Other lenders have a more difficult task in managing their funding. In Australia, those without Australian Prudential Regulation Authority (APRA) oversight and therefore without the benefit of being an Authorised Deposit-taking Institution (ADI) are unable to take deposits from retail investors and can only access corporate credit or wholesale markets.

When credit growth is running high and the savings rates of depositors are low – all lenders need to access well-functioning wholesale markets to continue to fund this demand for credit. Typically, in Australia’s past, this is the most likely scenario through most cycles. So, access to this type of capital is very important for our economy and has contributed to the growth and profitability of the lenders who operate within our borders.

But there are warning signs. Since early 2023, we’ve seen some ripples in the wholesale markets. Part of this stemmed from the aggressive tightening of cash rates by central banks worldwide which has affected all lenders. Capital available in the wholesale markets was also being repriced. These ripples grew to waves in March when some smaller banks in the US faltered and Credit Suisse needed rescuing. Suddenly wholesale borrowing got more difficult. Wholesale debt investors were wary of the solvency of smaller lenders and the risks of the recoverability of loans on their books, especially in commercial property and other areas of higher risk lending.

Unfortunately, these concerns have a habit of triggering other issues. As some wholesale lenders pulled back or tightened up their own credit appetite, the recipients of this wholesale lending suddenly needed to be a bit more cautious with their own loan growth. When there is uncertainty in the funds available to lend to your borrowers, most retail lenders also tighten up credit appetite or raise interest rates further to temper loan growth.

As multiple lenders all restrict credit availability in the market simultaneously, this acts as a handbrake on economic activity – which ironically usually means more bad debts and a greater risk of loan recoverability. While a first-mover advantage often exists – the first bank to tighten credit standards enjoys a period of moderating credit growth and easier liquidity management – this is more than undone when all lenders move in concert and precedes a more damaging vicious circle of tighter credit, higher bad debts, lower loan recoverability and therefore higher risk for wholesale investors, leading to even more restricted credit. This is commonly referred to as a credit crunch.

The Federal Reserve in the USA cited the rising risks of a credit crunch as their biggest focus in their most recent financial stability report.