If you’ve been following international news this week, you might think you’ve been transported back in time.

Over the course of the past seven days, there have been reports of banks failing, regulators jumping into action and share prices slumping. It almost feels a bit GFC 2.0.

So what’s really been going on?

A week ago, Silicon Valley Bank (SVB) collapsed.

READ MORE:
* Stocks tumble as Credit Suisse woes add to banking sector jitters
* How Silicon Valley Bank’s collapse is reverberating around the world
* Can the chaos from Silicon Valley Bank’s fall be contained?

SVB was known for lending to start-ups, particularly tech businesses. Rocket Lab had US$38 million invested.

But the bank recently warned it had taken a hit on some securities and had been unable to raise capital to offset the loss. Its share price started to drop, which prompted some venture capital firms to advise companies to pull their business.

When the failure happened, it was quick. A run on the bank resulted in US$42 billion being withdrawn in one day.

Part of the problem was that the bank had invested a lot of money in long-term bonds at low interest rates. When rates rose recently, the value of the bonds fell. Bonds’ capital value falls when it’s possible to get other bonds at higher interest rates.

American capital rules don’t require most banks to account for the falling value of their bonds if they don’t plan to sell them. But if something happens and they need the money unexpectedly, the loss of value becomes apparent.

(In New Zealand, these investments are carried at fair value.)

Then spooked by SVB, investors withdrew US$10b from Signature Bank, which also collapsed. And on Friday, it was reported that a group of Wall Street banks is planning a rescue package of at least US$20b for First Republic Bank amid concerns it could be the next to go.

Concerned about the prospect of worries prompting runs on more banks, the US Government has been trying to boost confidence.

After SVB collapsed, the Treasury, Federal Reserve and Federal Deposit Insurance Corporation said all clients would be protected and have access to their money. Signature depositors would also be “made whole”.

So what does it all mean?

The biggest worry out of all of this is that there could be contagion. People worried about the health of banks generally might want to remove their investments, destabilising even healthy banks.

There have also been concerns raised about whether central banks such as the Federal Reserve can continue to raise interest rates when it’s putting pressure on banks.

While central banks might be willing to trade off higher unemployment for lower inflation, the prospect of trading off financial stability is much less palatable.

ANZ senior economist Miles Workman said the amount of central bank interest rate increase that US markets were pricing to happen next week in had fallen from 42 basis points to 21.

But he said US inflation was still at 6%, which remained a concern.

“Uncertainty is high and there are many ways things could pan out. But our sense is that having taken measures to shore up confidence and limit the fallout of this month’s bank failures, the Fed has put itself in the best place it can be to be able to pursue its monetary policy remit – ie to continue hiking – even if that means doing so more cautiously.”

How could it affect us?

Workman said it was even more uncertain what effect there might be in New Zealand.

There is some direct effect – Silicon Valley Bank shares were in some KiwiSaver funds. Sam Stubbs, founder of Simplicity, estimated that if you had $100,000 in its balanced KiwiSaver fund on December 31, you would have lost the equivalent of $15.41 in its balanced fund.

Fisher Funds chief investments officer Ashley Gardyne said it had exposure to Signature, of about 0.2% and 0.6% depending on the fund, Gardyne said.

”To put that into perspective, for a customer with $50,000 invested in our KiwiSaver Growth Fund, their total loss is only about $320.

“The bigger impact for New Zealand KiwiSaver investors is on the global banking sector more generally. Over the last week, the global banking index has fallen around 12%, but regulators and central banks in both the US and Europe have been moving to shore up the banking system, providing liquidity and protecting depositors which has seen stability return in recent days.”

Shares in ANZ fell just over 4.2% in the five days to mid-afternoon on Friday. Westpac was down 2.65%.

Workman said there was strong oversight of local banks, making it a lot less likely they would get into difficulty.

But he said bank funding spreads were widening globally. That refers to the difference between what it costs a very safe borrower – like a big government – to borrow compared to someone who is seen as riskier. S&P has warned that New Zealand’s credit rating could come under pressure if the current account deficit does not decline.

ANZ chief economist Sharon Zollner said wider funding spreads were relevant for New Zealand “as a small economy at the end of the world, very reliant on China. If people decide to punish people for being risk, we could be in the firing line. There’s no sign of that yet but we do have a stake in this for sure.”

About 30% of New Zealand bank funding comes from offshore.

“What has happened over the past week has sent shockwaves through financial markets and markets continue to fear that some of the issues facing the small number of banks that have failed or are starting to look wobbly may be more widespread – we just don’t know,” Workman said.

“But our working assumption is that financial stability interventions will be successful in reducing stress, allowing the Fed (and other central banks) to remain focused on the still very important job of getting inflation back to target.”

Sam Shuttleworth, banking and capital markets sector leader at PwC, said the Reserve Bank had increased the capital levels that New Zealand banks had to hold and they held more capital than overseas banks.

“They’ve got that natural absorption buffer to cover those strategic systematic risks and absorb a lot more.”

He said New Zealand’s Open Bank Resolution mechanisms also meant that if something was to happen, it would be dealt with.

“That puts a mechanism in place that if something was to happen, how would that be dealt with, including a mechanism around secured creditors, how does the bank open up tomorrow. All that is designed to prevent a run on the bank.”

So, is it GFC part two?

Zollner said it was too early to say this was a repeat of the Global Financial Crisis.

She said the two US banks that had failed each had bespoke problems that were caused by light-handed regulation. The US regulatory focus in recent times had been on systemically important banks, “forgetting that smaller banks can pose a contagion risk if they fail”, she said.

She said, when the GFC blew up, there was widespread uncertainty about who was exposed. “No one trusted anyone and the system seized up.”

She said there were parallels now – there had been a period where money had been flowing freely without too many questions. “We’re just at the beginning of finding out what poor decisions have been made.”

She said the recent increase in interest rates had been rapid and unexpected and that was likely to cause stress to emerge. But she said that was where the parallels stopped so far.

“The question for Reserve Banks is whether it will stay in its box so they can bring inflation down.”

In a statement, Reserve Bank deputy governor Christian Hawkesby said it was monitoring the situation closely and was in contact with other regulators.

“We are confident that the banks we are responsible for supervising have sound liquidity and funding positions. These issues also reinforce the importance to financial stability of sound financial risk management by banks, particularly in an environment with large changes in interest rates.

“In New Zealand all registered banks are required to have systems in place to monitor and control their material risks, and this includes interest rate risks.

Our banks also operate different business models that mean that they are not as exposed to the risks that have led to recent events. Our rigorous stress testing has shown that they are well-placed to deal with far more adverse situations than what we are currently experiencing. We note all New Zealand banks are presently operating above minimum regulatory requirements.”