Tag Archives: APRA

Australian Banks Demand Protection From Derivatives Losses Under Bail-In Plan

8 Aug


It has been well-documented by others that the Cyprus-style bank “bail-in” scheme that is presently being prepared right across the G20, is really all about derivatives — those “financial weapons of mass destruction” that were at the heart of the GFC in 2008 (see Derivatives Managed By Mega-Banks Threaten Your Bank Account).

To briefly summarise, a critical aspect of what the bail-in scheme is intended to do, is to prioritise the payment of banks’ derivatives obligations to each other, ahead of depositors. In other words, it is about stealing the public’s bank deposits, to pay out at least some of the big banks’ Death Star-massive — and toxic — derivatives positions.

Yves Smith of Naked Capitalism explains:

In the US, depositors have actually been put in a worse position than Cyprus deposit-holders, at least if they are at the big banks that play in the derivatives casino. The regulators have turned a blind eye as banks use their depositories to fund derivatives exposures. And as bad as that is, the depositors, unlike their Cypriot confreres, aren’t even senior creditors. Remember Lehman? When the investment bank failed, unsecured creditors (and remember, depositors are unsecured creditors) got eight cents on the dollar. One big reason was that derivatives counterparties require collateral for any exposures, meaning they are secured creditors. The 2005 bankruptcy reforms made derivatives counterparties senior to unsecured lenders.

Note carefully that last point about the “collateral” for derivatives exposures, which means that derivatives counterparties are deemed “secured” creditors, making them “senior” to unsecured “lenders”.

In layman’s terms, what all that means is that when banks take out a derivatives bet, the bank on the other side of that bet (the “counterparty”) requires some collateral to be put up. Thanks to deregulation of the financial system over the past couple of decades, banks have — unbeknown to the public — been putting up their customers deposits as collateral for their derivatives bets.

Now, because collateral (or “security”) has been put up for those derivatives bets (or “positions”), this means that those bets are considered “secured”. And in a bank “resolution” (ie, a “bail-in”), the secured creditor has seniority (ie, priority) over “unsecured” creditors (ie, depositors).

Got that?

The big banks are all counterparties to each other on their derivatives bets. They have pledged “collateral” — often, your deposits — as “security” on those derivatives bets. When a bank fails, and is “resolved” under the new, FSB-directed bail-in regime, payouts on those “secured” derivatives bets get priority over paying you back your deposit.

Here at barnabyisright.com, we have recently been looking at the documents going back and forth between the Australian Treasury and the Australian banks. And it is here that we find confirmation of what has been reported by Yves Smith and others.

In the Australian Financial Markets Association (AFMA) 11 January 2013 letter in reply to the Australian Treasury’s September 2012 consultation paper, Strengthening APRA’s Crisis Management Powers,” we see clearly that our banks consider the issue of how derivatives would be handled in a bank bail-in to be “critical”:

Legal certainty around the enforceability of the netting and collateral arrangements in connection with OTC derivatives is critical to the stability of the market.

AFMA, January 2013, page 14

AFMA, January 2013, page 14

In particular, what the banks are concerned with — so much so, they call it a “guiding principle” in their response to Treasury — is ensuring that the implementation of bail-ins in Australia will “include appropriate respect for…collateral rights”, with safeguards to protect their derivatives positions against “destruction of value”:

Governing our response to the Consultation Paper are three guiding principles:

Ensuring consistent treatment of transactional claims relating to derivatives and other financial instrument, including appropriate respect for netting and collateral rights, subject to safeguards to avoid destruction of value.

AFMA, January 2013, page 2

AFMA, January 2013, page 2

The international bankers (the Financial Stability Board) who are behind the G20-wide bank bail-in scheme, have sought to portray it as being designed to “resolve” failing banks, while at the same time, “protecting” bank depositors.

However, the truth is that the FSB bail-in scheme is really designed to ensure that the mega-banks — “systemically important financial institutions (SIFI)” — will receive priority for payout on their derivatives positions, in any “resolution” of a failing bank.

Because for the bankers, propping themselves and their compadres up is all that matters. What we call “theft”, they call “ensuring financial system stability”.

According to the RBA, our banking system holds $21.5 Trillion in “Off-Balance Sheet” derivatives exposures:

Screen shot 2013-07-10 at 6.24.32 PM

Over $15 Trillion of that is the “value” of derivatives betting on interest rates.

In the “bail-in” of an Australian bank, do you really think there would be anything left to pay you back your deposit, after the banks get “seniority” for payout on their “secured” derivative positions?

See also:

Australian Banks “Welcome” Cyprus-Style Bail-In Plan

IMF Tells Australian Lawmakers To “Prevent Premature Disclosure Of Sensitive Information” On Bank Bail-Ins

Australia Plans Cyprus-Style “Bail-In” Of Banks In 2013-14 Budget

Crisis Management: APRA To Be Given Power To “Direct” Your Super

17 Jul
Australian Treasury,  Strengthening APRA's Crisis Management Powers, September 2012, page 34 (click to enlarge)

Australian Treasury, Strengthening APRA’s Crisis Management Powers, September 2012, page 34 (click to enlarge)

It’s been a big week for your humble blogger, vis-a-vis finding incriminating evidence on government websites.

Here’s another example of something I have warned of (repeatedly) since the inception of this blog, now coming to fruition.

That like so many other countries in the Western world since 2008, our government too would, someday, use the pretext of “crisis management” to steal your super to prop up an insolvent financial system.

Today, we learn that the Orwellian euphemism that has been chosen to describe this process in Australia, is “direction powers”.

From the Australian Treasury’s Consultation Paper, Strengthening APRA’s Crisis Management Powers, September 2012 (my bold emphasis added):

2.3.1 Potential new direction triggers

…it is being considered whether APRA should have new direction powers in relation to superannuation.

The purpose of the direction powers would be for the rectification of significant problems, in the nature of an enforcement power.

Possible triggers for the issue of a direction might include:

  • a breach of the RSE licensee law or licence condition;
  • an anticipated breach of the RSE licensee law or licence condition;
  • promoting instability in the Australian financial system;
  • conducting affairs in an improper or financially unsound way; and
  • where the failure to issue the direction would materially prejudice the interests or reasonable expectations of beneficiaries of the superannuation entity.

Note carefully what is being described here.

Earlier in the same document, the Treasury department bemoaned that:

APRA has comprehensive direction powers in relation to ADIs, general insurers and life insurers but not in relation to RSE licensees, even though the superannuation sector holds approximately $1.4 trillion in savings and a number of superannuation entities hold tens of billions of dollars in assets.

Oh dear! All that money, just sitting there making private sector fund managers rich on fees, and they (the government) don’t have the power to direct what happens to it. Sacre bleu!

Treasury went on to say that APRA needs an “early intervention tool” that is “preemptive”, and so allows it to “address a superannuation entity’s deterioration or non-compliance with prudential requirements”:

Australian Treasury, Strengthening APRA's Crisis Management Powers, September 2012, page 34 (click to enlarge)

Australian Treasury, Strengthening APRA’s Crisis Management Powers, September 2012, page 34 (click to enlarge)

Now here is where the cunning comes in.

How do you ensure that you give yourself the ability to “trigger” your new “enforcement power”, in order to give “direction” to a superannuation fund to … oh let’s say … direct a percentage of its (ie, yours, dear reader) money into government bonds to support the national government’s solvency? Or to the shares of a collapsing bank? Or to the shares in a new “bridging institution”, as directed by the FSB under its new, G20-wide bank resolution “bail-in” regime?


You establish a set of “triggers” for your new “direction power”. Just like those they have listed above. Including, most notably, the trigger that — in their judgment — “the failure to issue the direction would materially prejudice the interests or reasonable expectations of beneficiaries of the superannuation entity.”

In other words, if APRA (or the IMF, or FSB, who now tell APRA what to do) were to decide that it “would materially prejudice” your interests if they did NOT “direct” your super fund to do whatever the government wants, then that is all the “trigger” they need to enforce a “direction” on your super savings.

Don’t believe me?

Think I’m twisting what they said?

Read it again.

Very carefully.

With special note of this:

Enhancing direction powers in superannuation would allow APRA to detail specifically how an entity must address an identified concern. Direction powers would enable APRA to direct the entity as to what should be done to remedy the situation…

What if the “identified concern” is that failure to issue the direction would materially prejudice the interests or reasonable expectations of beneficiaries of the superannuation entity”?

Or what if the “identified concern” is simply that the super funds are not parking your money in the “investments” that the government wants them to, and that this is or could be “promoting instability in the Australian financial system” — another one of the “triggers” listed?

By this action, the government is effectively abrogating to itself what is essentially an unlimited power to “direct” your super fund to do “specifically” whatever the government says with your money, under the dangerously broad, and subjective, Big-Brother-Knows-Best pretext that “failure to issue the direction would materially prejudice” your interests.

See also:

Your Super Screwed By The Laboral Party

Stealing Our Super – I DARE You To Ignore This Now

But The Sheep Don’t Scatter: Banks Say “Sophisticated” Customers Have “Less Stable” Deposits

10 Jul


Here is a shining example of bankers’ true attitude towards depositors.

In the Australian Prudential Regulation Authority (APRA) document titled ‘Implementing Basel III Liquidity Reforms In Australia’ (pdf here), the very important topic of “cash outflows” or “deposit run-off” is discussed at length.

Unsophisticated common people like you and me call it a “bank run”.

In the section titled ‘Other matters raised in submissions’, we learn that bankers consider the deposits of “financially sophisticated” customers to be “less stable” (my emphasis added):

4.2.1 Cash outflows

Retail and qualifying small and medium enterprises (SME) deposit run-off

Within the LCR [Liquidity Coverage Ratio], retail deposit balances are classified as either ‘stable’ or ‘less stable’. Stable deposit balances are those that are considered to have the lowest propensity to be withdrawn during times of stress…

Comments received

Submissions [from banks] suggested including client relationship characteristics, such as the term of a relationship, the number of products and the use of a relationship manager, to assist categorisation of the deposit. They also proposed that dormant accounts be classified as stable due to their expected inactivity in a stress event and that self-managed super fund (SMSF) deposits be eligible to be classified as stable deposits as the trustee overseeing the SMSF deposit account is not necessarily a financially sophisticated individual.

APRA - Implementing Basel III Liquidity Reforms in Australia, page 17

APRA – Implementing Basel III Liquidity Reforms in Australia, page 17

In other words, “financially sophisticated” people won’t be stupid enough to keep their money in the bank if a crisis looms on the horizon. Their deposits are “less stable”.

People who are “not necessarily financially sophisticated” will leave their money in the bank. Their deposits are “stable”.

Somewhat amusingly (to this blogger), the bankers want to classify the deposits of Self-Managed Super Fund trustees in the same “stable” category as “dormant” accounts. They consider SMSF trustees to be idiots — “not necessarily financially sophisticated individuals” — who won’t try to withdraw their money.

Under the new FSB-directed global regime agreed to by the G20 in 2010 — now being implemented by Australia, Canada, Europe, the UK and USA — just as in Cyprus, all “unsophisticated” bank depositors will get screwed overnight.

Or more likely, over weekend.

It is also worth noting the bankers’ views on internet access to bank accounts in a “crisis” (ie, possible bank run scenario):

A number of submissions objected to the inclusion of internet access as a criterion in the less stable deposit scorecard. These submissions argued that means of access was not a strong indicator of withdrawal propensity and it should be removed from the scorecard; instead, greater emphasis should be placed on deposit size as this was more consistent with ADI experience.

APRA: Implementing Basel III Liquidity Reforms in Australia

APRA: Implementing Basel III Liquidity Reforms in Australia, page 17

In other words, the banks are confident that your having internet access does not necessarily mean that you are more likely to get your money out in a crisis. Given the number of times our banks have mysteriously suffered from internet banking “outages” in recent years, I’m not surprised. It’s called “economic shock testing” (see Electro-Physics: The Theory Of Economic Warfare).

Do not be deceived by the smokescreen of the “government guarantee” for depositors.

As we have seen in The Bank Deposits Guarantee Is No Guarantee At All, Australia’s so-called “guarantee” for deposits up to $250,000 only provides for up to $20 billion in Federal (borrowed) money per bank — less than 1/10th of the amount that each of the Big Four has in (electronic) obligations to bank account depositors (ie, “creditors”).

Or should I say, it “only promises to provide for up to $20 billion…”.

There is no money actually set aside to “guarantee” any depositors.

As confirmed in the APRA document, page 15:

Fully guaranteed retail deposits

The revised Basel III liquidity framework includes an additional retail deposit category for deposits that are fully insured under a pre-funded deposit insurance scheme. The deposit insurance scheme in Australia, the Financial Claims Scheme (FCS), is not pre-funded and, as such, this category is not relevant for domestic deposits.

APRA, 'Implementing Basel III Liquidity Reforms In Australia'

APRA, ‘Implementing Basel III Liquidity Reforms In Australia’

You have been warned.

Australian banks not only have ten times more in deposit obligations than the government has guaranteed promised to provide as insurance for each bank’s eligible deposits.

As of March 2013, the banks also have a new record $21.5 Trillion in Off-Balance Sheet “business” that is mostly derivatives; an increase of $2.5 Trillion in the March quarter alone, including a $2.2 Trillion increase in Interest Rate derivative contracts:

Screen shot 2013-07-10 at 6.24.32 PM

In the APRA document on implementing the Basel III bank liquidity reforms, we learn that the “cash outflow rate” for derivatives positions will be rated at 100 per cent of their measured value:

Additional derivatives risks

The revised framework includes a number of additional collateral outflow categories designed to ensure that risks associated with derivative positions are correctly captured in the LCR. The cash outflow rate for these categories is 100 per cent of the measured value.

APRA: Implementing Basel III Bank Liquidity Reforms, page 16

APRA: Implementing Basel III Liquidity Reforms In Australia, page 16

… while derivatives that are (supposedly) “secured” by so-called “High Quality Liquid Assets” — limited to cash; central bank reserves that “can be drawn down in times of stress”; and “marketable securities representing claims on or claims guaranteed by sovereigns, quasi-sovereigns, central banks and multilateral development banks, that have undoubted liquidity, even during stressed market conditions, and that are assigned a zero risk-weight under the Basel II standardised approach to credit risk” — these will have a cash outflow rate deemed to be zero per cent:

Derivatives secured by HQLA

The revised framework has clarified that where a derivative cash flow is secured with HQLA1, a cash outflow rate of zero per cent is to be applied.

APRA: Implementing Basel III Bank Liquidity Reforms, page 16

APRA: Implementing Basel III Liquidity Reforms In Australia, page 16

Remember that the cash outflow rate is determined by the perceived risk of it actually “flowing out”.

In the case of the form of “liquidity” known as “deposits”, APRA says (page 16) that “Stable deposit balances are those that are considered to have the lowest propensity to be withdrawn during times of stress and, hence, receive a low three or five per cent cash outflow rate. Less stable deposits are considered to have a higher propensity to be withdrawn and as a result, depending on deposit characteristics, receive a 10 per cent or higher cash outflow rate.”

So, in an actual crisis situation, just how much of the banks’ $21.5 Trillion in Off-Balance Sheet “business” will have a “cash outflow rate” of 100 per cent, and how much will have a cash outflow rate of zero per cent?

Who knows.

But one thing I do know.

I’d not want to have any of my money in a bank on the day — make that, the weekend — when we all find out.

Australia Plans Cyprus-Style “Bail-In” Of Banks In 2013-14 Budget

10 Jul
page 134, Portfolio Budget Statements, Australian Prudential Regulation Authority, Australian Government Budget 2013-14. CLICK TO ENLARGE

page 134, Portfolio Budget Statements, Australian Prudential Regulation Authority, Australian Government Budget 2013-14.

I found it.

As predicted. Apologies it took so long.

Unsurprisingly, the evidence was fairly well buried. Naturally, the government does not want you to know what they are doing.

Just like the Canadian government did in March, and just as Europe, the USA and the UK have now done, the Australian government too is now beginning to make good on its 2010 G20 commitment to implement the Goldman Sachs-chaired, internationalist Financial Stability Board’s new regime for bailing out the banks using depositors’ money.

On page 134 of the Australian Government Budget 2013-14 Portfolio Budget Statements, under the section for the Australian Prudential Regulation Authority, we find the first of APRA’s main strategic objectives for 2013-14.  It can be effectively summarised as “business as usual”.

Their second strategic objective for 2013-14, is to:

  • consolidate the prudential framework by enhancing prudential standards where appropriate, in line with the global reform initiatives endorsed by the G20 and overseen by the Financial Stability Board; [see image at top of this post]

Those “global reform initiatives endorsed by the G20” include the FSB plan to “bail-in” insolvent banks:

Click to enlarge

FSB: ‘Key Attributes of Effective Resolution Regimes for Financial Institutions’, Annex III (click to enlarge)

In the waffle that follows, we find further that:

APRA will focus on implementing the new global bank liquidity framework in Australia…

page 134, Portfolio Budget Statements, APRA, Australian Government Budget 2013-14

page 134, Portfolio Budget Statements, Australian Prudential Regulation Authority, Australian Government Budget 2013-14.

This is likely referring in particular to the Basel III International Framework For Liquidity Risk Measurement, Standards, and Monitoring.

When published in combination with the previously mentioned strategic objective to “consolidate the prudential framework… in line with the global reform initiatives endorsed by the G20 and overseen by the Financial Stability Board”, the implication is crystal clear.

“Global bank liquidity framework” is really just technocrat-ese for “global bankster plan to prop up insolvent banks using other people’s money, and so instantly impoverish everyone who still has any savings left”.

For further proof that what this all means is the Australian government planning to steal your money to “bail-in” so-called “systemically-important financial institutions” (SIFI’s) — under the orders of an unelected international body (of bankers and bureaucrats) you’ve never heard of; a body funded by the Bank for International Settlements (BIS), and chaired consecutively by Goldman Sachs alumni — then please study the detailed primary source evidence in this blog’s original breaking story published on April 1st –

G20 Governments All Agreed to Cyprus-Style Theft Of Bank Deposits … In 2010

That’s something else to thank our recently-deposed PM Julia Gillard for doing, without our knowledge or permission.


APRA Refuses FOI: Secret “Risk Registers” A Threat To Australia’s Financial System

27 Dec

h/t reader “Richo”

A perfect follow up to our two most recent posts on Australia’s Ponzi banking system.

The coverup by the government, Treasury, the RBA, and the so-called “regulators”, of the true state of Australia’s financial system continues apace.

From the Canberra Times:

They are 12 secret documents judged to be so potentially damaging that releasing their contents would endanger the stability of Australia’s whole economic system.

Australia’s biggest banks, insurers and superannuation funds are named, and some are apparently shamed, in ”risk registers” kept by the Federal Government’s banking regulator.

But in a gaping hole in Australia’s defences against the global financial crisis, Fairfax can reveal the crucially important registers were only compiled months after the worst of the crisis struck.

The regulator warns the risks outlined in the registers are so sensitive that releasing the information ”may affect the stability of Australia’s economy”.

The registers pinpoint the weakest links in Australia’s multibillion dollar financial services industry, outlining where individual institutions pose systemic risks and the possible remedies by the regulator.

Fairfax sought risk registers drafted by the Australian Prudential Regulation Authority, which is responsible for addressing system-wide risks in Australia’s financial system, under freedom of information laws.

The request sought registers kept during the height of the global financial crisis, which occurred when Lehman Bros collapsed in 2008.

But in denying the request, APRA revealed it had not compiled the crucial documents during the worst of the crisis.

A schedule released by APRA shows the first register was dated November 2008, suggesting APRA only drafted the documents after the worst shocks from the crisis in the US.

APRA’s rejection of the request was based on its general counsel Warren Scott’s assessment of the dangers to the economy if the registers were to be released.

”In my view the confidence in the economy may be undermined if the potential emerging risks and APRA’s discussions and thoughts were disclosed … this may have a systemic effect in the industry which may affect the stability of Australia’s economy,” he wrote.

The risk registers gather information from all areas of APRA, including confidential information from banks, insurers and super funds gained by its ”frontline” supervisors, specialist risk officers and statistics teams.

Officers from APRA meet every six weeks to discuss the ”key risks” facing each of four industry groups – banking, superannuation, general insurance and life insurance.

Key risks are assigned to an APRA ”risk owner” to recommend and carry out a response.

Mr Scott said release of the registers could influence investing decisions and harm individual institutions – a reference to behaviour such as a run on a bank.

”The subject matter of the registers is sensitive and remains sensitive at this point in time,” he wrote.

Mr Scott’s decision was supported by the Freedom of Information Commissioner, James Popple, in a draft ruling shortly before Christmas.

Fairfax’s application to the Office of the Australian Information Commissioner took more than a year.

Mr Popple partly based his decision on secret examples that showed banking, insurance and other financial services would suffer a ”substantial adverse effect” if the registers were disclosed.

Mr Popple found releasing the registers would be contrary to the public interest because of the damage it could cause by providing businesses with premature knowledge of APRA’s actions.

Like I said, in our ‘modern’ bankster-debt-driven world, the word “economy” is perfectly synonymous with the word “Ponzi”.

It’s all a con-fidence trick.

If you can’t “talk it up” … cover up.


Reader “Richo” says it well:

“Yes we wouldn’t want this house of cards coming down because the public, god forbid, actually figured out how vulnerable their investments are”.

Our Banking System Operates With Zero Reserves

24 Jun

At one stage, the Reserve Bank was forced to order another $4.6 billion in $100 notes. Picture: Luzio Grossi Source: The Australian

According to the US Federal Reserve’s Divisions of Research & Statistics and Monetary Affairs, Australia’s banking system has no monetary reserves.


In a Finance and Economic Discussion Series paper titled “Reserve Requirement Systems in OECD Countries”, researcher Yueh-Yun C. OBrien explains (emphasis added):

Abstract: This paper compares the reserve requirements of OECD countries. Reserve requirements are the minimum percentages or amounts of liabilities that depository institutions are required to keep in cash or as deposits with their central banks. To facilitate monetary policy implementation, twenty-four of the thirty OECD countries impose reserve requirements to influence their banking systems’ demand for liquidity.

Note that well. Only “twenty-four of the thirty OECD countries impose reserve requirements”.

Introduction: Central banks by definition are the sole issuers of “central bank money,” which consists of banknotes and deposit balances held by depository institutions at central banks. This feature provides them the power to implement monetary policy by influencing liquidity in their banking systems in order to achieve their policy (interest rate) targets and thus promote their long-term objectives.

That’s very important to note. Our central bank has ultimate power over the issuance of “central bank money” – the only “money” permitted – in our nation. Discussion of which is to open Pandora’s Box, so we’ll return to that topic another day.

Reserve requirements are the minimum percentages or amounts of liabilities that depository institutions are required to keep on hand in cash (vault cash) or as deposits with their central banks (required reserve balances).

Ok so far?

Twenty-four of the thirty countries that belong to the Organization for Economic Co- operation and Development (OECD) employ reserve requirement systems…

The remaining six OECD countries implement monetary policy without reserve requirements.4

Footnote 4 goes on to explain who those six countries are …

4 The six countries consist of Australia, Canada, Denmark, New Zealand, Norway, and Sweden.

… and then explains how our banking system operates, vis-a-vis the absence of any monetary reserves:

The central banks of these six countries make interbank payment settlement accounts available to depository institutions subject to certain rules. They provide standing facilities with interest charges and the lending interest rate sets an upper bound on the market interest rate. These central banks also pay interest on end-of-day account surpluses, and that interest rate forms a lower bound on the market rate Thus, lending and deposit rates form a corridor for the target overnight interest rate.

In addition to imposing rules for settlement accounts and providing standing facilities, most of these central banks influence the aggregated settlement balances in the banking systems mainly through open market operations.

Here’s a flow chart helpfully provided by the researcher. It shows (on the left) the monetary Reserve Requirement system used in 24 of 30 OECD countries.

Australia’s “no monetary reserves” banking system is circled on the right (click to enlarge):

Source: US Federal Reserve, FEDS, Reserve Requirement Systems in OECD Countries

Now, it’s very important to make a clear distinction here.  We need to remember that there are actually two basic concepts of what a banking “reserve” actually is.

One is “monetary reserves” … that’s what the US Fed’s paper we are discussing is all about.

The other is “capital reserves”.

Now, Australia’s banking system does have capital reserves.  It is a condition of Australia’s decision (January 2008) to adopt the Basel II Capital Adequacy framework. It is regulated in Australia by the Australian Prudential Regulation Authority (APRA), under Prudential Standard APS 110 Capital Adequacy.

So if our banks have capital reserves, does that mean everything is ok?

Not if you are a customer with a cash deposit in the bank.

The problem here is this.

Capital reserves relate to the question of the banks’ capacity to absorb investment losses.  It is a kind of reserve that is meant to protect shareholders in the bank, against the bank making losses on its investments. That is why the capital reserve requirement is essentially composed of a % of shareholder funds, that are held against the value of the banks’ “risk-weighted assets”.

Monetary reserves, on the other hand, relate more directly to the question of the banking system’s capacity to absorb a run on customer deposits.  That is, a good old fashioned bank run, where people lose confidence in the safety of the bank/s, and try to withdraw their cash … en masse.

In the twenty-four OECD countries that do have monetary Reserve Requirements, the banks are required to hold a certain amount of their customers’ cash deposits as reserves against customers’ withdrawals.

In the six countries – including Australia – that have zero monetary Reserve Requirements, essentially the central bank is the ultimate backstop.


If too many of us decide to go to the bank at the same time, and ask for our money on deposit – they don’t have it.

This helps to explain why, during the GFC’s Peak Fear period in late 2008, the Reserve Bank of Australia had to supply billions in extra cash to our banks.

The following quotation is slightly lengthy, but truly a must-read if you wish to gain a rare insight into what really went on behind the scenes during the GFC.

From Shitstorm, edited extract via The Australian (emphasis added):

Ian Harper, one of Australia’s leading financial economists, spent much of the weekend of October 11-12, 2008, reassuring journalists that Australian banks were safe.

Harper was an expert: he had been a member of the Stan Wallis financial inquiry in the mid-1990s, which had designed the system of banking regulation.

He explained that the Australian Prudential Regulation Authority already required banks to keep enough capital to cover any likely level of bad debts*. More importantly, the banking legislation provided that, if a bank failed, depositors would rank ahead of all other creditors. There was absolutely no reason for concern.

[*Note carefully what we observed above – the Basel II rules for “capital reserves” are to cover bad debts – investments gone bad. Not a bank run by customers wanting their cash deposits.]

But there was something about the calls Harper was getting from reporters over that weekend that worried him.

“There was a whiff of panic,” he recalls. It had been building all week. He had no doubt that the government and the Reserve Bank would be able to manage a run on cash, but it might take days to arrest. Panic has been an unpredictable force in the history of banking. And the instant world of electronic banking had never been tested with a full-scale crisis of confidence.

He talked about media calls with his wife. “Come Monday morning and they tell us one of the banks is in strife and internet banking is down, I can’t look you in the eye and say you can pay this week’s grocery bills.”

The man who had just been reassuring everyone there was nothing to worry about went down the street to the ATM and made a sizeable withdrawal to make sure his wife would have enough cash.

All around the country, banks were facing unusual demands for cash. Small businesses in Queensland and Western Australia were switching their deposits from regional banks to accounts with the big four banks.

An elderly woman turned up in the branch of one bank in Queensland with a suitcase and asked to withdraw her term deposits of $100,000 or more. Once filled, she took the suitcase down to the other end of the counter and asked that it be kept in the bank’s safe.

A story did the rounds of the regulators about a customer who wanted to withdraw his six-figure savings. The branch manager said he did not have that quantity of cash on hand, but offered a bank cheque, which the customer accepted, apparently unaware that the cheque was no safer than the bank writing it.

It was a silent run, unnoticed by the media. Across the country, at least tens and possibly hundreds of thousands of depositors were withdrawing their funds. Left unchecked, there would soon be queues in the street with police managing crowd control, as occurred in London at the Golders Green branch of Northern Rock a year earlier.

“With a bank run, or any rumour of a bank run, you can’t play games with that,” says Treasury Secretary Ken Henry.

“You can’t pussyfoot around that stuff. It’s a long time since Australia has had a serious run on a financial institution, but it’s all about confidence, and you cannot allow an impression to develop generally in the public that there is any risk.”

[In other words, when it comes to our savings, the notion of bank “safety” is a con-fidence trick. It is as simple, and as shocking, as that.]

The private banks keep reserves of cash distributed in 60 storerooms across the country with an average of about $35 million in each. They get topped up by the Reserve Bank before Christmas, when demand for cash typically rises by about 6 per cent, and at Easter, when there is a smaller increase.

But in early October, the Reserve Bank started getting calls from the cash centres for more, especially in denominations of $50 and $100.

The Reserve Bank has its own cash stash. It is coy about exactly how much it holds, but it is understood to be in the region of $4 billion to $5bn.

As the Armaguard vans worked overtime ferrying bundles of $10,000 out to the cash centres, the Reserve Bank’s strategic reserve holdings of $50 and $100 notes started to run low and the call went out to the printer for more. The Reserve Bank ordered another $4.6bn in $100s and another $6bn in $50s…

Households pulled about $5.5bn out of their banks in the 10 weeks between US financial house Lehman Brothers going broke – the onset of the global financial crisis – and the beginning of December. That is roughly 80 tonnes of cash salted away in people’s homes. Mattress Bank is doing well, was the view at the Reserve. A year later, only $1.5bn had been put back.

Think about those numbers for a moment.

Very carefully.

Households pulled “about $5.5bn out of their banks” in 10 weeks.

According to the ABS, at December 2008 there were 10.916 million employed persons in Australia.

So, our quiet run on the banks, a silent mass withdrawal demand amounting to a mere $504 cash per employed Aussie, was more than our banks actually had.

Forcing the Reserve Bank to print up an extra $10.6bn – that’s $971 per employed person – to keep our banks liquid and able to feed the ATM’s.

Really think about that for a moment.

Our banks did not have enough cash money to give every employed Australian a mere $504 in cash, on demand.

And yet, lemming-like, we accept their making multi-billion profits for executives and shareholders, every year.

If that’s not enough to crease your brow with concern, then consider this.

The fact that our banking system operates with zero monetary reserves may also help to explain why the RBA secretly borrowed US$53bn (around AU$88bn at the time) from the US Federal Reserve during the GFC panic (emphasis added):

National Australia Bank Ltd, Westpac Banking Corp Ltd and the Reserve Bank of Australia (RBA) were all recipients of emergency funds from the US Federal Reserve during the global financial crisis, according to media reports.

Data released by the Fed shows the RBA borrowed $US53 billion in 10 separate transactions during the financial crisis, which compares to the European Central Bank’s 271 transactions, according to a report in The Australian Financial Review.

NAB borrowed $US4.5 billion, and a New York-based entity owned by Westpac borrowed $US1 billion, according to The Age.

The RBA is all too aware of this critical danger to our financial system.

Consider this, from The Australian in July 2008, a couple of months before the GFC peaked (emphasis added):

The Reserve Bank of Australia has a dark worry about our banks: they get 90 per cent of their cash from each other. If one bank gets into trouble, the Australian financial system could be snap-frozen overnight.

This concern was laid out by the RBA’s assistant governor for the financial system, Philip Lowe, and the chief manager of domestic markets, Jonathan Kearns, to a private RBA gathering at Kirribilli House in Sydney last week.

Banking systems of other countries do not have the same level of mutual dependency, they claim, and it was not the case in Australia until about eight years ago…

Australia’s banks are, as the RBA governor Glenn Stevens tirelessly says, in great shape. Stockbrokers agree, even as they field the sell orders from overseas clients.

“The banks are trading at 12 or 13-year lows in terms of their price-to-earnings ratios,” UBS equities strategist David Cassidy says.

“Given what is happening in the US, they can always trade more cheaply. But since our economy still looks on track for a soft landing, it looks like they’ve been way oversold.”

But it does not look that way from abroad. At a recent conference held by one of the world’s largest banks, the Australian banking system was identified as one of the best investment opportunities, for going short.

The argument is that Australia’s banks hold more of their assets in mortgages than banks elsewhere and Australia’s housing is more overvalued relative to average earnings than the US housing market at its peak, or the British, Irish or Spanish markets.

This will ring alarm bells for regular readers.  All this was said – in a private RBA gathering – before the GFC really hit.  And yet, nothing has changed regarding our banking systemic risk.

We have seen previously that Australia’s banks (allegedly) hold some $2.66 Trillion in On-Balance Sheet “Assets” between them.

But, 66% of those “assets” are actually loans.  And the highest proportion of those loans are for mortgages.  In a property market where house prices “are the most overvalued in the world” – and where those prices have just had their biggest quarterly slump in 12 years. And where arrears on mortgages have recently exceeded their GFC highs.

A fall in the property market, or a rise in unemployment putting even more mortgage-holders into arrears, are real risks that could wipe out the value of the banks’ “assets” – our loans, and the “collateral” backing those loans (our houses).

In fact, that is just what happened – very briefly – during the GFC.  Mortgage arrears began to rise as the RBA kept increasing interest rates into the teeth of the storm.  Our property market began to fall.  Unemployment began to rise.  The banks’ usual lifeblood – borrowing money from overseas to lend to Australians at a profit – had already begun to freeze up due to the dark woes abroad.  And so, our banks had to borrow tens of billions from the RBA using what are called “repos” – short term cash loans from the RBA, secured against banks’ collateral.

Estimable blogger Houses and Holes documented this in a September 2010 post aptly titled “Invisopower!”. The following chart is his work. It graphs the value of repos borrowed by our banks from 2004 through 2010. You can clearly see that our banks were regularly borrowing over $15 Billion per month throughout 2008, with a peak of almost $50 Billion per month during the height of the GFC in late 2008.  Just to stay solvent. This massive liquidity support from the RBA only ended when the Government put taxpayers on the hook by introducing the government (taxpayer) guarantee to prop up our banking system:

Now, some may try to argue that Australia’s banks having “capital reserves” under the Basel II banking concord means that our banks have plenty of cash, and so retail customers with bank deposits – you and me – have nothing to worry about.

As we have seen, the real world events of late 2008 decry any such attempts at reassurance, as pure and utter nonsense.

A Big Lie.

More tellingly, there is evidence to show that the bankers themselves do not consider their APRA-regulated “capital reserves” as being available to provide retail customers with their own cash back, in the event of a bank run.

Following is a quote taken from a letter to the Australian Treasury, from the Australian Bankers Association in December 2006.  The letter relates to new “draft regulation 7.602AAA designed to reach a balance between consumer protection and the cost to businesses in relation to mandatory compensation arrangements under Chapter 7 of the Corporations Act 2001” (emphasis added):

Regulation for Compensation for loss in the Financial Services Sector

For related entities that are not APRA regulated entities it should be noted that APRA supervises the capital adequacy of a locally incorporated ADI on both a stand-alone and consolidated group basis (see AGN 110.1 – Consolidated Group, paragraph 1). It follows that account has been taken of the ADIs related entities for the purposes of the capitalisation of the ADI. Whilst these capital reserves are not available for use in a related entity’s compensating a retail customer for loss, their mere existence mitigates the risk that the related entity within the conglomerate would lack the capacity to meet that compensation claim. It is understood that these rules do not apply to all other APRA regulated bodies suggesting that a distinction should be made in the case of ADIs by removing the requirement for a guarantee in their case.

The context here is the issue of banks and their “related entities”.  A draft regulation proposed a requirement for banks to guarantee their related entities.  In lobbying to change this (!?!), the Bankers Association stated that “the requirement for the parent to provide its guarantee of the related entity’s obligations should be removed” or “clarified to confine the limit of the propose guarantee.”

In other words, we do not want to guarantee our “related entities” against losses.

And the basis for the Bankers Association argument was truly astonishing.  And very revealing.

In essence, their argument was that, even though capital reserves “are not available for use” in compensating retail customers for loss, “their mere existence mitigates the risk that the related entity… would lack the capacity to meet a claim”.

This is no different to saying, “We have money that can not be used to compensate retail customers, but you should just pretend that it can.”

Banking is a pea-and-thimble trick.  “Our” cash, that we are led to believe is really there under the banksters’ thimble, just isn’t.

The claim that Australia’s banks are “the safest in the world” is quite simply, a monstrous lie.

Like all government-approved banking systems, Australia’s banking system too is nothing more than a Ponzi scheme.

A huge con-fidence trick.

Backstopped by the so-called “independent” Reserve Bank of Australia.

And, by the taxpayers of Australia … thanks to the Labor government’s Guarantee Scheme for Large Deposits and Wholesale Funding.

Just as in the USA, UK, Ireland, Spain, and elsewhere in Europe, when our housing market collapses – taking our banks solvency with it – you already know what is going to happen.

The banks will be bailed out. By our government, who will borrow the “necessary” bailout billions against ours and our children’s children’s future taxes.

In the good times, banks profits are privatised – massive salaries, bonuses, perks and parties.

And when it all goes bad – as every Ponzi scheme must – their losses are socialised.

In my firm view, the concept of “banking” and “money” as practiced by government decree throughout the world, is arguably the greatest evil afflicting the entire human race, and impeding human progress.

Banking is a vile parasite on the human host. It must be abolished, and replaced with something better. A system whereby “money” is rendered a true servant of humanity … never again to be our master.

I know how this can be achieved. But that vision must wait for another day, and another post.

For now, just remember the Moral of the Story today.

Ignore all the “con-fidence” building reassurances spruiked to the public by our politicians, regulators, and so-called banking “experts”.

Instead, use your commonsense, and follow the advice that Australian banking system design “expert” Ian Harper gave to his own wife in the GFC:

“Come Monday morning and they tell us one of the banks is in strife and internet banking is down, I can’t look you in the eye and say you can pay this week’s grocery bills.”

The man who had just been reassuring everyone there was nothing to worry about went down the street to the ATM and made a sizeable withdrawal to make sure his wife would have enough cash.

What The Senate Ignored: Banks Make The Most Profits On Fees To Get At Our Own Money

7 May

The Senate Economics Reference Committee released its report on Competition within the Australian banking sector yesterday.

The media has immediately focussed on one of the recommendations – that the Gillard government should “reconsider its decision to ban exit fees” on mortgages, “with a view to allowing enough time for the effectiveness of the existing ban on unfair and unconscionable exit fees …to be assessed”.

Controversy.  Wow-wee.

I’m much more interested in why both the Senate Committee, and the media, have ignored the far more obvious (and costly) example of banks gouging customers with “unfair and unconscionable” fees.

Their fees to access our own money.

Evidence from the RBA showed that the banks make far more profits from charging you to get at your own money, than they do from fees charged on credit cards.  Personal loans.  Even more than the profits from their fees on housing loans:

Economics Reference Committee | Competition in the Australian banking sector - Bank Fees 4.65

It gets worse.

The Committee also received evidence suggesting that bank fees hurt the poorest in our community the most.  And, that these poorest customers are effectively subsidising wealthier customers:

Economics Reference Committee | Competition in the Australian banking sector - Bank Fees 4.69

The Senate Committee made 39 recommendations concerning the banking sector. Did any of their recommendations try to tackle the fact that banks make the most profits on their fees charged simply to get at our own money? Or, the fact that bank fees hurt the poorest in our community the most?

Only if you think the following recommendation would actually achieve anything:

Economics Reference Committee | Competition in the Australian banking sector - Recomm. 31

Or, if you think that spending taxpayers money to set up special ATM’s in remote indigenous communities with low fees – rather than forcing banks to pull their greedy heads in – is a practical and just recommendation:

Economics Reference Committee | Competition in the Australian banking sector - Recomm. 32

This Senate Committee report leaves what is clearly the most “unfair and unconscionable” example of bank gouging effectively untouched.

It is the bank(ster)s most profitable rort.  Billions and billions and billions of little “transaction” and “service” fees.

The price of permission.

To get some of our own money.

Senators … for shame!


Twitter user Yagu4Pm comments –

@BarnabyisRight banks never put ATMs in to help customers. It was to reduce labor costs & make huge profits by charging usage fees.

Aussie Banks In Market Crosshairs

11 May

The markets have begun lining up Australia’s banking system in the crosshairs.  How do we know?  Late last week, the spreads on credit default swaps (CDS) for Australia’s banks widened the most of all banks in the world.

By the close of trading on Friday, all 4 members of our “safe as houses” 4-pillar banking system, along with our own ‘Goldman Sachs’-style investment bank Macquarie, saw deteriorations in their CDS spreads by amounts that were the worst in the world.

What does that mean?  Simply, the cost of taking out “insurance” against the bank defaulting on its debts increased dramatically.

From CMA Market Data‘s “Sovereign Risk Monitor”:

Friday, 7 May 2010 — 23:30

Largest Widening Spreads (Greatest Credit Deterioration)
Entity Name 5 Yr Mid Change From Close
bps bps %
Westpac Banking Corporation (SUB) 165.09 +50.23 +43.74
Australia & New Zealand Banking Group Limited (SUB) 167.06 +50.23 +42.99
Commonwealth Bank of Australia (SUB) 165.10 +48.44 +41.52
National Australia Bank (SUB) 167.05 +48.14 +40.49
Macquarie Bank Limited 174.28 +49.45 +39.62

It seems the markets are a wake up to the ever-growing threat the Eurozone crisis poses to Australia’s financial system. Unfortunately, very few Australians realise (or will honestly admit) just how vulnerable our banking system is:

The chief executive of National Australia Bank, Cameron Clyne, referred last week to Australian banks’ dependence on wholesale funding markets as their Achilles heel…

On average, Australian banks are sourcing just under a third of their funding from overseas wholesale markets and still too much of their existing borrowings are short term.

Australian banks are among the more vulnerable plays in the world to another Lehman-style event because of their dependence on overseas wholesale markets, which have proven already they can freeze up for extended periods.

But overreliance on international wholesale capital funding is far from being the only risk to our banking system.  Australia’s banks also have a chronic overexposure to the domestic housing (mortgage) market. A fall in property values here – just as in the rest of the Western world – would be catastrophic for our banking system.

From Contrarian Investor’s Journal:

We must confess, we are getting more and more nervous about the potential for a Black Swan hitting the Australian economy. Particularly, we are looking at a vulnerability in the banking system. Here are some facts about Australian banks:

  1. As at December 2009, around 75% of the Australian mortgage market is held by the Big 4 banks. 50% are held by Commonwealth and Westpac while 25% are held by ANZ and NAB. (source: CoreData’s Australian Mortgage Report Q1 2010)
  2. 60% of Commonwealth’s lending books are residential mortgages.
  3. 50% of Westpac’s lending books are residential mortgages.

Now, here’s an interesting news report from almost two years ago:

“The Reserve Bank of Australia has a dark worry about our banks: they get 90 per cent of their cash from each other. If one bank gets into trouble, the Australian financial system could be snap-frozen overnight.”

A final thought.

Our banks have over $13 Trillion in off-balance sheet business.

From Money Morning:

We dropped the line yesterday about the banks having $13 trillion of off-balance sheet business. We’ve mentioned this number several times over the last year, but if you’re a new reader to Money Morning, here’s a link to the Reserve Bank of Australia spreadsheet that contains the awful truth.

To be precise, it currently runs to $13,058,814,195,842.70.

Just to put that in perspective, the banks have a total of $2.59 trillion of on-balance sheet assets. We’re sure the banks and the RBA will claim that all the off-balance sheet business is completely offset, so that losses are contained.

Personally, we don’t think you should believe a word of it. The number one risk with the off-balance sheet business is counterparty risk. As long as each counterparty can keep the ponzi scheme going then sure, everything will be tickety-boo.

But as we all know, that can’t happen. We’ve seen counterparties collapse before (Lehman, Bear Sterns, etc…) and they’ll collapse or need bailing out again.

There’s only so long that banks can keep the ponzi going. They’ve scraped through by the skin of their teeth thanks to an unprecedented bail-out by the taxpayer.

The issue of counterparty risk is precisely why the Greek debt crisis is a threat to Australia – despite what Ken Henry and Glenn Stevens would have us believe.

It is clear that our Aussie banks are not so safe after all.

Barnaby Fights Gouging Banks

18 Mar

From the Sydney Morning Herald:

Kevin Rudd is at odds with experts over his claim that new laws give government regulators the power to stop big banks from ”gouging” mortgage payers through excessively high interest rates, consumer advocates say.

Asked about a recent Reserve Bank report suggesting the banks have been profiteering with recent interest rate rises, Mr Rudd said: ”The Reserve Bank is right. The banks have been gouging. That’s the bottom line here.”

But the laws, still before the Senate, are about protecting borrowers from unfair loan contracts, not from unjustified increases in interest rates, according to a Choice spokesman, Christopher Zinn.

The Opposition Finance spokesman, Senator Barnaby Joyce, also said the new consumer laws had no relevance to rates and suggested that if Mr Rudd was truly concerned about borrowers being charged too much he would give the competition watchdog the power to solve the problem.

”The Prime Minister appears to be saying the banking market is over-concentrated and the big banks are exploiting that market power to put their rates up. If that’s what he thinks, then he should give the Australian Competition and Consumer Commission the power to step in and fix it … this is a job for the ACCC: it’s got nothing to do with the consumer credit laws,” Senator Joyce said.

Once again, we see Barnaby Joyce front and centre, fighting to defend the little guy.

Another Financial Crisis Coming

4 Mar

From ABC News (America):

Even as many Americans still struggle to recover from the country’s worst economic downturn since the Great Depression, another crisis – one that will be even worse than the current one – is looming, according to a new report from a group of leading economists, financiers, and former federal regulators.

The report warns that the country is now immersed in a “doomsday cycle” wherein banks use borrowed money to take massive risks in an attempt to pay big dividends to shareholders and big bonuses to management – and when the risks go wrong, the banks receive taxpayer bailouts from the government.

“Risk-taking at banks,” the report cautions, “will soon be larger than ever.”

According to data from the Reserve Bank of Australia, the Australian banking system has $13 Trillion in Off Balance Sheet business, compared with only $2.59 Trillion in On Balance Sheet business.

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