RBA Says Our Banks Are Stuffed … In Other Words

29 Jun

Yesterday, RBA Assistant Governor Guy Debelle indulged in some MOPE.

Management Of Perceptions Economics.

Lies, deceit, and propaganda, in other words.

But for those with an ear to hear, and an inclination to check the “authorities'” claims, what he really did – unintentionally – was to give us a heads up.

That our Too Big To Fail banks (TBTF) are going to get bailed out, sooner rather than later.

Go grab a modest quantity of your favourite beverage, and settle in.  You are about to learn – in detail – why we cannot trust a word the banksters say.

Ready?

Now as expected, the mainstream press all lazily parrotted the “everything’s fine, move along, nothing to see here” headline that Mr Debelle wanted. Here’s a good example, from the nations’ “premier” newspaper:

Australian banks safeguarded from Greek debt crisis, says Guy Debelle

Our standards are more rigorous here at Barnaby Is Right.

Let’s critically examine what Mr Debelle actually had to say in his official Address to Conference on Systemic Risk, Basel III, Financial Stability and Regulation (emphasis added):

Today I am going to talk about a few interrelated issues concerning the banking system: collateral, funding and liquidity.

The financial crisis brought into sharp relief the liabilities side of a financial institution’s balance sheet, that is, the funding structure. This had previously been somewhat neglected, but the fates of Northern Rock, Bear and Lehmans were clearly affected by the nature of their funding. While their funding structure played a significant part in the downfall of those institutions, I would argue the ultimate concern was about the quality of their assets. The funding problems were symptomatic of concerns about asset quality.

The solvency of any bank first and foremost is a function of the quality and value of its assets. This is, of course, true of any entity, but it is particularly true for banks because of the implications asset quality has for liquidity and because of the leveraged nature of financial institutions.

The crux of my argument today is this: if I am a creditor of a bank, my due diligence should be spent mostly on assessing the asset side of the bank’s balance sheet in determining whether or not I will get repaid in full.

Exactly.

Now, in the classic British political satire Yes Minister, master of obfuscation and manipulation Sir Humphrey Appleby said that it is always best to “dispose of the difficult bit in the title; it does less harm there than in the text.”

And by beginning his speech with this quite correct and valid talk of asset quality – and then not examining those “assets” in any detail – this is the clever game that Mr Debelle has played here.

No doubt he expected that no one would actually bother to check the banks’ asset quality.  They’d just take it on presumption, and Mr Debelle’s inference, that they’re fine.  And indeed, none in the mainstream press have bothered to check.

So let us do just that, shall we? Let us assess our Australian banks’ all-important “asset quality”.

Just two days ago ( “Our Banks Racing Towards A ‘Bigger Armageddon'” ), we saw that our banks held a combined $2.68 Trillion in On-Balance Sheet “Assets” at March 2011. So $2.68 Trillion is the claimed “value” of their Assets.

Now, about Mr Debelle’s “ultimate concern”.  The all-important “quality” of those Assets.

What exactly are these bank “Assets”?

$1.76 Trillion (65.56%) of these “assets” are actually loans.

That’s right – your loan is considered the bank’s “Asset”. They own you, as their debt slave.

$1.018 Trillion (57.84%) of those loans, are Residential loans.

That’s right – fully 38% of our banks’ Total “Assets” is the notional value of their loans given as mortgages.

Here’s a chart sourced from the RBA’s own data, showing the % breakdown of our banks so-called “Assets”:

Click to enlarge

Now, in light of the recent housing-triggered banking and debt crises in the USA, UK, Ireland, Spain, and many other nations throughout the Western world; and in light of the fact that our property market is widely considered “the most overvalued in the world”; and in light of the fact that our property market has recently suffered its biggest quarterly fall in 12 years; and in light of the fact that arrears on mortgage payments have spiked to a record high, in the same quarter as house prices had a record fall … do you really think that having over 65% of your “Assets” in the form of loans, with 38% in the form of home loans, could be considered as high “asset quality”?

In light of the fact that business failures have risen 25%, with more than 10,000 going under in 2010; and in light of the fact that a leading Australian businessman has said that Eastern Australia is in “deep recession” and NSW and Victorian manufacturing is “stuffed”; and in light of the fact that the only Australian economist to predict the GFC has recently said that we will “almost certainly” be in recession in the second half of 2011 … do you really think that having 24% of your “Assets” in the form of commercial (business) loans, and 4% in the form of personal loans, could be considered as high “asset quality”?

In other words, do you really think that having over 65% of your Total “Assets” in the form of loans to households and businesses, who are all increasingly vulnerable to (eg) cost-of-living pressures, loss of employment, house price falls, and/or a recession, could be considered as having high “asset quality”?

Don’t answer that yet.

There’s more to consider.

Our banks presently hold a staggering $16.83 Trillion in Off-Balance Sheet “Business”.  That’s around 15 times the value of Australia’s entire annual GDP.  And most of that Off-Balance Sheet Business, is in derivatives. The exotic financial instruments at the very heart of the GFC.  These are the instruments of intergalactic-scale gambling that the world’s most famous investor, Warren Buffet, famously called “a mega-catastrophic risk”, “financial weapons of mass destruction”, and a “time bomb”.

(They are also the reason why it is the banking industry that is pushing so hard for a CO2 trading scheme. Because for banks, it means trading in a juicy new mega-market casino, with a whole new type of “derivative” – carbon permits).

Here’s a chart of our banks’ On-Balance Sheet “Assets” (blue line), compared to their Off-Balance Sheet derivatives “Business” (red line):

Click to enlarge

But wait, there’s still more!

Just 6 days ago, we saw the global head of HSBC’s foreign exchange division warn of “a bigger Armageddon out there”, in foreign exchange markets.

And just 5 days ago, we saw a warning given by Fitch Ratings that Australia’s banks are the “most vulnerable” to Europe’s debt crisis, due to their heavy reliance on wholesale funding from abroad.

In other words, whether it be Greece, Portugal, Spain, Italy, Belgium, or any of the other massively indebted EU nations embroiled in a debt crisis, when one (or more) of them finally does go under – an inevitability – our “safe as houses” banks will go under with them:

Now, yesterday Mr Debelle contradicted the HSBC and Fitch Ratings’ warnings. While admitting that Australian banks’ reliance on funding from overseas does represent a foreign exchange risk, he argued that there is nothing to worry about.

Why? Because, quoth he, our banks’ foreign currency exposures are “fully hedged” into Australian dollars (emphasis added):

If a liquidity issue were to arise around this funding, it is of critical importance that the foreign-currency denominated funding is fully hedged into Australian dollars, which indeed it is.

Now, that critical claim is one we should all take with a crate of salt.

Here’s why.

In supposed proof of his claim that our banks’ foreign exchange exposure is “fully hedged” into Australian dollars, Mr Debelle referred (in his speech’s footnote #9) to a paper that appeared in the RBA Bulletin, December 2009.

Doubtless no one in attendance bothered to check that old paper. Certainly, not a single journalist who reported on Mr Debelle’s comments in the mainstream press bothered to check first, and then report the truth.

But I did.

In that old paper, we see that the authors did claim that our banks had their foreign exchange exposure fully hedged.

Well … sort of.

Here is what they actually wrote.  Note carefully the all-important weasel words (my emphasis added):

Summary

The 2009 survey of foreign currency exposure indicates that Australian institutions remain well hedged against the risk of sharp movements in the exchange rate. Australia’s foreign currency debt liabilities are essentially fully hedged into Australian dollars using derivative instruments…

Hardly a categoric affirmation.

And here’s the really crucial point. Mr Debelle’s referencing this paper in support of his claim is a nonsense – and thus, suspicious – simply because the data in that old paper is (obviously) now completely out-of-date!

Mr Debelle must know this.  Because the RBA publishes its own statistical data for our banks’ derivatives exposure – and their most recent data is current to 31 March 2011.

Moreover, the data used in that old paper was sourced via an ABS survey – that is, it relied on the banks honestly reporting their true positions (!?!).  And, the data was only current to 31 March 2009 – more than two years ago.

At that time, the banks’ admitted to holding a notional value of foreign exchange derivatives positions, allegedly for “hedging” purposes, totalling gross $2.802 Trillion:

Table 2: Residents’ Gross Outstanding Foreign Exchange Derivative Positions By counterparty, notional value, A$ billion, as at 31 March 2009(a)
Counterparty Long foreign currency/short AUD positions Short foreign currency/long AUD positions Net positions
(a) Positive values represent derivative positions under which the holder will receive foreign currency in exchange for Australian dollars at a predetermined exchange rate (that is, a long foreign currency/short AUD position). Negative values represent derivative positions under which the holder will receive Australian dollars in exchange for foreign currency at a predetermined exchange rate (that is, a short foreign currency/long AUD position).
Source: ABS
Resident 554 −554 0
Non-resident 991 −703 288
Total 1,545 −1,257 288

As you can see, the breakdown of our banks’ foreign exchange derivatives “positions” at March 2009, was Long foreign currency $1.545 Trillion, and Short foreign currency $1.257 Trillion.  For a net Long position of $288 Billion.

And the counterparty to that $288 Billion Long “position” (ie, gamble) was … “Non-resident”.

Now, a few important points to consider.

Firstly, these 2 year old figures did not represent solid proof of a “fully hedged” foreign exchange position.  And it certainly is not proof of that claim being true now, 27 months later, in June 2011!  Instead, what it represented was a $288 Billion Long foreign currency position, at 31 March 2009. A net $288 Billion bet that foreign currencies would improve in value, compared to the Aussie Dollar.

Secondly, why do you think Mr Debelle would seek to reassure us that our banks’ foreign exchange risk is “fully hedged”, and back his claim by reference (in the footnotes) to a 2 year old, redundant paper – just 4 days after Fitch Ratings warned of the vulnerability of our banks to foreign exchange volatility, and 5 days after the global head of HSBC foreign exchange warned of “a bigger Armageddon out there” in foreign exchange markets?

[Hint: These days it’s euphemistically – and deceitfully – called “spin”, or a “smokescreen”]

Thirdly – and perhaps most importantly – as we saw just 2 days ago, at 31 March 2011 our banks’ gross foreign exchange derivatives position has grown (blown?) from the claimed $2.80 Trillion … to $3.98 Trillion:

Click to enlarge

Let us not even bother going into the huge question marks over this.

Including very basic questions.  Such as, why did the banks report a $2.80 Trillion FX derivatives exposure to the ABS survey … when the RBA’s own statistics report that they had a $3.58 Trillion exposure at that date (see highlight in chart above). Or, the basic question of why did Mr Debelle fail to reference the current, and much larger, foreign exchange derivatives exposure of our banks.

And let us not bother going into the even bigger questions (and dire implications) over our banks’ $11.68 Trillion exposure to Interest Rate derivatives – that’s the going-parabolic blue line on the above chart.

We’ve seen more than enough to know that Mr Debelle’s belated assurances about our banks are a sham.

It is my view that Fitch Ratings’ and HSBC’s warnings are most likely closer to the real truth.

And the reality of our banks’ extreme vulnerability, due to their off-shore funding reliance, their truly staggering derivatives exposure, and perhaps above all, their poor “asset” quality, is the real reason why Mr Debelle gave the speech that he gave yesterday.

Whether he meant to or not, the simple message for the wise and prudent to take away from (the inconsistencies, lies, and deceptions in) his speech is this.

He is essentially saying, “Don’t worry folks … our banks are going to fail … but the RBA can just print money to bail them out”.

Don’t believe that printing money is what Mr Debelle was saying?

Here it is in his own words:

As I discussed earlier, an Australian dollar liquidity issue can be addressed by the Reserve Bank. The Reserve Bank can meet a temporary liquidity shortfall by lending Australian dollars against the stressed bank’s assets denominated in Australian dollars.

Where does the RBA get its dollars from, in order to “lend” support to our soon-to-be-insolvent, imploding banks?

It creates them. Out of thin air.

Click click on the mouse button. Tap tap on the keyboard.

Just like all “independent” central banks.

And then lends those dollars, at interest.

As we have seen previously ( “Our Banking System Operates With Zero Reserves” ), thanks to the way our banking system is designed, printing more money is the only thing that the RBA can do in response to a bank insolvency crisis.

And as we also saw previously, that is exactly what they did do, in the GFC.

Welcome to the Grand Opening of our Zimbabwe Experience, dear reader.

Brought to you by your friendly “independent” RBA banksters, and their Big Four cronies.

A final thought.

It is particularly interesting that Mr Debelle was effectively reassuring everyone that the RBA is able to provide “liquidity support” (ie, money) for our banks in the event of their running into trouble with their wholesale funding from abroad.

What he did not mention, is that our government – that is, we the taxpayers – has provided both explicit and implicit support for the banks through the Government Guarantee Scheme For Large Deposits And Wholesale Funding.

(Indeed, when Moody’s recently downgraded the credit rating of our Big Four banks, they made it quite clear that if these taxpayer guarantees were not there, our banks’ credit ratings would be slashed by at least another two ‘notches’)

So, if Mr Debelle is arguing/reassuring that the RBA is able to provide liquidity support for our banking system, then why is the Australian taxpayer on the hook to backstop the banks?

And why did Mr Debelle not mention this very important fact in his speech?

SNAFU.

As with anything involving the “unholy alliance of politicians and bankers versus ordinary people”, everything about this stinks to high heaven.

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13 Responses to “RBA Says Our Banks Are Stuffed … In Other Words”

  1. Stephen Ryan June 29, 2011 at 9:24 am #

    This is the most ridiculously argued hypothesis I think I have ever read. Utter garbage. Extrapolated nonsense. It gets a big fat F

    • JMD June 29, 2011 at 9:57 am #

      Care to detail even one ridiculous point?

      Asset quality IS liquidity which IS solvency. The banks are insolvent & so is the RBA.

      In fact Stephen, Guy Debelle is laughing at you as he snorts cocaine & bangs hookers because he knows he can always pass off his bad credit on hard working chumps like you. Guy’s bad credit is of course the dollar itself, just as the Zimbabwe dollar was the credit of the Reserve Bank of Zimbabwe, which got caught holding the bag of Zimbabwean government bonds.

  2. Whacked June 29, 2011 at 10:24 am #

    Query the hyper-inflation thingy, whilst the RBA can inflate M1 to the moon, similar to what the US Fed has done, the single biggest issue to create a hyper experience is initially the M3 and then thereafter a loss of confidence in the currency. Increase in M1 does not automatically mean an increase in M3. Need to look at Minsky and Hayek, whilst the latter a Austrian Ec, the simple fact of the matter is that the monies have to grow through M3 level, currently they look as though they are contracting and that is what is expected in a financial crisis and its aftermath. Look at the Weimar experience and then Zimbabwe and you will see that the single biggest issue was the loss of confidence.

    If you want hyperinflation just look at Japan… this is the fruitcake on the plate, as their 206% debt to GDP and urgent need of more funds to fix their problems will have to feed through to their bond rate. This will be the issue (after they spend the pension monies of course) and this well could be a trigger for something far worse globally. Note that they *have* to increase M3 to achieve the reconstruction that is necessary. If they seek to borrow more on the open market and with the US Bond rates itching to increase then this can only have a detrimental effect on the whole situation and confidence will be lost in the ability of Japan to meet the increased costs with the subsequent downturn in manufacturing and the aging population. The latter is a dead certainty and the whole situation that is developing is very very complex but the outcome is certain.

    • The Blissful Ignoramus June 29, 2011 at 10:38 am #

      Thanks, Whacked … many sound points here.

      Please do not misconstrue my use of the “Zimbabwe” rhetorical device/image at the end as inferring that I think we will see hyperinflation. Honestly, I am unsure just what exactly will be the chronological sequence of events that we will experience Down Under. If I were to guess, it would be severe asset deflation, followed at some point by high inflation/hyperinflation. But as I said, only my guess.

      I was merely attempting to (colourfully) highlight the fact that our central bank too, simply creates “money” out of thin air … and has (in a veiled manner) just stated that they (again) stand ready to do so to prop up our insolvent banks. It is my primary beef with the current state of society – the global human enslavement arising directly from the form and nature of “money”, and the granting of exclusive powers to issue said “money” to cabals of parasites.

    • JMD June 29, 2011 at 10:38 am #

      Whacked, the value of the obligations of the central bank are given by the quality of its assets, just as Guy says is so for other banks, though he doesn’t apply his analysis to his own institution. Quantity is a minor consideration.

      The hyperinflations in both Weimar Germany & Zimbabwe were the product of the quality & thus value of the ‘assets’ of the central bank going to zero. What were these ‘assets’? Overwhelmingly government bonds.

      TBI, a bit off topic but here’s an interesting article;

      http://www.zerohedge.com/article/afghanistan-central-bank-head-flees-us

      The head of the Afghan Central Bank has fled to the US. The Afghan Central Bank is a product of the US occupation. This could be a real turning point as it indicates failure of the occupation. The rats are fleeing the sinking ship. It will be very interesting to follow this story.

      • The Blissful Ignoramus June 29, 2011 at 10:41 am #

        Thanks very much JMD … that IS significant.

      • JMD June 29, 2011 at 10:46 am #

        I should add that I suspect the development of a banking network in Afghanistan along western lines, with a central bank monopolising the issuance of the currency & holding US Treasuries as its ‘core asset’ was the real reason for the occupation.

        Think of the millions of untapped chumps who could be accepting the bad debt of the bankers as payment for their toil. There’s much cotton to pick.

        • The Blissful Ignoramus June 29, 2011 at 10:57 am #

          You may well be right.

          I (also) suspect other key motivations. Such as, taking over and revitalising the poppy field/heroin trade that was (allegedly) closed down by the Taliban – a big source of revenue, and Western societal destruction. And of course, the simple and obvious – financing a multi-trillion $ “endless” war is great business, if you’re in the business of creating “money” out of thin air, and lending it to sovereign nations at interest.

      • Whacked June 30, 2011 at 6:29 pm #

        Head of Central Bank will be found to have committed no more than highlight the fraud/misappropriation of significant amount of monies from the Kabul Bank.

        If it was me I wouldn’t hang around (no pun intended).

        “My life was completely in danger and this was particularly true after I spoke to the parliament and exposed some people who are responsible for the crisis of Kabul Bank,” he was quoted as saying by the BBC.”

        http://www.dawn.com/2011/06/28/afghan-central-bank-chief-flees-to-us-reports.html

        This is not ‘failure’ of the occupation, this is greed in its purest form by relatives of the President. Once you expose these types and make these charges there is no place to hide.

        Now the site ‘zero hedge’ is brilliant in bringing forward pertinent news stories, yet they tend to sensationalise everything back to the ‘cartel’ and ‘RBA’ … I acknowledge that both are incestuous, but their claim in this case is totally inappropriate. As I said … I wouldn’t be hanging around… as a permanent resident in the US I would be heading home.

  3. JMD June 29, 2011 at 2:49 pm #

    An article from Chris ‘housing ponzi scheme’ Joye. I don’t agree with everything he says but he does make a good point about the difference between liquidity & solvency, that is, there is none.

    http://www.businessspectator.com.au/bs.nsf/Article/Reserve-Bank-RBA-insolvent-illiquid-Dr-Guy-Debelle-pd20110628-J98NB?OpenDocument&src=sph

  4. Fred June 29, 2011 at 11:14 pm #

    I already believe we are heading for rough & taxing times so I don’t need much convincing. But, getting back to the quality of your main article, I was not all that inspired by all your syllogisms. Agreed, house prices will likely drop etc, but your argument that follows and concludes with “…do you really think that having over 65% of your “Assets” in the form of loans, with 38% in the form of home loans, could be considered as high “asset quality”?” – did not rattle my cage. I sense Mr. Ryan sees it similarly. That argument and a few others seemed to jump to conclusions too quickly.

    While asset qualities may not be as high as we are led to believe, an argument that asset quality will not be good enough, and that it will not be good enough to prevent ‘credit events’ for Oz, would nail it. How do you better argue that given expected or possible changes in prices, rates, GDP, etc, margins of safety on house and business cash flows will not be enough to service the debt? There was I felt a few other ‘loose’ arguments but I won’t dwell on it. At least you’ve got the guts to run your own blog!

    • The Blissful Ignoramus June 30, 2011 at 12:05 am #

      Thanks for the comments Fred.

      As always, Time will prove to be the final arbiter of whether the “conclusions” are valid, or not.

    • JMD June 30, 2011 at 10:41 am #

      Fred, you are not understanding or are ignoring the ‘global financial crisis’. The quality of the assets of the banking system was found to be completely shot. Again, asset quality IS liquidity which IS solvency.

      A truly liquid, thus solvent, banking structure cannot suffer such drastic ‘revaluing’ of its assets. It cannot suffer wholesale liquidation as in ’08.

      Quality assets are always in demand.

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