Australia’s banking industry faces emerging threats from potential rapid-fire bank runs to climate change and geopolitical tensions that are without historical precedents, a senior Reserve Bank official has warned.
Brad Jones, an assistant RBA governor, told a Sydney conference on Tuesday that “the emerging risks we are likely to confront over the next decade have a different complexion to those of recent decades” and that what passes for resilience today will likely need to evolve over time.
Jones listed risks that could surface from within Australia’s banks such as a sudden withdrawal of deposits, sparked by social media and facilitated by the ease of digital transfers.
He cited the demise of California-based Silicon Valley Bank earlier this year, with technology amplifying rather than causing the bank’s woes. The bank lost 30% of its deposit base “in a matter of hours, with a further 50% poised to be withdrawn the following day”.
“In our current system, any bank would struggle to survive a run of this magnitude,” Jones said, noting the pace of deposit withdrawals exceeded any experienced during the global financial crisis and would have required provisions “far beyond” international guidelines to be resisted.
Australia’s financial system has so far avoided any major uptick in bad debts resulting from the fastest increase in official interest rates in more than three decades. Whether that successful run continues may hinge on how much higher borrowing costs go – with another RBA rate rise widely tipped for next week – and how long they stay high.
Jones cited other internal risks including spillovers from entities that were not individually systemically important thanks to the speed of money and information flows that could magnify “herding effects”. Higher volatility of interest rates after the “great moderation” of the past two decades also brought risks to the financial sector.
External challenges were already under way, however, with geopolitical risks high among them. Jones did not cite the current Middle East tensions but noted trade and financial sanctions were also contributing to a “slow-burn fragmentation” even without a “fast-burn kinetic risk” of actual conflict.
“[F]raying support for international cooperation risks hampering operation of the global financial safety net,” Jones said.
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Among other external risks were cyber-attacks, particularly as financial institutions shifted 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 said.
The threat from global heating and the resulting physical risks from more extreme weather could trigger “unexpected changes” to regulations and consumer preferences as well as lower the value of assets or businesses in emissions-intensive industries.
While analysis suggested losses would not be “of a magnitude that would cause significant stress”, those early findings “need to be treated with caution as our understanding of climate-related risks to the financial system is still developing”, he said. “[L]osses could be larger and occur faster than currently anticipated.”
Jones said it was “entirely possible, even likely, that regulation and supervision will need to adapt as the threat environment evolves”.
“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 said. “We have a shared interest in getting our collective response right.”