Tag Archives: big 4

By Hook Or By Crook – Moody’s Says Our Banks Are Too Big To Fail

20 May

Australia’s Big Four banks have all just received a credit rating downgrade by ratings agency Moody’s.

From the Sydney Morning Herald:

Moody’s Investors Service has downgraded the long-term debt ratings of Australia’s big four banks to Aa2 from Aa1, citing their relatively high reliance on overseas funds rather than local deposits.

For a closer analysis of what this really means for Australia’s economic future, we turn to a man far more knowledgeable on this topic than I.

From the must-read MacroBusiness.com.au (emphasis added):

Moody’s analysis of the Australian banks’ vulnerability is pointed. In fact, it’s right on the money as it were, capturing both the past vulnerability and potential future problems, as well as solutions.

To put it bluntly, Moody’s is onto us.

For well over a decade, Australia’s banks have funded huge swathes of the current account deficit. As well, over the past two commodities booms, much of the export income has been leveraged up and blown on housing and fancy living. Moody’s is effectively calling the risks of this model to account. And they’re still not finished:

At Aa2, the major banks’ ratings continue to incorporate 2 notches of uplift from systemic support. Moody’s views bank supervisors and the government in Australia to be supportive by global comparison and the banks to have high systemic importance, as implicitly recognized by the government’s “Four Pillars” policy (which restricts M&A among the banks).

Moody’s also notes that creditor-unfriendly initiatives — such as bail-in legislation — are not on the policy agenda in Australia.

Heavens to Betsy.  It’s finally out in the open. The big four are too big to fail and Moody’s rates the Australian government’s implicit guarantee of the banks’ wholesale debt (as well as the explicit deposit guarantee) as worth two ratings notches. Moreover, by phrasing it this way, Moody’s has essentially put the Australian government on notice that if it dares back away from that guarantee then it can count on the result. The further implication is that the Budget had better remain shipshape to provide the guarantee.

Moody’s is rightly concerned about our banks’ heavy reliance on borrowing from off-shore, in order to lend into our housing bubble.

But as we have recently seen (“Tick Tick Tick – Aussie Banks’ $15 Trillion Time Bomb“), our banking system is vulnerable to a much greater danger than reliance on wholesale funding.

Derivatives.

The exotic financial instruments at the very heart of the GFC, that the world’s most famous investor, Warren Buffet, famously called “a mega-catastrophic risk”, “financial weapons of mass destruction”, and a “time bomb”.

To give you an idea of the vast disconnect between our banks’ $2.66 Trillion in On-Balance Sheet “Assets” (66% of which are loans), and their $15 Trillion in Off-Balance Sheet exposure to OTC derivatives, take a look at the following chart.

It shows our banks’ combined total Assets – blue line – versus a red line of total Off-Balance Sheet “business” (click to enlarge):

$2.66 Trillion in "Assets" versus $15 Trillion in Off-Balance Sheet "Business"

Never mind the risk of wholesale funding liabilities.  What happens when our banks’ $15 Trillion worth of Off-Balance Sheet “financial weapons of mass destruction” blow up – just as they did in the USA?  That’s more than 10x the entire value of this country’s annual GDP!

Now you know the answer.

The takeout from the Moody’s downgrade is very simple.

Moody’s has effectively just warned the Australian government that it MUST continue to guarantee the liabilities of our entire banking system. Or else the Big Four banks’ credit ratings will be downgraded even further.

Meaning much higher interest rates.  And, the real risk of off-shore funding drying up completely.

Australian taxpayers are now firmly on the hook … to bail out the crooks.

Because – just like in America – they are now considered Too Big To Fail.

For a sneak preview of our future, here’s how Australia will look when the SHTF.

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Tick Tick Tick – Aussie Banks’ $15 Trillion Time Bomb

6 May

*This post follows up on my August 2010 post, “Aussie Banks’ $14.2Trillion Time Bomb”. Please read the article for detailed background to this update.

How safe are Australia’s banks?

Previously we saw that our “safe as houses” banks have a massive disconnect between their On-Balance Sheet Assets, and their Off-Balance Sheet “Business” (specifically, OTC derivatives).  Last time we checked, they held $2.62 Trillion in Assets, and a new record $14.2 Trillion in Off-Balance Sheet “Business”.

The disconnect has widened even further.

First, let’s take a look at a chart of their “Assets”.

In the chart below, the yellow line represents the total value of Personal Loans. The green line represents Commercial Loans.  The red line represents Residential Loans.  And the blue line represents the grand Total of Bank Assets (click to enlarge):

$1.77 Trillion of Total "Assets" = Loans

The total value of Bank Assets has barely moved – $2.66 Trillion. It has still to regain the peak of $2.67 Trillion in Dec 2008.

It’s worth noting that $1.77 Trillion (66%) of the banks’ $2.66 Trillion in “Assets”, is the value of Loans – personal, commercial, and residential.  That’s right.  Your debt to the bank is considered their “Asset”.  Slavery is still a thriving business in the 21st Century.  It’s how bank(ster)ing works.

What about their Off-Balance Sheet “Business”?

It has blown out by another $1.3 Trillion at its recent peak ($15.5 Trillion), and as at December 2010 sits at just under $15 Trillion.

To give an idea of the vast disconnect between our banks’ “Assets” (66% of which are loans), and their exposure to OTC derivatives, the following chart shows their total Assets – blue line from the above chart – versus a red line of total Off-Balance Sheet “business” (click to enlarge):

$2.66 Trillion in "Assets" versus $15 Trillion in Off-Balance Sheet "Business"

What are derivatives?

Derivatives are the exotic financial instruments at the very heart of the GFC.

Back in 2003, the world’s most famous investor, Warren Buffet, famously called derivatives “a mega-catastrophic risk”, “financial weapons of mass destruction”, and a “time bomb”.

Take note of the sharp dip in the near-parabolic rise in the red line on the chart. This coincides precisely with the late 2008 / early 2009 impact of the GFC on our banking system.

Our banks reduced a little of their exposure to OTC derivatives at that time (down $1.4 Trillion from Sep ’08 to Jun ’09) but quickly resumed their old ways.

At least, until September last year.  Again we see a sharp dip forming through the December quarter of 2010.

A final thought to consider.

If our banks were really so safe, why did two of our Big 4 (Westpac and NAB) both quietly borrow billions of dollars directly from the US Federal Reserve during the GFC?  And never advised shareholders, the prudential regulatory authority (APRA), the RBA, or the public?

An even bigger question – why did the RBA borrow $53 billion from the Federal Reserve without informing anyone?

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.

All is clearly not as safe as we are told in our “safe-as-houses” banking system.

UPDATE:

Still have confidence in our banks – especially the two that had to borrow from the US Federal Reserve?

Westpac, Australia’s second-largest bank, suffered a catastrophic IT meltdown yesterday when its entire banking system collapsed after an air-conditioning failure.

The bank’s ATM and eftpos facilities were useless for about six hours and its internet banking website was offline for 10 hours.

Customers reacted with fury over the system collapse, which came days after Westpac reported a record $3.96 billion net profit, up 38 per cent for the first half of the year…

Many Westpac customers flocked to Twitter to vent their anger, but the bank’s outage pales in comparison to the National Australia Bank‘s recent IT problems.

In late November, software issues at NAB lasted for more than a week and brought other financial institutions to their knees. The incident forced chief executive Cameron Clyne to issue an unprecedented public apology in major newspapers.

Three weeks ago, workers could not access their pay when a 24-hour IT failure affected employers who used NAB for their payroll processing.

The Commonwealth Bank has also had its share of IT glitches, from its internet banking going offline to ATMs discharging incorrect amounts of cash.

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