AUSTRALIA FIRST TO MARKET

Research evidence excerpt

AUSTRALIA FIRST TO MARKET

ds to a lack of comparability between banks on their preparedness or lack thereof to

deal with emerging cybersecurity risk (pre-event and post-event processes), driven by advanced AI capabilities such as

Frontier Models. While there is significant regulatory focus on capital ratios, we believe looking at cybersecurity risk through the

lens of the capital framework is not the best approach. In our view, there should be an increased focus on cybersecurity driven

liquidity risk and this should be tested through increased infrastructure resilience testing and through a deposit-run

liquidity haircut test as we believe liquidity, not credit risk, could be the main trigger in a scenario of a potential

banking crisis with social media likely to trigger unprecedented volatility in deposit flows as we witnessed at Credit

Suisse. In this changing environment, we are likely to see differentiation between players, based on: i.) Geopolitics - US

players are likely at an advantage, having early access to the most sophisticated AI models, with the US being the epicenter of

AI developments (e.g. Project Glasswing), followed by potentially China which also seems to be ahead of peers, while Rest of

the World is likely at a disadvantage; ii.) Size and interconnectedness as G-SIB banks are likely to have early access to test

out the latest developments compared to smaller banks. We also start to question whether, rather than focusing purely on

earnings, we should look to assign a 1x higher multiple (i.e. lower implied CoE) for ‘sticky’ client deposit banks with material

excess deposits, based on our view of their ability to manage through the next crisis scenario. We believe a degree of premium

for US GSIBs (currently at avg.