Tag Archives: big four

Westpac, NAB Survive On US Federal Reserve Life Support

24 Dec

BREAKING NEWS

UPDATE: Aggregate balance of US Fed loans to Westpac = USD87.52 billion, NAB = USD378 billion (csv file 1e_Fed Dated Estimated Income Ranking Text Only)

From Bloomberg:

Fed’s once-secret data released to the public

Bloomberg News today released spreadsheets showing daily borrowing totals for 407 banks and companies that tapped Federal Reserve emergency programs during the 2007 to 2009 financial crisis. It’s the first time such data have been publicly available in this form.

To download a zip file of the spreadsheets, go to http://bit.ly/Bloomberg-Fed-Data. For an explanation of the files, see the one labeled “1a Fed Data Roadmap.”

The day-by-day, bank-by-bank numbers, culled from about 50,000 transactions the U.S. central bank made through seven facilities, formed the basis of a series of Bloomberg News articles this year about the largest financial bailout in history.

“Scholars can now examine the data and continue the analysis of the Fed’s crisis management,” said Allan H. Meltzer, a professor of political economy at Carnegie Mellon University in Pittsburgh and the author of three books on the history of the U.S. central bank.

The data reflect lending from the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility, the Commercial Paper Funding Facility, the Primary Dealer Credit Facility, the Term Auction Facility, the Term Securities Lending Facility, the discount window and single-tranche open market operations, or ST OMO.

Bloomberg News obtained information about the discount window and ST OMO through the Freedom of Information Act. While the Fed initially rejected a request for discount-window information, Bloomberg LP, the parent company of Bloomberg News, filed a federal lawsuit to force disclosure and won in the lower courts. In March, the U.S. Supreme Court decided not to intervene in the case, and the Fed released more than 29,000 pages of transaction data.

As we saw in “Our Banking System Operates With Zero Reserves”, a previous data release showed that Australian banks … including the Reserve Bank of Australia … secretly borrowed billions from the US Federal Reserve to survive during the GFC. In the case of the RBA, the value of its loans totalled around AUD88 billion given the exchange rate at that time:

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.

This new data release allows us to see more detail about the secret loans to Westpac and NAB.

Two of the four pillars of our allegedly “safe as houses” banking system.

And now we can see that it wasn’t just a “New York-based entity owned by Westpac” that borrowed from the Fed. It was Westpac itself.

Between 20 Dec 2007 and 16 Jan 2008, Westpac secretly borrowed USD90 million per day from the US Federal Reserve.  Between 9 Oct 2008 and 1 Jan 2009, Westpac borrowed USD1 billion per day. For a total of 113 days, Westpac was surviving on daily loans from the US Fed:

Click to enlarge

For a total 252 days straight, between 6 November 2008 and 15 July 2009, National Australia Bank survived by secretly borrowing USD1.5 billion per day from the US Fed:

Click to enlarge

[Don’t forget that during the GFC, the AUD plummeted from 98c to the USD, to 60c … where the RBA actively bought AUD’s in order to keep it propped at 60c. So these USD quoted loans were in fact dramatically higher when considered in light of the relative value of the Aussie dollar at the time]

Half of our “Four Pillar” bankstering system survived on USD2.5 billion per day of US Fed-supplied life support during the peak GFC “fear” period … and in NAB’s case, for many months afterwards.

And all on the hush hush.

We’d never know about it, except for Bloomberg News taking the US Fed to court when they refused an FOI request for the information.

How’s your con-fidence in our AAA-rated Ponzi now?

If you’ve not read it yet, and if like most Aussies you are oblivious to the hushed up bank run that was occurring right here in Oz during the GFC, then you should take the time to read my June 24 blog, “Our Banking System Operates With Zero Reserves”:

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.

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.”

Now, what was it that I wrote just hours ago … about our AAA-rated Ponzi economy?

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Aussie Banks Warned – One Week To Prepare For Meltdown

16 Dec

Your humble blogger has been warning of this for months.

As has Fitch Ratings, amongst others.

Now, according to today’s Australian Financial Review, our Aussie banks “have been given 1 week by regulators to stress test how they would handle a spike in joblessness, plunge in home prices spurred by EU debt crisis.”

In other words, to prepare for meltdown.

According to Bloomberg:

  • Australian Prudential Regulation Authority envision worst-case scenario of 12% unemployment, 30% drop in house prices, 40% fall in commercial property values, AFR says
  • Banks will assume that write-offs, other mitigation measures are unavailable; later stress tests might allow for such steps, AFR says
  • Australia’s banks have A$87.2b of exposure to Europe, or 2.7% of assets, with A$74.6b of it mostly tied to bank borrowers in France, Germany, Netherlands, AFR says, citing RBA statistics

A “worst case scenario” of only 12% unemployment? Some say that we’re already at 8.6%.

No doubt our banks will come through these self-conducted “stress tests” … a la the farcical self-conducted “stress tests” that have been repeatedly passed by EU banks … with flying colours.

It’s all about public con-fidence, you see.

The entire modern financial system is built on con-fidence.

Without your continued con-fidence in the banksters’ system, their obscene wealth-from-debt-slavery machine implodes.

As with every con-fidence trick, it’s just a matter of time before a critical mass wakes up (pun intended).

(h/t ZeroHedge and Business Spectator for this story)

RBA & Treasury Coverup – Data Culled At Behest Of Banks

6 Dec

Being the first Tuesday of the month, there’ll be lots of attention on the Reserve Bank today, with many hoping for another cut in the official interest rate in time for Christmas.

So I thought that today, we might take a closer look at the RBA too.

Remember that critical joined-at-the-hip relationship between our Big Four banks, and the government’s balance sheet, that your humble blogger has been banging on about lately?

The relationship that means our government must get its budget back in shape, else its guarantees that are the only thing propping up our zombie banks will lose credibility with the ratings agencies?

Michael West at The Age has been looking at those government guarantees too. His investigation has dug a little deeper into the dark heart of our government-banker kleptocracy (my emphasis added):

Public information turns confidential – RBA culls data

The Reserve Bank of Australia and federal Treasury have been systematically purging public information from their databases at the request of the big banks.

During the course of an investigation into the wholesale funding guarantee, BusinessDay found large swathes of information relating to the use of the guarantee had been expunged from the http://www.guaranteescheme.gov.au website.

This culling of public data follows revelations here last year that the corporate regulator, the Australian Securities & Investments Commission (ASIC) had been deleting evidence of the waivers it had provided to liquidators.

Commitment to transparency?

Now the RBA and Treasury appear to have made an even greater mockery of the government’s “commitment to transparency and accountability”. The funding guarantee scheme is an unprecedented concession for the banks – they are underpinned by the taxpayer and, thanks to sovereign largesse, cannot go bust.

Nonetheless, almost all detail relating to more than $100 billion in taxpayer-guaranteed funding has vanished. Only the details of current guarantees survive.

We can only surmise that both the government and the banks are trying to pretend there was never any corporate welfare in the first place. For the banks’ part, it is harder to justify $10 million executive salaries for running a taxpayer-guaranteed institution.

And for the government’s part, the censorship can only be put down to an obsequious backpedalling on previous public commitments in order to appease the powerful banks.

Unconvincingly trying to rationalise their role in the purge, Treasury responded that public information about sovereign support for the banks had suddenly become confidential.

“Further data on liabilities issued under the Scheme by individual participating institutions is not provided on the Guarantee Scheme website for reasons of confidentiality,” a spokesman told BusinessDay.

It was the sort of line which would have made Sir Humphrey Appleby proud.

With Europe in disarray, and the impending prospect of further taxpayer support for the banks – the RBA has recently foreshadowed relaxing the rules on what assets banks can swap for RBA cash – this is hardly the time for there to be any question over the integrity of public institutions and their information.

[click the link to read the entire article, including how the RBA and Treasury tried to cover-up in response to Mr West’s investigations]

None of this should come as any surprise to regular readers of barnabyisright.com.

There are already very big questions over the “integrity” of our public institutions.

As we saw in Funding For Policy Scandal – Australia Is A Kleptocracy, our very system of government means that our political parties depend on bank loans to fund their election campaigns.

Why?

It is because the parties do not receive their multi-million dollar handouts from the public trough – a distribution which is based on % of the popular vote – until after the election, when the actual number of votes received by each party is confirmed.

So, they have to go hat-in-hand to the banks, begging for loans, in order to mount their campaigns in the first place.

If that is not a relationship of dependency that is absolutely ripe for corruption, then I don’t know what is.

There really is “An Unholy Alliance Of Politicians And Bankers Versus Ordinary People”

Our “Lehman Moment” Near – S&P Downgrades Banks

4 Dec

Just four days ago, your humble blogger noted that our mainstream news media, financial commentariat, and blogosphere, have (again) overlooked the key issue, in their reporting of Treasurer Swan’s MYEFO budget update.

Once again, they have all overlooked the critical economic risk; the joined-at-the-hip relationship between our Big Four banks, and our government’s financial position, as perceived by the major credit ratings agencies.

To wit, back in May this year Moody’s Ratings agency essentially declared our Big Four banks are Too Big To Fail. And in downgrading the Big Four’s credit ratings, Moody’s tacitly warned the government that it must maintain the implicit and explicit government (taxpayer) guarantees propping up the Big Four, else Moody’s will cut their ratings by another 2 notches.

By inference, this means that Moody’s was also warning the government that it must achieve and maintain a pristine government sector balance sheet, in order to support the plausibility of its guarantees for our Ponzi banking system.

If the government cannot reverse the direction of its ever-rising debt trajectory, and demonstrate a plausible path back to achieving an annual budget surplus (in order to start paying off the gross debt), at some point in the not-too-distant future their failure to manage the debt will be taken as a sign that our government’s guarantees of our banking system are less than reliable.

Wayne’s (unreported) MYEFO prediction of a 57% blowout in net public debt this year alone, will only hasten the arrival of that day.

As will his blowing through our third increased debt ceiling in just 3 years, by around mid-2012.

Commonwealth Government Securities On Issue | Source: Australian Office of Financial Management (AOFM)

Inevitably, our banks will have their credit ratings cut further.

They will find it increasingly difficult to attract funding from international money markets, upon whom the banks are dependent for around 40% of their wholesale funding. (Indeed, as we saw on Wednesday, the yield spread on Aussie banks’ bonds compared to non-financial Aussie corporate bonds, has just hit an all-time high).

Funding costs for the banks will rise.

Interest rates for Australian borrowers debt slaves will rise. (Or at the very least, RBA interest rate cuts will not be passed on).

Availability of loans to businesses will fall even further, choking the economy.

Unemployment will rise.

Bad loans (defaults) will increase.

Our housing bubble’s gentle 10-month price deflation, will accelerate.

Our economy will crash.

Our banks will collapse like the Ponzi house of cards that they are.

And the all-time record debt-soaked government taxpayer …

Click to enlarge

… will be obliged to bail out the banks, as per the Government Guarantees.

Now, we have a further red flag that my Missing The Key Economic Point For Dummies blog was right.

From The Australian (emphasis added):

Australia’s major banks are confident the first ratings downgrade by Standard & Poor’s in two decades will not have a major impact on their funding costs, despite the ongoing volatility created by the European sovereign debt crisis.

The share prices of the major banks — Commonwealth Bank, ANZ, Westpac and National Australia Bank — rose by 1.5-2 per cent, despite the one-notch ratings downgrade from AA to AA- as the overall market rose 1.4 per cent for a sparkling weekly gain of 7.6 per cent…

… The banks’ ratings were last cut in the early 1990s as the Australian economy struggled with recession.

S&P defended the ratings downgrades, which it attributed to Australian banks’ heavy reliance on wholesale funding markets.

And from ABC News (emphasis added):

BBY banking analyst Brett Le Messurier says the downgrade is not too serious but could lead to higher borrowing costs in the long term.

Mr Le Messurier says the big four banks still have plenty of liquidity to help them “ride out the current turmoil in Europe for some time”.

“In and of itself it doesn’t matter that much, but if another one follows then they get into the “A” category,” Mr Le Messurier said.

“And that is going to lead to increased wholesale funding costs over and above what’s resulted from the current European crisis and therefore that will ultimately feed through to consumers.”

And from the Wall Street Journal (emphasis added):

When it comes to Australia’s banks, don’t listen to the spin.

Late last night, Standard & Poor’s cut its rating on all of the big 4 — Australia & New Zealand Banking Group, Commonwealth Bank of Australia, Westpac and National Australia Bank — warning about rising costs and a continued increase in wholesale funding costs. Given Australia’s banks predominantly fund themselves offshore, the ongoing European sovereign debt crisis has raised concerns about the contagion possibilities…

… The moves come about six months after Moody’s did almost exactly the same thing and predictably, just like then, each of the banks have come out today to defend their balance sheets and businesses.

But while ratings agencies certainly don’t carry the clout they used to, make no mistake, there are a stream of issues for Australia’s banks.

For one, a credit facility from the Reserve Bank of Australia, or RBA, established to help banks satisfy new global banking rules, known as Basel III, are certain to lower each of the banks’ risk-taking possibilities and profits.

But actions speak louder than words and when the RBA cut its key cash rate a month ago, NAB refused to pass on the favor in full. If Europe gets worse, and the RBA cuts a few more times, all those banks that today are talking about their strong balance sheets will change their refrain when they decide to hold back on passing those cuts on.

The NZ Herald’s Liam Dann debunks the spin, and explains why the banks’ attempt to downplay the ratings cuts masks an important truth (emphasis added):

You can say all you like about yesterday’s banking downgrade being “anticipated”, “reflecting methodology changes” and not “impacting on consumers” – but down is still down. It’s the wrong direction.

So despite the spin suggesting this is no big deal, the big Australasian banks should hopefully be paying close attention to the Standard & Poors review which saw their ratings cut from AA to AA-…

… taking a step back from the technical stuff, it’s important to recognise that this methodology change is not some just arbitrary fiddling with numbers.

It’s grounded in the very real increase in risk to lenders that has occurred since the global financial crisis struck.

The changes stem from the failure of the ratings agencies to identify that crisis in 2007 and 2008.

So, in some respects, this downgrade represents the credit agencies doing their job properly – finally.

The big shift in the way S&P now looks at banking risk is that it has weighted its focus away from the cyclical ups and downs which are reflected in an institution’s quarterly financial performance and towards the underlying structural risks of a region’s banking sector.

So now, S&P is analysing first the structural risks in the Australasian banking system as a starting point, and then assessing the relative position of each bank’s performance within that context.

And finally, from Ireland’s The Journal (emphasis added):

S&P said the decision was based on the cost posed by sourcing cash from overseas markets and the country’s foreign debt.

Following the crash of Lehman Brothers in 2008, which S&P failed to foresee, the agency revised its rating criteria – and it is in the context of these new considerations that the banks were downgraded, reports The Australian.

Meanwhile, rival rating agency Moody’s said it would keep the banks on their AA rating and retain their outlook as positive.

Experts have warned that a continuing European debt crisis could expose the banks to a further downgrade.

As noted in Wednesday’s blog, our Net Foreign Debt is yet another key factor that our politicians (on both “sides”) and lapdog media studiously avoid focussing any attention on. Why? According to the latest RBA data, our Net Foreign Debt at June 2011 was a whopping $675 billion. More than 50% of GDP. So naturally, noone in positions of power want to mention it, even though it is a very serious structural problem, and one that is now fundamental to triggering negative consequences such as this S&P rating downgrade.

Break out the popcorn folks.

It has begun.

As usual … Barnaby is right:

“If you do not manage debt, debt manages you” – Feb 2010

And You Thought Europe’s Banks Were In Trouble

22 Aug

You may or may not be aware that a big reason behind the current market turmoil, is Europe’s banks. French and Italian banks in particular have been the focus of attention in the past fortnight.

But the problems with banks are not confined to Europe. Consider what one of the best financial blogs in the world had to say recently about the banks of a nation whose economy is disturbingly similar to ours (from Zero Hedge):

Is the next domino to fall … Canada?

While two short months ago, “nobody” had any idea that Italy’s banks were on the verge of insolvency, despite that the information was staring them in the face (or was being explicitly cautioned at by Zero Hedge days before Italian CDS blew out and Intesa became the whipping boy of the evil shorts), by now this is common knowledge and is the direct reason for why the FTSE MIB has two choices on a daily basis: break… or halt constituent stocks indefinitely. That this weakness is now spreading to France and other European countries is also all too clear. After all, if one were to be told that a bank has a Tangible Common Equity ratio of under 2%, the logical response would be that said bank is a goner. Yet both Credit Agricole and Deutsche Bank are precisely there (1.41% and 1.92% respectively), and both happen to have total “assets” which amount to roughly the size of their host country GDPs, ergo why Europe can not allow its insolvent banks to face reality or the world would end (at least in the immortal stuttered words of one Hank Paulson). So yes, we know that both French and soon German CDS will be far, far wider as the idiotic market finally grasps what we have been saying for two years: that you can’t have your cake and eat it, or said otherwise, that when you onboard corporate risk to the sovereign, someone has to pay the piper. Yet there is one place where that has not happened so far; there is one place that has been very much insulated from the whipping of the market, and one place where banks are potentially in just as bad a shape as anywhere else in Europe. That place is…. Canada.

As the chart below shows, which is a ranking of global banks by tangible common equity, lowest first, of the banks with a TCE ratio of under ~4% a whopping 30% are those situated in Canada, the same place where nobody thinks anything can go wrong, and which has been completely spared from the retribution of the bond vigilantes. Something tells us Canadian sovereign CDS, not to mention Canadian bank CDS, are both about to go quite a bit wider.

How do Australia’s banks rate on the Tangible Common Equity (TCE) scale?

Better.

But not that much better.

Take note, dear reader. Here we are about to see a classic example of how our Treasurer wilfully cherry-picks from International Monetary Fund reports.

Here’s what The Goose recently had to say about the IMF’s latest report:

The IMF has just completed a regular review of Australia’s finances.

The Treasurer, Wayne Swan, reported the results.

He said the IMF had noted “our resilient financial system.”

“Australia’s banks are well capitalised, prudently managed, and among the highest-rated in the world,” Mr Swan said.

“The IMF notes that banks have improved their capital positions and reduced their reliance on short-term foreign funding, and that they are well placed to ride out any future financial turbulence in offshore markets,” he added.

Wayne has, as usual, gilded the lily, and put words in the mouth of the “authorities” he quotes.

And, he just “happened” to conveniently forget what else the IMF wrote (emphasis added):

17. Bank profits have recovered and the return on equity for the major banks is now around pre-crisis levels. Capital adequacy has improved, driven both by increases in capital and declines in risk-weighted assets. Common equity as a share of tangible assets has also risen to nearly 5 percent for the four large banks

Oops.

A TCE of “nearly 5%” is not exactly streets ahead of the Canadian banks. Moreover, “nearly 5%” is actually worse than the 5.42% TCE of Italian bank Intesa Sanpaolo (see ZH chart above), whose shares have been under attack and subject to multiple trading halts in the last fortnight to save it from collapse.

18. Challenges remain, however. Banks may be tempted to take on riskier strategies in an environment of structurally lower credit growth. Household debt remains high (150 percent of disposable income) and a rise in mortgage rates could lead to an increase in bad loans, although current arrears are modest. While we recognize improvements in the composition of banks’ funding structure, their sizable short-term external borrowing still remains a risk. In addition, concentration in the banking sector has increased in the wake of the crisis with the assets of the four large banks now comprising about 75 percent of total bank assets…

Oops.

We have already seen recently, that “riskier trading strategies” is exactly what our banks have been engaged in ( “Fresh Evidence Our Banks In ‘Race To The Bottom’ Means You Can Kiss Your Super Goodbye” ).

21. While banks have reduced their reliance on short-term external borrowing, disruptions in global capital markets could still put pressure on their funding. Therefore, banks should be encouraged to further reduce their short-term borrowing.

Oops.

This reliance on short-term funding is a key reason why Moodys ratings agency downgraded our banks’ credit ratings in May, and warned the govrnment that it must maintain the government guarantee else they will be downgraded further.

And, it is why Fitch Ratings considers Australia’s banks “most exposed” to the European debt crisis.

Funny … I don’t recall hearing Wayne mention any of that.

Do you?

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.

None.

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.

Meaning?

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.

Fresh Evidence Our Banks In ‘Race To The Bottom’ Means You Can Kiss Your Super Goodbye

9 Jun

From news.com.au, 7 June 2011:

Fresh evidence is emerging of a “race to the bottom” among banks and other lenders as demand for mortgages slides and competition boils over.

Lenders are increasingly cutting standards by enabling home buyers to make smaller deposits, new research indicates.

About three in every five mortgage products now enable home buyers to borrow up to 97 per cent of the value of their property, according to financial research group RateCity.

RateCity chief Damian Smith said the rise in loan-to-value ratios (LVR) indicated that lenders wanted to kick-start growth in the sluggish home loan market.

“We haven’t seen this level of money offered to mortgage borrowers since the start of 2009,” Mr Smith said.

He warned that change in lending criteria was putting borrowers at risk.        

“There is a concern for some borrowers who take on too much debt, because it makes them more susceptible to risk if rates increase or property values fall.”

It’s not just borrowers that are put at risk.

What this means is that the day is drawing nearer when the Government proclaims “No Super For You!!”

How’s that, you say?

Bear with me on this. All will become clear:

High loan-to-value ratios also place banks at greater risk, with the likelihood of a lender absorbing a loss in the foreclosure process increasing as the amount of equity decreases.

Similar borrowing practices were behind the collapse of the US housing sector when people with a higher chance of defaulting on on their payments were provided loans at higher-than-normal interest rates.

Indeed.

It places banks at greater risk.

On 18 May 2011, Fitch’s Ratings credit rating agency offered this ominous warning about Australia’s banks’ lending standards (from Business Week):

… Australian banks could have their credit ratings cut if they lower standards to boost mortgage sales as demand for home loans slumps.

If we do start to see signs of erosion in those lending standards, there may be some negative pressure on ratings coming through,” Tim Roche, director of Fitch’s financial institutions group in Sydney, told a credit forum today.

Here’s how the domino effect works.

1. House prices fall – as they are right now.

2. Banks lower lending standards – as they are right now.

3. Arrears on mortgages rise – as they are right now.

4. Ratings agencies cut Big Four banks’ credit rating – as they have just done, and are threatening to do again.

5. Banks cost for wholesale funding rises due lower credit rating.

6. Banks pass on increased costs to you, as interest-rate increases.

7. Mortgage arrears rise further due to interest rate, cost-of-living pressure.

8. House prices fall further due “distressed” vendor sales.

9. Banks’ “asset” values, profits fall.

10. Residential Mortgage-Backed Securities (RMBS) fall in value and are downgraded – as they are right now.

11. Banks’ lose trillions on “derivatives” bets related to RMBS.

12. Banks’ credit ratings downgraded even further.

13. Rinse and Repeat, from 5.

14. Bank/s cannot borrow (a “credit squeeze”).

15. Short-sellers smell blood in the water; Banks’ share prices collapse.

16. Banks fail … just as in the USA, UK, and the EU.

17. Government pilfers your super to prop up our government-guaranteed, Too Big Too Fail banks.

Think it can’t happen here?

It can.

And it will.

Both parties are already planning for it.

The Government has effectively guaranteed it (How? By guaranteeing the banking system; a guarantee underwritten by you, the taxpayer).

And Senator Joyce has specifically forewarned of it.  Just as he (correctly) forewarned of the US debt default that is happening right now.

Labor has introduced legislation moving in that direction in the May budget.

And the Liberal Party has just announced a new policy – disguised as a “reform” to “help” business – that is aimed squarely at getting the ATO‘s hands on your super … before it even gets to your super fund.

Learn all about the wave of superannuation confiscations rolling across the Western world, and our own super theft to come, here.

UPDATE:

h/t reader and Guest Poster “JMD”, in Comments below.

Want to try and access your super early, and beat the government to it?

No can do.

Not unless you’re underwater on your mortgage. Then you can … to pay out the banksters:

“You can however access your super early, ‘to prevent your home being sold by the mortgage lender as a result of non payment on your home loan’. It would be interesting to find out when that rule was slipped in, allowing the banks to access your super but not you.”

Go to http://www.rest.com.au/Forms-Publications.aspx

You will see a tab to click on; Withdrawals from your account, then a pdf; “Fact Sheet: Accessing your super early.”

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