The recent collapse of the Silicon Valley Bank (SVB), Signature Bank and the averted collapse of Credit Suisse has a lot of the world worrying. And Australians are among them. But do we need to be concerned? Or are we at risk for bank runs in Australia?

The short answer is we simply don’t have the specific circumstances as those faced by SVB or Credit Suisse, or world circumstances like seen pre-Global Financial Crisis (GFC) in 2007-09. Our research shows that if your savings are on deposit with a bank in Australia, your biggest ‘bank run’ fear is fear itself.

Let’s explain.

The risk of bank runs in Australia

Background: What happened with Silicon Valley Bank, Signature Bank and Credit Suisse?

So what happened with SVB, Signature Bank and Credit Suisse?

Signature Valley Bank

SVB was a bank that primarily serviced venture capitalists and customers in the US tech industry – known as riskier businesses. In the case of SVB, the tech boom started to come to an end, and inflation began to increase. So, America’s Central Bank (like your RBA) began to raise interest rates.

All the tech companies and venture capitalists that had more than $250,000 worth of deposits became concerned, and ‘ran’ to get those deposits out. (They are uninsured deposits under the US Federal Deposit Insurance Corporation (FDIC).

SVB needed US$2.25 billion to remain solvent. By the end of the 10 March 2023 its individual depositors (customers) had withdrawn around US$42 billion triggering its collapse on 10 March 2023.

Because the SVB did not have enough money to pay its customers, the FDIC closed it and took control of its assets.

The SVB’s collapse is the biggest US lender to fail since the GFC and the second biggest in US history.

Signature Bank

Signature Bank – a New York institution – primarily serviced customers in the legal and real estate industries. However, it was forced to close its doors after making ‘risky bet on crypto’ and experiencing a huge run on deposits. This run on deposits was in part caused by the collapse of SVB, which created panic in Signature Bank customers. And like SVB, those that held uninsured deposits, rushed to remove them.

On Sunday 12 March, regulators seized Signature Bank and closed its doors announcing ‘that keeping the bank open could threaten the stability of the entire financial system’.

Credit Suisse

Credit Suisse then faced similar collapse. In recent years, Credit Suisse had experienced several scandals, the collapse of two investment funds, significant losses and an unstable executive. Luckily – and unlike the other two banks – it was saved through a purchase by Switzerland’s largest bank, UBS, for around US$3.3 billion, which was approved by Swiss regulators.

What is a bank run

Let’s look at what a ‘bank run’ or ‘deposit run’ actually is. In this context, when we say ‘bank’ we’re referring to any lending institution or specialist lender that holds customers’ money. 

For a bank run to occur:

• Many of the bank’s customers must withdraw their money at the same time (this creates a visual image of people literally ‘running’ to their bank).
• The customers are doing this out of fear or worry that the bank will become insolvent (run out of money).
• As more customers ‘run’ to withdraw their money, the bank must go to their cash reserves. A bank’s ‘cash reserve’ is the set amount it has on hand, either in their vault or in an account with a central bank. The set amount is based on their experience in what amount is needed day to day. And how that amount can be safely secured.
• The increasing number of customer withdrawals can in turn cause panic, which means more customers withdraw their money.
• As more customers withdraw their money, the bank must increase its cash position to meet the withdrawal demands. One way of doing this is to sell its assets, which can be difficult to do quickly for an appropriate price.
• In an extreme case, the bank’s cash reserves may be insufficient to cover all the withdrawals, which means they become insolvent.

It’s important to know that a bank run most often occurs due to panic or fear rather than a bank’s actual insolvency. This was reported to be the case for Signature Bank. But - this panic or fear can cause increasing numbers of customers to withdraw their money. And this can then push the bank into actual insolvency.

Has there ever been a bank run in Australia?

The RBA’s list of financial disturbances in Australia shows there hasn’t been a ‘bank run’ since the early 1990s (with the collapse of the Farrow Corporation in Victoria). Financial experts say there is little chance of significant fallout for Australia’s broader financial system from the collapse of SVB, Signature Bank or the Credit Suisse situation. The local financial system in Australia is well capitalised, and our regulators are keeping a close eye on international events.

In Australia, the responsibility for prudential supervision of financial institutions and for promoting stability in the financial system belongs to the Australian Prudential Regulation Authority (APRA). Established by the Australian government in 1998, APRA is an independent statutory authority, supervising banking, insurance, and superannuation institutions.

Further, the federal government established the Financial Claims Scheme (FCS) during the GFC to protect customers from an Australian bank’s collapse. Click through to see the banking institutions covered under the FCS. In effect, the FCS is a government-backed safety net to ensure that customers’ deposits are protected.

What this regulation means

If there’s a failure of an Australian bank and the government activates the FCS, APRA aims to ensure most customers will receive up to $250,000 per account holder (per institution) within seven calendar days.

For bank runs in Australia, the greatest fear is fear itself

The global financial situation now is not the same as what preceded the GFC. Australian banks tend to not have the concentrated, non-diverse customer base as SVB of Signature Bank had. Nor have they experienced the history of scandal and unstable executive of Credit Suisse.

Research has shown that historically, customers’ fear and panic contributed to bank runs during the Great Depression in the 1930s. In fact, this was a decisive factor in making the financial crisis more significant than it otherwise would have been.

At the end of the day, we’re confident that our system, our banks and our regulators are well placed to weather any economic situation. And, of course, avoid any potential bank runs in Australia!

Get in touch!

Our Lending Loop team is always here to help with all your home loan or refinancing needs and to answer any question you may have. We work with over 40 of Australia’s biggest lending institutions and are ready to help you find the best loan for you. Give us a call today at Lending Loop.