The recent failures of several banks in the United States could counterintuitively be a boost for ASX shares, according to one expert.
Silicon Valley Bank, Signature Bank and Silvergate Capital have all closed over the last few days as they faced a classic bank run.
The US$175 billion collapse of Silicon Valley Bank was the second largest bank failure in that nation's history, according to Visual Capitalist.
AMP Ltd (ASX: AMP) chief economist Dr Shane Oliver noted that the financial chaos has almost wiped out all the January gains in the US stock market and leaves Australian shares vulnerable too.
"These closures have led to concerns they may reflect the start of broader problems in US banks," Oliver said on the AMP blog.
"This is quite possible as Fed rate hiking cycles, by tightening financial conditions, invariably trigger financial stresses — think the tech wreck and GFC."
What's going to happen now that these banks have failed?
However, a devastation of the US financial system looks unlikely, as regulators have stepped in quickly to stop the bank collapses becoming a "contagion".
"US authorities have moved quickly to guarantee deposits (beyond the $US250,000 usually covered by deposit insurance) and the Fed has unveiled a Term Funding Facility that enables banks to borrow cheaply from the Fed in order to avoid selling their bonds at a loss," said Oliver.
"This should help reduce the risk of runs on banks and avoid a fire sale of bonds."
The support will minimise problems for businesses that were customers of these banks and save them from sacking staff or not paying their suppliers.
"However, it will take a while to determine the full impact and for the dust to settle," Oliver added.
"And either way banks are likely to see a tougher environment ahead as growth slows and higher rates cause more financial stress for borrowers."
Fortunately, the chances of such collapses in Australia are even more remote as banks here play under much stricter rules.
"All Australian banks are required, post GFC, to maintain much stronger capital buffers and have tougher restrictions in terms of what they can invest in," said Oliver.
"They also have very diverse deposit bases so are less at risk of high deposit withdrawals than regional US banks… Australian bank deposits are implicitly (if not explicitly) protected."
The big vulnerability for Australian banks is if the real estate market tanks, causing a flood of home loan defaults.
What does all this mean for ASX shares?
For the immediate future, there could be chaos, warned Oliver.
"Right now shares are at risk of more downside until some of the issues around the US financial system, inflation, recession and short-term interest rates are resolved."
But in the longer run, the trauma from the US could prompt central banks to stop raising interest rates.
"It's normal for problems like this after rapid rate hikes," said Oliver.
"Given the now high risk of recession (which would curtail inflation) it makes sense for central banks (including the RBA) to pause rate hikes."
So on a 12-month horizon, he's bullish on ASX stocks.
"We see shares being stronger on a one-year view, as inflation falls taking pressure [off] central banks, hopefully enabling economies to avoid a deep recession."
