Australia’s banks are “unquestionably strong” amid “strained” conditions in global financial markets after the collapse earlier this month of Silicon Valley Bank, according to Christopher Kent, an assistant governor of the Reserve Bank.
In the RBA’s first public comments since the bank’s failure, Kent told the KangaNews DCM Summit in Sydney on Monday that “volatility in Australian financial markets has picked up but markets are still functioning”.
“[M]ost importantly, Australian banks are unquestionably strong – the banks’ capital and liquidity positions are well above [the Australian Prudential Regulation Authority’s] regulatory requirements,” he said.
“Even if markets remain strained for a time, Australian banks’ issuance [of bonds] will continue to benefit from the strength of their balance sheets.”
Volatility in global markets shot up in recent weeks after US regulators took control of Silicon Valley Bank and two other banks. Overnight, Swiss authorities helped coordinate the takeover of struggling Credit Suisse by rival investment banking giant UBS.
The US Federal Reserve, the Bank of England and four other central banks also intervened to boost liquidity in US dollar swap markets, Bloomberg reported. The Reserve Bank was not part of the intervention.
The RBA’s Kent also said higher interest rates were also likely to have a “somewhat elongated” lag in influencing the behaviour of borrowers, compared with past events.
On the one hand, a higher proportion had taken out fixed-rate loans than usual during the Covid pandemic period of low interest rates. Many savers had also built up sizeable buffers.
RBA's view on how fixed-rate loans' share will sink, assuming they all switch over to variable rates when they mature. pic.twitter.com/MLUb7fOjtn
— @phannam@mastodon.green (@p_hannam) March 19, 2023
“This means that it’s likely to take longer than usual to see the full effect of higher interest rates on household cashflows and household spending,” Kent said.
The RBA has a target to bring the three-decade high inflation rates – with the consumer price index running at an annual rate of 7.8% in the December quarter – back down to 2%-3% over time.
In the wake of financial market uncertainty, investors have lately lowered their expectations about whether the RBA needs to add to its record run of 10 increases in the cash rate to 3.6%. As of the end of last week and prior to the UBS takeover of Credit Suisse, they were predicting more cash rate increases in this cycle.
Kent said a combination of the delayed shift from fixed-rate home loans to variable-rate ones and extra competition among lenders meant only about two-thirds of the RBA’s 350 basis points of increases since last May had been passed on to borrowers.
The relatively high level of fixed rate loans meant that the average outstanding mortgage rate across all loans has increased by around 110 basis points less than the cash rate since last May, the RBA says. pic.twitter.com/pSKzuvCxmW
— @phannam@mastodon.green (@p_hannam) March 19, 2023
A key question for the central bank and the wider health of the economy is how remaining fixed-loan borrowers adjust their spending habits once they face sharply higher monthly debt repayments.
About 590,000 loans, accounting for about 10% of the value of all loans, rolled off fixed rates last year. Half of the remaining fixed-rate loans, or about 880,000 loans, are due to roll into variable rates during 2023, the RBA said.
“I suspect many fixed-rate borrowers do not adjust their spending in advance, but rather wait until they roll on to the higher rate,” Kent said. “Even those that are more forward-looking are likely to make moderate adjustments at first, with further adjustments required at the time of the switch.”
The size of borrowers’ buffers is also moderating the response. The RBA was “very conscious of the challenges facing borrowers”, Kent said, noting the additional stock of savings was not distributed evenly among borrowers.
“Those with relatively new loans and on lower incomes are likely to have more modest buffers, if any, and they will be feeling more pressure to adjust their spending than others,” he said.
While many savers have built up buffers, those on higher incomes not surprisingly have larger ones. Still, the ratio is not out of whack with the relative size of loans balances, $230k for lowest income vs $575k for the highest, the RBA says. pic.twitter.com/ye1MPCBScq
— @phannam@mastodon.green (@p_hannam) March 19, 2023
According to the RBA, variable-rate borrowers with lower incomes added $17,000 on average to buffers in offset and redraw accounts over the past three years. By comparison, the highest income borrowers accumulated on average of $39,000.
However, those on lower incomes were working to repay loan balances of $230,000 on average, compared with $575,000 for higher-income borrowers, a similar ratio to the buffer size.
“One final caveat is that, even within the income quartiles, the average is skewed by some borrowers accumulating much larger balances than others,” Kent said.
About whether bank bailouts abroad might affect the RBA’s stance on interest rates, he said the board would “be taking into account” financial conditions as they do at each rates meeting.
Australia, meanwhile, had made little use of US dollar swap arrangements during the Global Financial Crisis. With the relative strength of Australian banks, Guardian Australia understands RBA had little interest in joining the overnight global efforts.
Australian shares pared early losses to be about 0.25% lower for the day in recent trading. Bank shares had also clawed back losses with Macquarie the main exception, with its shares more than 2.2% down.
