Here’s some timely news. Timely, in that we have recently seen proof that the Australian Government has included plans for a Cyprus-style “bail-in” of the banks in the 2013-14 Budget.
From today’s Australian Financial Review:
Banks vulnerable to housing collapse
Australia’s banks have the highest exposure to the residential mortgage market than banks in other major economies, making a US-style banking collapse likely should house prices plummet.
And since the AFR has a paywall that prevents us reading more, here’s MacroBusiness with details of what Moodys had to say:
The continued strong expansion in real estate loans—at least relative to other lending segments—has raised some eyebrows. The Australian banking sector has the highest exposure to residential mortgages in the world, according to the International Monetary Fund (see Chart 5). With the absence of any publicly supported securitization market—such as that provided by Fannie Mae and Freddie Mac in the U.S.—and a currently weak private securitization market, any new mortgage originations have to stay on banks’ books. This trend has been exacerbated by recent changes to RBA rules in that the central bank will accept residential mortgage-backed securities, which may be internally securitized (that is, the loans may be securitized by the originating institution and held in their entirety by the same institution on their books), as collateral for loans.
The high degree of exposure to the domestic mortgage market raises many concerns. Recent experience has shown that house prices can fall significantly and trigger serious banking meltdowns. But what are the chances of a similar housing collapse in Australia? Many international analysts think the chances of an antipodean housing bust are quite high—it would take a bold economist who has been in a decade-long coma to declare that an Australian housing correction was impossible. When trends in Australian house prices are compared globally, the signs look worrying. House prices have increased for longer and faster than in many of the markets where prices cratered during the Great Recession.
Here at barnabyisright.com, we have warned repeatedly of precisely this scenario from the inception of this blog.
The FSB-directed new regime requiring the G20 nations to bail-in their banks using depositors money is looming ever nearer.
UPDATE:
Don’t say you weren’t warned. One example only, from 29 June 2011 –
RBA Says Our Banks Are Stuffed … In Other Words
Barnaby Is Right 
Is any one concerned about the Big 4 banks running up $24 Trillion in Off Balance Sheet Business? Here are the figures, copied and pasted from the RBA web site.
B2 BANKS – CONSOLIDATED GROUP OFF-BALANCE SHEET BUSINESS
$ million
21534346.815
In Dec 07 it was:
13133660.76
Don’t believe me? Do your own homework at:
http://www.rba.gov.au/statistics/tables/index.html
Download the spreadsheet titled:
Banks – On-balance Sheet Assets, Liabilities and Off-balance Sheet Business – B2 [XLS]
Shouldn’t our banks be in liquidation?
Thanks Laurie .. I’ve blogged on precisely this (the banks’ off-balance sheet derivatives exposure) repeatedly over the past few years, including just a few days ago.
Interesting blog especially in the light of the bail in scare articles.
I have understood the Achilles heels of banks for many years and understand that they operate fine as long as there are not bad shocks which make them account. There was a time in the past where mortgage holders put the keys on the kitchen bench and left so it could occur again. But the banking business has risks just like many other public companies and those who think otherwise are liable to be burnt if they believe otherwise.
So are we in for a stampede if the house of cards begins to crumble?
And what does one do to avoid this other than buy gold……which is being forced down by paper traders who manipulate markets?
We also need to factor in that those who own the game are able to force the price of any commodity they like in any direction they choose to make their money at the expense of society. Such is the power of the casino to win all of the time.
This could be an interesting topic and I look forward to seeing where it is going to go.
Just a thought…..
Is it not an offense against corporate law for a director(or Board of Directors) of a public company to knowingly operate a company, whilst insolvent????
Should it not then follow, that EVERY director/CEO of ALL of our banks be facing criminal charges??
If ‘Off Balance Sheet’ means the banks owe the $21 trillion to hedge funds etc, then YES, they are trading fraudulently … with the support of the RBA and the Treasurer! The same banks hold less than 10 cents in the dollar against our savings. If we all withdrew 20%, the banks would close their doors. Ponzi scheme? Not if the govt says it’s legal!
The entire financial system is going to collapse, everyone in this forum knows it, many people don’t want to admit it. The failure in the derivatives market is mathematically un avoidable. We are in a controlled collapse. The government and banks will keep lying to the public until this thing comes down in a screaming heap. When it does, I hope all the corrupt politicians and bankers responsible for hiding the true state of our government backed fraudulent financial and banking system are held to account. Lets hope those responsible are jailed for massive fnancial fraud and racketeering in the aftermath.
I suggest that collapse will only come when certain conditions line up. This I would see as a severe collapse in the value of residential real estate, a terms of trade collapse and the worldwide markets with identical problems. This is where money printing on the current scale looks like a means to an end. But great for the global economies like the US and Europe which will then be able to (legally) default on debt. Does it sound like the ship being aimed at the rocks?
Last October, I asked Malcolm Turnbull to comment. He flicked it and I got this newspeak in reply. Any translations gratefully accepted.
October 12, 2012
Dear Laurie
Malcolm Turnbull referred your email of 27 September 2012 onto the Shadow Treasurer, Joe Hockey, for attention. Mr Hockey has asked that I respond to you on his behalf.
Your request was an interesting one and relates to how we should interpret figures which the Reserve Bank publishes on the banking system’s balance sheet and off balance sheet exposures. The issues are technical in nature and so I asked the Reserve Bank for assistance in responding to the points you raised.
I have reproduced their response below.
“Thank you for your email. A banks’ solvency is determined by the difference between its balance sheet assets and liabilities. Table B3 shows banks’ liabilities, which are currently $2.8 trillion in aggregate. This is less than their total assets ($3 trillion in Table B2), meaning that the banks in aggregate are solvent.
Table B4 covers the off-balance sheet business of banks, which is predominantly their derivative positions. Note that the derivatives in this table are recorded as gross notional amounts outstanding, hence the figures are quite large. The notional amount of a derivative is the face value amount that is used to calculate payments on the derivative contract; as this amount is not exchanged by the parties, it is referred to as a ‘notional’ amount (e.g. in an interest rate swap, both parties to the derivative contract will swap the interest flows on a given notional amount, say $1 million). The market value of banks’ outstanding derivatives, which measures the current cost of replacing the existing contracts, is recorded on the balance sheet and is much smaller than the gross notional amounts. For example, the gross notional amount of banks’ outstanding derivative contracts is around $19 trillion, but the gross market value of these derivatives recorded on the balance sheet is less than $½ trillion. (The net market value of derivatives, that is, the market value of derivatives in an asset position less the market value of derivatives in a liability position, is less than $100 million, indicating that the bulk of banks’ derivative positions offset one another, with very little effect on the banks’ solvency position). Other off-balance sheet items recorded in Table B4 include various contingent assets and liabilities which may become assets or liabilities upon the occurrence of some future event that is not controlled by the bank. Because of their contingent nature, they are not recorded on the balance sheet. More detail about the components of banks’ off-balance sheet business is contained in the Notes to Table B4.”
I hope this answers your enquiry and thank you for your interest in this matter.
Yours sincerely
Tony Pearson
Chief Economist and Director of Policy
Office of the Hon Joe Hockey MP
Shadow Treasurer | Member for North Sydney
T: 02 9929 9822 | F: 02 9929 9833 |
Hi Laurie – the reply you have received (via Turnbull, via Hockey, via RBA) is exactly the kind of standardised answer I would have expected.
Have a read of (eg) this June 2011 post, for more light on the subject –
RBA Says Our Banks Are Stuffed … In Other Words
Link provides excellent analysis Blissful. It appears that the article is a few years old now and it would be interesting if the statistics were better or worse at this point in time.
The only thing I question is whether or not the analysis might be relevant to any bank in the world as banks are all leveraged and all have exposure to collapse should the market move against them. Derivatives aside all transactions have a risk of some sort. In good times the risk is non consequential. In bad times they become the literal sword of Damocles. The anomaly is that if you don’t lend to finance transactions then you cannot exist as this is the function of a bank.
You have rightly pointed out that the behaviour and risk appetite of banks is a real problem and only magnify the danger to the private sector. And of course transferring bad debts to depositors is corruption of the worst kind. Personally, I would favour CEOs and directors being forced into bankruptcy (pun) first as this should be the punishment to stop irresponsible and unaccountable conduct.
The question is what do ordinary citizens do to protect themselves from the banking system and from perverse government. This is worth more than a few lines.
“it would be interesting if the statistics were better or worse at this point in time”
Roughly the same.
An increase in Total “Assets” ($3.09 Trillion @ May 2013, vs $2.68 Trillion in 2011 post).
Total loans (residential + commercial + personal) comprise 63.75% ($1.97 Trillion) of Total “Assets” at May 2013 — that’s a higher total, but lower % than at 2011 post (65.56%, $1.76 Trillion).
Residential loans (mortgages) increased as percentage of Total loans ($1.166 Trillion or 59.17%, vs $1.018 Trillion or 57.84% in 2011 post).
Residential loans as percentage of Total “Assets” about the same (37.7%, vs 38% in 2011 post).
Off-Balance Sheet “Business” (ie, derivatives) total is now much higher ($21.5 Trillion, vs $16.83 Trillion in 2011 post).
Interestingly, On-Balance Sheet Liabilities are now higher ($2.89 Trillion) than at 2011 post ($2.5 Trillion).
The difference between their On-Balance Sheet “assets” and liabilities (@ May 2013) is just $199.3 billion.
…as banks are all leveraged and all have exposure to collapse should the market move against them
Correct. And it is the interconnectedness of the banks (ie, counterparty risk), globally, that is the reason why the politicians (falsely believe that they) cannot let one of them collapse.
Derivatives are a Pandora’s Box from what I can see. However, derivatives a nil gain game as a loss by one player is offet by a win from another. In a non rigged financial landscape Australian banks should have their hedges in both directions. Indeed Australian banks may even come up winners.
Ok, I am assuming that our lot are up to playing craps with those who have rigged the world’s interest rate market (Libor), the world’s silver market (Goldman Sachs?) and the world gold market. The latter is going to blow up in their paper trading faces if and when the money printing game becomes a repeat of Weimar Germany and perhaps this is the intent so that the debt which needs to be repaid overseas can be wiped off the slate and a fresh beginning made. Sounds like I am indulging in a bit of conspiracy theory too but it does remain to answer the questions on the table given the current position in which the US, Europe and Japan find themselves in.
Just read your 2011 post. We can only hope that because derivatives are offshore debt, we could liquidate the banks and tell the overseas creditors to join the queue. The govt could then buy the banks (nationalise) for the price of the deposits. Property prices and credit rating would crash of course. And then maybe we could rebuild an honest, productive economy?!?!
I had a look at the link Kevin. Having been to the US for the past 3 years it is clear that average Americans are being worked over. But you need to realise that Australia has the highest part time workforce (as a percentage) in the western world and that had John Howard implemented his Work Choices policy as dictated to him by his political masters, big business and the rich, then we would be close to matching the US 17 million itinerant workers. The difference is that we have a population of 23 million and the US has 320 million.
I am not sure if we can blame the banks for this process. From where I stand it is always business groups which keep spruiking and pushing for lower wages whilst business leaders keep taking more money with an insatiable appetite which begs belief.
You are assuming that the ACCC and ASIC are organisations which enforce laws and that the courts are an institution which punishes crooks. The reality is that both the ACCC and ASIC run a case every once in a while lest the public think that they are incompetent pen pushers, which they are, and the courts are places where justice is rarely metered out in a fair manner. They are not.
It appears to me that we live in the land of the lawless where criminals with money, which includes the corporate sector, can do as they like.
Don’t expect any sympathy for corporate crime. This is a sanctioned behaviour in Australia.
More reports around the globe for a coming collapse as early as next month. I think I’m going to withdraw all my savings as of tomorrow
Come on guys. Really. To get a banking collapse you will need to see the banking system’s Achilles Heel hit: falling real estate values. In case anybody has been on extended sabatical I suggest you look at the feeding frenzy at the moment. Values are going up.
I have reservations about property values as this is extending what is close to the most expensive houses in the world.
I believe in cause and effect. The cause is not playing out. And if anybody is worried then split up your bank accounts and stay away from the big players who run the casino and play with your money. I’m not too concerned at present.
To lead Australia according to the psychopathic dictates of the Banks, a psycopathic Prime Minister and lackeys is required.
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The following article is food for thought as to what could happen here after the Banks collapse Australias’ economy, turn our workforce into mere chattels [cattle/goyim] and lower our living standards.
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http://www.informationclearinghouse.info/article35546.htm
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Obama’s “Just-in-time” Workforce:
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17 Million Temporary Workers in America
Having been to the US for the past 3 years I can attest to the rape of working Americans. But those at the top of the tree are still doing fine. No problems.
Australia has also had the onset of the part time industry where full time jobs were destroyed and later reappeared as 4 hour shifts. But the rates in the US are unbelievable as are the lack of conditions and being on call 24 hours a day 7 days a week. Australian kids would refuse to work for what many Americans do. So if you think you’ve got it hard here in Oz then think again. The point is though that employers in Australia are after the same ends as in the US…the routing of the workforce whilst bosses shove their snouts deep into the feeding trough and take ever increasing amounts of the feeding pie. Its been happening here as in the US and I do not expect the game to stop any time soon short of an outright revolt. I read that this is beginning to happen in the US.