You’ve got mail: Billions lost @bank #bankrun

That is the question many in the markets have been asking themselves in recent months as more than a decade of globally low inflation and rock bottom interest rates reverse.

"You would see people lining up outside banks and say, ‘Oh Oh, that seems like a run’. But of course today that doesn't happen because it's just one Tweet that could effectively create a panic and can create a bank run.” – Farhan Faruqui

I recently caught up with ANZ chief financial officer Farhan Faruqui and the bank’s chief economist Richard Yetsenga to discuss the fast-changing environment and we dug into the factors which make the current market ructions unique.

Here’s an edited transcript of the discussion:

Adelaide: These recent events in the banking and financial systems seemed to accelerate very quickly. How much did factors like social media play a role in super charging the market volatility?

Farhan: It is increasingly fast today compared to what it used to be … and that basically means that social media and the ability to move deposits with the touch of a button on your app makes crises potentially spread far more quickly.

For those of you who are movie buffs, you may have watched “It’s a Wonderful Life”, the James Stewart film from 1946. There's a bank run scene in that movie and you should watch that because that's how bank runs used to be back in the day. You would see people lining up outside banks and say, ‘Oh Oh, that seems like a run’.

But of course today that doesn't happen because it's just one Tweet that could effectively create a panic and can create a bank run. Those kinds of issues are surfacing and how we resolve those issues and how we manage those is crucial.

Adelaide: What does this mean for regulators? If the market is moving quicker than we have seen before, do regulators also need to increase their pace?

Richard: Regulators routinely apply stress tests to banks around deposit flight with an extreme test being the loss of 25 per cent of a bank’s deposits in a month. They ask “what does that mean for the bank? How will it respond?” Well, Silicon Valley Bank lost 25 per cent of its deposits in a day. So clearly, that stress scenario is less unrealistic than it seemed when I think regulators thought about that. So, I would expect that to be quite a lot of movement.

Adelaide: Have we seen the worst of this instability or is there more to come? What happens next?

Richard: I think it's over in the front page of the Financial Times kind of sense but not over in the sense that there's legacy here and we still have to get inflation back to target - and that's going to bring some problems with it. It’s certainly not over in a slow-moving sense … I think rather than looking for kind of one big landmine, some other smaller challenges, I think, will probably come our way.

Adelaide: We face a world in which we may need more rate rises to tame inflation but also we face a world in which tightening credit means possible financial problems. Does this create problems for central banks?

Farhan: I think the central banks around the world are now faced with the dual challenge of managing inflation on the one hand and managing financial sector, financial stability risks on the other hand.

Before the financial stability issue reared its head, it was easy because the path of least regret was to raise rates, manage inflation, which came with the potential cost of a minor recession. That was okay. But now to raise rates potentially can lead to much deeper issues. And now they're having to balance the two and how the banks react - and how that impacts credit, cost of funding, ability to invest - will all play out over the course of the next few months. And that's something we need to continue to watch.

Adelaide: So what does this mean for the real economy and any businesses struggling get by?  Are there certain sectors which will be more exposed than others?

Farhan: I think if you were to look for signs of where we think there are vulnerabilities, they would be in sectors or businesses where the ability to pass on higher costs is constrained. That could be input costs but you should also look for businesses or sectors which face challenges in attracting labour – because that will mean a higher cost of labour and therefore a higher cost of doing business. If those higher costs can’t be passed on it challenges the ability to continue to operate in business.

And I think, finally, it's going to be about businesses where there's more discretionary spending. So discretionary spending, and discretionary retail, are more impacted because people will tend to continue to hold back on consumption … those which are on the upper end of price points are likely to be more affected.

Adelaide Timbrell is a senior economist at ANZ