The biggest impact of bank failures in the US and Europe on local banks looks likely to be significant erosion of margin caused by higher wholesale and deposit funding costs. The Credit Suisse resolution and treatment of its hybrid holders has caused selling pressure on local hybrids. Macquarie Securities reported in a note on Australian banks this week that margins on major bank capital notes have risen by 20 to 30 basis points since the end of February. YieldReport said the biggest margin increases over the past week were 77 bps for Macquarie Bank Capital Notes 2, 60 bps for Bank of Queensland Capital Notes and 43 bps for Commonwealth Bank PERLS 11. Much has been made of the fact that US$17 billion of Credit Suisse hybrid notes were “written to zero” when the bank failed, rather than being converted to equity. But BondAdviser’s Charlie Callan pointed out in an article on Livewire that Credit Suisse’s hybrid documentation stated that conversion was not an option. Callan said: “While higher interest rates, falling house prices and weaker financial conditions may challenge our local banking system and financial hybrids may sell off, or even in the future be failed in, the critical takeaway is that there is not a scenario locally where we could see local hybrid holders treated the way Credit Suisse hybrid holders have been treated in terms of its subordination to common equity.” Macquarie said the major banks do not need access to the hybrid market in 2023, with the first call date for a major bank capital note issue in April 2024.   Some of them need to continue to issue tier 2 instruments to meet their loss absorbing capacity requirements. The major banks are required to raise an additional 3 per cent of LAC by January next year and a further 1.6 per cent by January 2026. Macquarie said Commonwealth Bank and NAB are already at their 2024 targets, while Westpac needs to refinance A$1 billion of upcoming tier 2 maturities. ANZ has a bigger funding task, with about $2.5 billion required to support Suncorp Bank assets. The current cost of tier 2 instruments is 200 to 300 bps above senior debt and Macquarie expects spreads to “remain elevated”. Macquarie said the risk of big banks suffering deposit outflows is low. If anything, Australian consumers worried about bank failures in the Europe and the US are more likely to want to hold their deposits with a big bank. But it expects more competition for stable deposits, given their importance in the funding mix.