Tag Archives: APRA

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.

Don’t Mention the Debt

25 Feb

Even 12 months ago – before the Rudd Government began its massive second round of “stimulus” spending on school halls and insulation – noone wanted to talk about our debt problem:

Our overseas borrowing is the great unspoken. It is the one subject assiduously avoided in public by Kevin Rudd, Malcolm Turnbull, Ken Henry, APRA, the Reserve Bank and the big banks. They probably even gloss over the matter when chatting privately among themselves.

It is Australia’s Ponzi scheme. Bernie Madoff goes to Bondi. We keep getting those foreign dollars in while sending plenty out, but never quite as much, hoping no one will blow the whistle lest the whole game end.

Read the full article in the Feb 19, 2009 Sydney Morning Herald.

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