UBS has agreed to buy Credit Suisse in a historic, government-brokered $2bn deal aimed at containing a crisis of confidence that threatened to spread across global financial markets.
The past month has witnessed the failure or bail-out of three mid-size US banks, leading investors to worry which institutions may be next.
US banks borrowed a combined $164bn from two Federal Reserve backstop facilities last week, indicating funding stress and escalating fears about how widespread and serious the liquidity issues are in the country’s banking system.
Shane Oliver, chief economist at AMP, warned that the effect on the Australian market from the turmoil in the banking sector could be higher wholesale funding costs for the nation’s largest banks, and a tightening in lending, which would be negative for economic growth.
Regulators in Australia have attempted to boost confidence in the country’s banks by highlighting their high liquidity and capital strength.
The Reserve Bank has reported that non-bank lenders account for about AUD600bn ($448bn) in credit, or approximately 5% of the Australian financial system’s assets.
AMP’s Oliver believes that concerns around counterparty risk could lead to a reduction in interest rate rises from the Reserve Bank.
According to veteran fund manager Anton Tagliaferro, there is a “crisis of confidence in the international banking sector”.
Counterparty risk exists when there is a concern that the bank you trade with can’t meet its obligations, or is about to go bust.
He added that central banks would stand behind the regulated banking system, but his greater concern was with non-bank lenders that have expanded their activities in areas such as car and building financing substantially since the GFC.