Guaranteed To Trigger Further Bank Turmoil
Sydney Morning Herald
Friday October 24, 2008
A bit over year ago in London there were queues outside the troubled financial institution Northern Rock as depositors fearing for their savings sought to withdraw their money. Three weeks ago the now nationalised Northern Rock was attracting queues as depositors from other institutions saw it as a safe haven for their savings.
This week both the National Australia Bank and ANZ have released results that demonstrated the damage that has been done to their profit numbers thanks to the financial crisis.And while these two banks are considered to have been most negatively affected by the events of the past year, it is hard to escape the fact that both have experienced very strong growth in their deposits.There has been a flight by customers towards traditional, well-known bank brands, both in terms of lending and deposits.Quite simply, financial chaos favours safe brands. In terms of lending, these banks have been able to capitalise on their AA rating to borrow money in the wholesale market more cheaply than the single A-rated banks and more cheaply still than the financial intermediaries like mortgage originators.But the real bonus is that the banks, credit unions and building societies are now basking in the glow of the Federal Government's promise to guarantee the deposits they hold. This has several positive implications for these institutions. Retail and business customers have rapidly been taking funds out of the non-guaranteed sector, such as cash management trusts and investment banks, and placing them into our domestic APRA-licensed banks.The wholesale movement of funds around the system at such a rapid pace, and the consequences for the institutions facing large scale redemptions, is enormous and the Government is scrambling to rectify the situation.As yet it does not have a plan worked out but it recognises that something needs to be done. In the meantime, worried people are enhancing the positions of Australian banks that are using this surge in cheap deposits to reduce their reliance on the more expensive wholesale funding.Meanwhile, the Government is promising billions of dollars in handouts to low- and middle-income earners before Christmas in an attempt to stimulate the economy. Some will land in the laps of retailers (as the Government has designed) but some will also go into bank deposits.And this is precisely why, when one strips out the problem loans and investments from the ANZ and NAB portfolios, there is strong underlying growth in loans and deposits.And the financial period just reported by these banks finished at the end of September 30 - before the Government announced the guarantee.The influx since then can only be gleaned anecdotally. Reference to this was made this week by APRA at Senate Estimates. APRA told an estimates hearing that the Government guarantee had led to substantial funds being pulled out of foreign-owned bank branches, which are not covered by the scheme. Once the Government extends the guarantee scheme to other types of liquid investments or deposits, the exodus will abate, but not necessarily reverse.Much will depend on how the guarantee is structured and the cap imposed on how much will be covered by the free guarantee.Similarly, the extent to which the guarantee the Government is offering to banks on wholesale lending is taken up depends on the fee that is attached.Neither bank painted a rosy picture for the near-term future. Both said they expected Australia not to follow Europe and the US into recession but to show nominal growth.If their predictions come to pass, our banks will come away from this bizarre financial crisis with limited bruising and in a strong position.If Australia moves into recession, with high levels of unemployment, the banks will suffer from a wave of consumer loan defaults which will be more damaging to their businesses than the corporate insolvencies we have seen to date.
© 2008 Sydney Morning Herald
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