Australia: Banking sector facing threats

Officials at Reserve Bank of Australia has issued a warning that the banking industry in Australia is facing new risks that have no historical parallels. These risks include the possibility of rapid-fire bank runs, climate change, and geopolitical conflicts.

At a conference in Sydney on Tuesday, an associate RBA governor named Brad Jones stated that “the emerging risks we are likely to confront over the next decade have a different complexion to those of recent decades,” and that the definition of “resilience” will likely need to change over the course of time.

Jones enumerated potential dangers that could emerge from within Australia’s financial institutions, such as a sudden exodus of deposits, which could be prompted by social media and made easier by the convenience of digital transactions.

He used as an example the failure of Silicon Valley Bank, which was situated in California, earlier on in this year. According to him, the bank’s problems were exacerbated by technology rather than caused by it. The bank saw a loss of thirty percent of its deposit base “in a matter of hours,” with another fifty percent of its deposits potentially being taken the next day.

“In our current system, any bank would struggle to survive a run of this magnitude,” said Jones, stressing that the speed of deposit withdrawals was faster than anything experienced during the global financial crisis and that it would have required protections “far beyond” international rules to be resisted. “In our current system, any bank would struggle to survive a run of this magnitude,” Jones said.

The official interest rate in Australia has increased at its quickest pace in over three decades, but so far the country’s financial system has been able to avoid any large increase in bad debts as a result of this. The continuation of that good run may depend on how much higher borrowing costs go – with another RBA rate increase widely predicted for the following week – as well as how long they remain at their current level.

Jones noted additional internal risks, such as spillovers from businesses that were not individually systemically important thanks to the speed of money and information flows, which may increase “herding effects.” Another danger that Jones mentioned was that the speed of money and information flows could cause “herding effects.” The financial sector was exposed to additional risks as a result of the increased interest rate volatility that followed the “great moderation” of the preceding two decades.

However, external difficulties were already underway, and geopolitical dangers constituted a significant portion of them. Jones did not specifically mention the ongoing tensions in the Middle East, but he did highlight that trade and financial sanctions were contributing to a “slow-burn fragmentation” even in the absence of a “fast-burn kinetic risk” of real violence.

According to what Jones had to say, “[f]altering support for international cooperation risks hindering operation of the global financial safety net.”

Cyberattacks were another type of risk that came from the outside, particularly for financial organizations that moved their services to the cloud. “[E]xposure is concentrated in a select number of service providers, and an outage could leave many institutions unable to perform critical functions,” he stated.

Threat posed by global warming and the subsequent physical risks posed by more extreme weather could result in “unexpected changes” to legislation and the preferences of consumers, as well as a decrease in the value of assets or firms in industries that produce high levels of emissions.

These preliminary findings “need to be treated with caution as our understanding of climate-related risks to the financial system is still developing,” he said, despite the fact that study revealed that losses would not be “of a magnitude that would cause significant stress.” “[L]osses could be higher in both magnitude and speed than are currently anticipated.”

Jones stated it was “entirely possible, even likely, that regulation & supervision will need to adapt as the threat environment evolves.” He described this as being “entirely possible, even likely.”

“There are limits to what even the most finely calibrated regulatory and supervisory regime can achieve when industry governance and risk management practices fall short,” he added. “There are limits to what even the most finely calibrated regulatory and supervisory regime can achieve.” “It is in all of our best interests to ensure that our combined response is effective.”

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