Insights   •   Fixed Income

From Crisis Cause to Crisis Cushion

Credit Analyst
Head of Australian Cash and Bonds

In a previous piece, we presented our view that global banks would act as a cushion to the broader economy during the next recession rather than a cause of the downturn, as was the case during the Global Financial Crisis (GFC). This view was predicated on a concept we dubbed foundational oversight, or the post-GFC impact of new regulations and internal self-correction that served to reduce bank risk appetite and strengthened fundamentals. 

Though a global pandemic was not contemplated, the banking sector did indeed act a source of strength during the Covid-19 pandemic. Without broader government support for the economy, however, outcomes could have been far worse. We conclude that post-GFC changes allowed banks to act as a cushion to the broader economy but were not a panacea in the face of a total collapse in economic activity. 

Moving ahead, we remain confident about bank fundamentals but also cautious given the potential for loose monetary and fiscal policies to promote asset bubbles.  As such, we maintain a preference for large, diversified banks with scale.