Only a decade removed from the Global Financial Crisis (GFC), it may seem a bit counterintuitive to label banks as more of a ‘cushion’ than a ‘cause’ of the next cycle. However, due to dramatic fundamental changes that have occurred post-GFC, we believe that banks today are much more defensive from a fixed-income investor standpoint than they were during the depths of the crisis. Our view is underpinned by a two-pronged concept we call foundational oversight, which has benefitted creditor confidence.
Nevertheless, banks will not be immune to challenges that arise from the next downturn given their critical role in intermediating risk. In our view, as the implementation of resolution regimes across global banking jurisdictions continues, investors need to be increasingly cognizant of where their debt lies in a bank’s capital structure. During the next crisis, some senior bank creditors could be called upon to explicitly take losses. In this context, we favor the senior debt of the major Australian banks for capital preservation and liquidity.