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This time last week, news hit trading terminals in Asian trade that Silicon Valley Bank in the United States was closing its doors – a necessary move to prevent a feared nationwide bank run.
News followed about financial distress at Signature Bank, then Credit Suisse, and now First Republic.
The latter is based in San Francisco and is known as a banker to the rich.
It operates as a regular commercial bank and a wealth manager.
Signs of trouble for First Republic
Its problems are similar to the ones faced by Silicon Valley Bank (SVB) – only not as large in scale.
In SVB's case, soured investments produced a reduced capacity to meet depositors' demands.
In First Republic's case, it lent out more money than it has in deposits from customers – making it vulnerable to a bank run if confidence in the banking sector shatters more broadly.
According to S&P Global Ratings (S&P), about 70 per cent of its deposits are uninsured.
Both S&P and Fitch Ratings downgraded the bank to "junk" status.
Anticipating a crisis, Wall Street titans – including JP Morgan Chase and Citigroup – offered a cumulative $30 billion in cash to safeguard the bank.
Australia's Westpac has raised the issue that this inter-bank bailout "occurred despite authorities' swift action to guarantee the deposits of both SVB and Signature after they re-opened under the control of the Federal Deposit Insurance Corporation (FDIC)."
In addition, AMP's chief economist Shane Oliver noted today there have been "record bank borrowings at the Federal Reserve's discount window".
This is the cheap money the Federal Reserve has made available to banks so they do not need to realise big losses on their bond investments to meet the needs of depositors.
He said it highlighted "the scale of stress in the US banking system".
And experts expect more banks to fail.
Morningstar Equity Research quoted William Isaac today in a note:
"There's no doubt in my mind: There's going to be more. How many more? I don't know. How big? I don't know. Seems to me to be a lot like the 1980s."
Mr Isaac oversaw the FDIC in the early 1980s amid widespread bank failures and high interest rates.
What does this mean for interest rates?
The financial news flow has major Australian banks reassessing their forecast for interest rate movements both in Australia and overseas.
The thinking is that notwithstanding a credit crunch, financial intermediaries are likely to reduce their lending in the months ahead, and that will crimp economic growth further.
"… It would not surprise if the [Federal Reserve] paused [its interest rate hiking cycle] in March – particularly if financial markets and the banking sector (in the US or abroad) remained under stress leading up to the meeting," the NAB noted today.
Westpac sees just one more US interest rate hike – and what the US Federal Reserve decides to do with interest rates influences – to some degree – decisions made by the Reserve Bank.
What about Australia?
Westpac is concerned about a deeply negative consumer mood.
"The Westpac-MI Consumer Sentiment survey remained at 78.5 for a second consecutive month, which indicates sentiment is firmly entrenched in deeply pessimistic territory – a situation only comparable to the major economic dislocations observed during the 1980s-90s," Westpac noted.
"With the domestic outlook gloomy, business confidence will struggle to earn significant reprieve over the period ahead.
"…The hit to broader confidence is likely to have a lasting impact on economic activity and employment."
The bank expects the RBA's aggressive interest rate tightening cycle has probably done much of its job in setting up financial conditions such that inflation will soon return to the bank's target of between 2 and 3 per cent.
"…We continue to expect a return to near-target inflation in the second half of 2023."
Combine all of this with "wildly gyrating markets highlighting the uncertainty" around the health of the global financial system, and Westpac now has the Reserve Bank pausing its interest rate hiking cycle at its next meeting in April.
It has also lowered the "terminal" or peak point in the RBA's cash rate from 4.1 to 3.85 per cent.
That is a significant development for millions of mortgage borrowers.
However, the ANZ Bank is holding firm on its previous interest rate calls:
"Given the robustness of much of this week's data flow, we continue to look for 0.25 percentage points of tightening at both the April & May Board meetings, giving a terminal cash rate of 4.1 per cent."
That said, there has been a significant shift in market pricing for the RBA.
"Indeed, [financial] markets have moved from pricing 0.12 percentage points for the RBA's April decision last week to 0.009 percentage points at the time of writing today."
That is financial jargon for saying the money markets disagree with the ANZ bank's view and are betting the Reserve Bank will hold the cash rate at 3.6 per cent in April.