Meanwhile, their deposit bases are well diversified across sectors and geographies. 

Earlier, assistant treasurer and minister for financial services Stephen Jones told the summit that Australia’s banks were “unquestionably strong”, thanks to their strong capital position and the country's robust regulatory framework. 

Westpac has boosted its capital buffers and liquidity position in the years since the Global Financial Crisis in 2007/08 to better insulate itself against the sort of financial market turmoil seen currently.

The bank holds liquid assets of around $180 billion - that compares with $45 billion in 2008 in the aftermath of the GFC. The bank’s Common Equity Tier 1 capital ratio - a measure of the bank’s equity capital compared with its total risk-weighted assets - is now above 11 per cent, up from 4.5 per cent in 2008. 

King also highlighted the differences between Credit Suisse, which got bought out by Swiss rival UBS earlier this month after its share price collapsed, and Australia’s banks.

“Credit Suisse was in businesses which, historically, were a little bit more edgy,” King said, where as Australia’s banks are largely focused on the domestic market, and in core banking businesses, “which is always good for stability.”

That doesn’t give them immunity to big swings on the global money markets, although they were well positioned to ride out the latest bout of turbulence. 

“Wholesale markets are a little bit fraught at the moment, but because we’re all well advanced on our funding programs for this year we can sit it out,” King said. “We’ve got to be cautious on funding, we’ve got to be ready to go back into the wholesale markets when they’re ready for us, but no one is pressured to do that at the moment.”

Tough Competition

Turning to the domestic economy, King said the bank’s focus had switched from where the RBA cash rate would peak – Westpac economists see a terminal rate of 3.85 per cent – to how long the rate would stay at that level. 

“The duration will have an implication for how many of our customers will need help,” King said, adding that with rate cuts likely to come through from the first quarter of 2024, “it feels like 2023 is going to be the hard piece that we need to help people through.” 

Even so, King said macro-economic conditions in Australia remained positive.

“Offset balances are still high, paid ahead is still high, delinquencies are still low – they’ve ticked up a little bit, but in the grand scheme of things not much.” 

In terms of Westpac’s own mortgage business, King said it was the most competitive market he’d seen over his entire career. 

“We’re playing in the market, but we’re not growing above the market, in fact we’re growing a little bit less. With the amount of churn we’re seeing in the refinancing market, you have to play because if you don’t, your book will shrink very quickly.”  

Still, with interest rates rising, credit buffers strong, and property prices moderating, it was a good time to write mortgage business, King added.

“The question we’ve got is: is the return right for that risk? That’s one that industry will sort out with competition over time.”