Should we guarantee the banks now?

Don’t blink because you might miss it. Today I agree with Chris Joye:

Does cutting rates in December do anything to solve bank funding problems (only guarantees and liquidity facilities will), and will the banks pass on any cut given the turmoil in overseas funding markets?

I personally think a better policy response is to guarantee, one way or another, bank access to funding, and keep rates stable for the time being. The RBA knows that the ultimate Euro response to all of this could be Eurobonds, debt monetisation, and inflation.

After yesterday’s remarkable construction-work-done data, which trumped market expectations by an order of magnitude and which will individually add about 1.7 percentage points to Q3 real GDP (not annualised), it’s clear the domestic economy is not in the hole that so many pessimists claim. The only rationale for cuts at this stage is the offshore environment. (h/t The Lorax)

Ok, so I don’t agree at all. The domestic economy is not in a hole yet even if it’s growing slowly. But if the European crisis continues and asset price falls do as well, dragging sentiment down with them, then stalled growth in the services economy will overwhelm the isolated pockets of ballistic construction. That was surely the lesson of 2011. The chance that Europe will pour forth inflation is pretty low, though there is a risk it will come from across the Atlantic with QE3.

However, I do agree with CJ that it’s worth thinking about getting out in front of this crisis with bank guarantees rather than rely solely on rate cuts that will have limited impact on the bank’s problems and may distort appropriate settings for the economy more widely.

Consider, assuming the ECB does not print, we can let a credit crunch develop in Australia as funding costs for the banks refuse to fall and rate cuts can’t keep pace. At some point, perhaps before there is even a credit event such as Lehman, the credit ratings agencies will get restive about the Australian banks. As we have seen, they are not the same happy-go-lucky types of 2008, and it’s possible that they will warn about our bank ratings if the guarantee does not appear relatively quickly. Remember what S&P had to say in its recent BICRA downgrade:

In our view, weaknesses for the Australian banking sector are its material dependence on net external borrowings, which fund about 24% of domestic customer loans; and limited support from core customer deposits, which fund only about 38% of domestic customer loans. We consider that these weaknesses are partly offset by a domestic debt capital market that can support the banking sector and the government and central bank, whom we view as responsive and flexible to banks’ funding needs.

We classify the Australian government as being “highly supportive” of the banking system, reflecting our expectation of timely financial support to ensure the stability of the financial system, if needed. This assessment factors in a well-developed administrative and institutional framework that should facilitate a timely and coordinated response, and a track record of proactive and prompt support for the banking system through measures such as guarantees for retail and wholesale funding during the global financial crisis. We believe that the existing legislation, policy, and relationships with supranational agencies do not hinder the Australian government from assisting the banking system.

I ask you, what is timely? Is it better to get out in front? Or wait until it’s a crisis? As we’ve seen elsewhere, once the ratings agencies are involved, it’s very bad for whatever institution that is targeted. Would it be more or less damaging to the bank’s credibility to be guaranteed sooner rather than later? Obviously markets already know about the guarantee. Everybody does. So there’s no new moral hazard. In fact, it could even reduce moral hazard. Come clean, as it were. Instead of all of this cloak and dagger stuff, with dodgy repos, rushed new bonds, clandestine regulatory oversight and opaque accounting for wholesale debts.

But I guess that’s kind of why it won’t happen. To do it openly, and before any other country, risks throwing the bankers onto the pitchforks of the people. And we can’t have that!

85 Responses to “ “Should we guarantee the banks now?”

  1. Phroneo says:

    I would hope that guarantees would only cover deposits. If credit markets froze up then it will be because of economic conditions not some one-off issue that can be circumnavigated without cost.

    Transferring the risk to the Government and taxpayers won’t solve anything long-term. The main reason banks require as much financing as they do is because of the massive liabilities created by our housing bubble. Helping them to hold that up using taxpayer money is not a solution. If houses were not so expensive, the banks wouldn’t need to borrow so much and the funding-crisis would be minimized or non-existent. Cheaper houses = more stable banking system; and this is the direction we must head. We will get there one way or another so let’s not engage in can kicking…

    Finally, this is not a short-term problem. There is too much debt and no possibility of the US or Europe recapitalizing their banks or enacting stimulus without blowing up bond markets. China also cannot afford another stimulus and returning to high inflation would cause massive riots.

    It would be more prudent to ring-fence deposits and let the banks handle it. The government could even relocate the deposits to a new government bank and it could be used to lend conservatively for things such as small business. Guaranteeing banks would only delay a bigger problem which would probably not take long to arrive. I would only support it if it was done to soften the landing, not trying – in futility – to prevent it.

    • Alex Heyworth says:

      “Cheaper houses = more stable banking system”

      I would agree, if you meant that the houses had never got so damn expensive in the first place. But now we have the situation where banks have lots of mortgages over high priced housing among their principal assets. So it would be a case of Cheaper houses=mismatch between bank assets and liabilities=banks going bust.

      The only way this can be dealt with is if the housing bubble is unwound slowly.

      • Phroneo says:

        Yes, but unfortunately, housing bubbles never unwind slowly. If there is a slow decline, it only happens after an initial sharp decline. To try and unwind is slowly can only create more problems. It’s a noble goal but it is impossible and has never happened after any bubble.

        Knowing this reality, it makes no sense to use tax payer money to try and save banks. Better to redirect it to the unemployed that will swell after any property bust.

        In addition to it making no sense to try and prop up housing with tax payer money, it is unfair to have more and more young people being forced to jump into mortgage slavery just to delay a housing crash. They’ve already given billions to property investors. Why should they give billions more to (try) save them and the banks? Finally, if you delay the crash and more people jump in, then there will be more people to default when it finally does crash.

      • Alex Heyworth says:

        I’d agree with you if (a) the banks were the parties mainly responsible for this situation and (b) bank shareholders were the only ones hurt by your proposed “solution”. But I don’t agree with either of these premises. On the first point, as I’ve already pointed out downthread, the blame is distributed among a range of players, including governments and the RBA in Australia, overseas governments and consumers/bank customers here.

        On the second point, allowing the major banks to collapse would be hugely disruptive to our whole society, we would all be losers big time.

        What I think would be a better solution would be for the government to guarantee the banks, but charge heftily for the privilege.

      • Phroneo says:

        There isn’t enough time for that. The fees would cover only a fraction of the losses. All such ideas only work if you implement them during the good times which is politically impossible.

        But yes, if the Government (we) needs to step in then they need compensation. I like Rusty Penny’s suggestion. If the banks really go broke without the taxpayer’s help then the taxpayer should be able to acquire them for what they are worth: $0.

        I do agree they are not entirely to blame. The government should have (among other things) ensured that no loan can be made with less than a 30% deposit and we wouldn’t be in this mess. Whatever happens, the taxpayers suffer so it’s only fair that the banks also suffer, and in this case, be acquired for free.

      • PhilBest says:

        I strongly suspect the RBA is covertly propping up the banks with “QE” already, specifically to forestall the likely result of the property bubble.

        The USA and other countries never tried this – they are trying to restart a crashed economy with QE. Australia’s RBA, I suspect, is using QE to stop the crash ever happening; at least not in the BANKING sector.

        Pity about all the young households in mortgage slavery for the rest of their life, though; and the oncoming generations, if house prices never come back down to sensible levels. I do not believe this is ultimately sustainable, for simple reasons of international economic competitiveness. But I have no idea how it could play out.

      • Johnno says:

        It’s not the issue of how expensive housing got but rather the percentage mortgages make up of a banks balance sheet. Was reading somewhere, Cirkey I think, it’s estimated that approx. 55% of the Big 4′s balance sheet are made up of mortgage debt with Com Banks being markedly more. In comparison US and European banks, pre GFC, mortgages were anywhere between 20-30% of a balance sheet. Wish I could find the link but these figures make it loud and clean that a deflating property market is not going to dent our banks but …. them over. Protection at all costs.

    • Mr Squiggle says:

      If my savings deposits and transactions accounts were force-fed into a government bank, I would pull every cent out.

      In. a. flash.

      I reckon my mattress would be safer

      As it is, I’m still struggling with the idea of covered bonds issued by my bank of choice.

  2. danna says:

    i’m a bit of a newbie, but i’d much rather see no guarantee at all. Sink or swim. The ratings agencies seem to playing a game here and are trying to play countries off against each other by getting governments to foot banks bills. whoever doesn’t will get downgraded. if all the countries said nah we’re not going to guarantee banks and we’re going to let all bad loans default the downgrades wouldn’t matter… you can downgrade everyone to BBB but who cares? people still have to put their money somewhere, and if central governments pump out enough money to keep inflation positive there’s still incentive for people to invest their money. Of course, the people with money will require a higher interest rate to PROPERLY account for the risk of default – and viola – no easy credit booms and investment will go to entrepreneurs, not speculators. Govt guarantees and the like just continue the same old same old wrongness.

  3. Q Continuum says:

    Staying in front means admitting to the citizens there’s a problem to be in front of. As an aside, pitchforking bankers may provide a good polls boost for either political party.

    • Yep I agree Q.. This is more a political argument than an economic one.

      We have seen from Europe what happens when pollies attempt to play catch-up to the market so an “up-front” guarantee from the government makes sense from an economic stand-point.

      However, this would be a huge political step to take by an admission that all is not well in the Australian economy and in fact “strong fundamentals” and the “mining investment boom” aren’t the gold eggs Mr Swan and Co. would have the public believe.

      The government does however have he opportunity to blame Merkel and Co. for this decision, so in that regard the current mess in Europe does present them with an opportunity to “get in early”

      Japan seems to be going that option

      http://www.bloomberg.com/news/2011-11-24/japan-cites-europe-crisis-as-risk-to-rebound.html

    • Nick says:

      + a new national sport to concentrate on before the cricket gets going and while there is no footy on!

  4. Rusty Penny says:

    Only guarantee the banks if the government susequently assumes 100% ownership of them for virtually no cost, and the banks’ equity holders lose everything.

    • Alex Heyworth says:

      So you think no blame attaches to the RBA for running excessively loose monetary policy? Or to state and local governments for excessively restrictive planning policy? Or to the public for so enthusiastically jumping on the consumer credit bandwagon? Or to US and European governments for comprehensively stuffing up their economic policies?

      “It’s all the fault of bank shareholders.” What a crock of shit.

      • monsieurbarso says:

        By all means apportion blame to all these other guilty parties, but how to hold them to account ? Change of Government ? I think not. Legislate against greed ? Perhaps a ban on bank’s advertising credit ?
        Shareholders are supposed to wear risk, non ? It may not be their fault, but it’s their risk.

      • Rusty Penny says:

        The RBA can send whatever message they like.

        Bankers take risks. If the RBA is committed to an excessivley loose monetary policy, then a bank should alter its policies to compensate.

        No one forced a bank to lend into a housing bubble, regardless of government planning policy.

        The SOLE job of a banker is to lend out someone else’s money based on a risk assessment of getting the money back. if they are not doing that job, i.e. assessing the credit worthiness of a potential borrwer, then what actual job are they doing?

        If the RBA has loose money, then adjust the credit worthiness corresondingly.

        If governments have excessively restrictive planning policies that curb supply, adjust credit worthiness corresondingly.

        I mean your third point ‘consumers jumping on the credit bandwagon’… WTF ????? They can’t jump on the bandwagon unless the banker consents to hand out credit.

        This all is prevented if a person charged with assessing credit risk, actually undertakes the job of assessing credit risk.

      • littleguy says:

        “The SOLE job of a banker is to lend out someone else’s money based on a risk assessment of getting the money back. if they are not doing that job, i.e. assessing the credit worthiness of a potential borrwer, then what actual job are they doing?”

        Exactly.

      • Alex Heyworth says:

        “They can’t jump on the bandwagon unless the banker consents to hand out credit.”

        And the banker can’t hand out credit to someone who doesn’t ask for it. It takes two to tango.

      • Rusty Penny says:

        Erhh no, it is not the duty of a potential borrower to self-assess their credit worthiness, as I stated prior, this is the bankers job, their SOLE job.

        Also, there is no entitlement to for clients borrow money, the bank can decline, and should exercise this function if their is excess risk in lending it out in the first place.

        It is the height of absurdity to say a borrower wanted money, therefore a credit binge is (partly) their fault a credit binge occurs.

        A credit bubble can not occur if the bankers job, and remuneration is dependent on them assessing credit risk properly, instead of pushing volume of loans.

      • Alex Heyworth says:

        True, but the looming crisis has nothing to do with the credit worthiness of Australian borrowers. It’s all about the Europeans.

      • Rusty Penny says:

        True, but the looming crisis has nothing to do with the credit worthiness of Australian borrowers. It’s all about the Europeans.

        Erhh, yes it is.

        Part of risk assessment is to factor in future global credit conditions, and the ability of a borrower to adjust to these conditions.

        A housing bubble occuring in much of the OECD world, a global credit binge, a mercantilist attitude by China. These should be factors considered by a bank in lending money, well if they were worried about failing because of poor decisions they should.

        However, there seems to be too many all too willing to exonerate their poor decisions and have the costs of the poor decisions socialised.

      • Alex Heyworth says:

        RP, my argument all along has been that banks are only bit players in this whole affair, and singling them out to take the rap is not only daft, it is shooting ourselves in the foot. As others have pointed out elsewhere on this thread, the government probably needs to do no more than say it will guarantee the banks if necessary. They can blame the European instability for the need to issue such a guarantee, say that the economic fundamentals are fine etc etc, even indicate that the guarantee would come with a price.

        If you can save all that bother simply by issuing a press statement, where’s the harm?

      • Rusty Penny says:

        RP, my argument all along has been that banks are only bit players in this whole affair,

        They are solely to blame for being insolvent. Every other participants can make poor decisions, banks have to adjust to ensure they aren’t consumed.

        The RBA may send a poor signal, governments may have poor planning policies, but this is information that a bank must then adjust their decision matricies upon.

        They aren’t entitled to have static processes and hope government provides perfect signals at all time.

        That is called risk, and that is why they as enterprises get rewarded. When risk goes against them, they lose, up to 100% of their equity.

        and singling them out to take the rap is not only daft, it is shooting ourselves in the foot.

        Erhh no it’s not, it is the best outcome. Creative destruction ensures poor performers are eliminated. it sends a signal for other performers to lift their game as well as providing oportunity for new entrants to the market.

        As others have pointed out elsewhere on this thread, the government probably needs to do no more than say it will guarantee the banks if necessary.

        All points in this thread are speculation about an actual outcome. I personally do not have faith that jawboning will be sufficient.

        They can blame the European instability for the need to issue such a guarantee, say that the economic fundamentals are fine etc etc, even indicate that the guarantee would come with a price.

        Or they can blame the decision makers of the banks for not accounting for recent European behaviour for making these banks so vulnerable. After all, it is the job of a banker to assess these risks that make them vulnerable.

        If you can save all that bother simply by issuing a press statement, where’s the harm?

        The harm is you set a precedent for entitlement, which creates a welfare mentality and is exactly the opposite of enterprise and rewarding successful assessments of risk.

        It entrenches poor performers.

      • Alex Heyworth says:

        The trouble is, RP, that you start out from the assumption that the management of Australian banks is incompetent. If you had a slightly less jaundiced view, you might be able to concede that in fact they are very well managed, which is part of the reason they did not succumb to the shenanigans of 2007-2009. I agree there were other reasons as well, including the government deposit guarantee and the assistance they got from the US Fed.

        The potential crisis we face is largely of foreign origin, and I happen to believe that it is best that we face it together. You seem to have the view that we look around for a scapegoat and let them take the fall. I have pointed out to you that this would be inflicting more pain on our nation and its citizens than the alternative, but apparently I’ve not persuaded you that this is so. I’m sorry about that. I’ll desist from further attempts, and trust that you can do likewise vis a vis my firmly held opinion.

      • Rusty Penny says:

        Alex Heyworth says: November 24, 2011 at 5:45 pm The trouble is, RP, that you start out from the assumption that the management of Australian banks is incompetent. If you had a slightly less jaundiced view, you might be able to concede that in fact they are very well managed, which is part of the reason they did not succumb to the shenanigans of 2007-2009.

        They are poorly managed without a doubt. They lent into a housing bubble and suckled at the teat of foreign lenders when there was a credit bubble developing worldwide.

        That is clearly part of the risk assessment required to operate a bank, and 100% ignored or overlooked.

        I agree there were other reasons as well, including the government deposit guarantee and the assistance they got from the US Fed.

        And in the absence of these interventions, failure would have occured.

        Sounds like poor management to me.

        The potential crisis we face is largely of foreign origin, and

        Foreign signals, that were occuring long ago, and ignored. Measures could have been put in place to avert any of these forces affecting them.

        This type of risk needed to be managed, it was poorly managed.

        I happen to believe that it is best that we face it together.

        Face together… LOL

        In otherwords socialism, or more accurately, socialism of the costs. Funny there isn’t a reciprocal level of socialism of the profits.

        You seem to have the view that we look around for a scapegoat and let them take the fall.

        I’m saying risk should be applied to those who took the risk on board.

        The taxpayer did not take this risk on as an enterprise.

        I have pointed out to you that this would be inflicting more pain on our nation and its citizens than the alternative, but apparently I’ve not persuaded you that this is so.

        No, what you’ve done is recited from the bankers playbook of fear.

        Removing bankers and bank owners is not the same as removing poor managers and having the owners wear the pain.

        Banking will still remain.

      • Rusty Penny says:

        meant to say…

        Removing banks is not the same as removing poor managers and having the owners wear the pain.

      • TSpencer says:

        well done RP, if only MB was proliferated by fellows with similar logic and understanding

      • flawse says:

        Good stuff RP.

        However, no matter what the Banks do people are still responsible for themselves – good or bad!. That must be a fundamnetal tenet of our society. Otherwise in the end govt rules people’slives.

        Alex we didn’t succumb to the GFC only because we are a nation extremely rich in natural resources and we are prepared to sell the rights to own and mine those resources, for generations to come, to foreign interests to finance our current consumption. Post GFC about $100B came into the country one form and another. That was what rescued us. It was NOT that the Banks were well managed

      • danna says:

        Isn’t that largely irrelevant? The banks are supposed to assess risk and make decisions based on that risk assessment. The shareholders decide if the banks strategy fits with their investing philosophy and if so they invest. It’s not the shareholders ‘fault’… it’s called investment. If the shareholders choose to invest in banks for short term profits over long term stability then that is the risk that the shareholders take and they should take the cut when the SHTF.

      • Alex Heyworth says:

        Including you? I presume you have superannuation. Then you’re (indirectly) a bank shareholder too. Don’t come crying to me when your super fund goes backwards for the next five years as well.

      • Rusty Penny says:

        Why is that a factor in citing operational behaviour?

        Appealing to emotion that permitting failure financially affects your super fund, thus never permit failure?

        Sort of goes against the grain of enterprise, it may as well under government ownership in that case.

      • Alex Heyworth says:

        So you would cut off your nose to spite your face. Masochist.

      • Rusty Penny says:

        Again, what are you protecting here?

        You seem to want to absolve investment decisions of failure.

        “Well you f8cked up in your enterprise, but at least you had a go.here’s a small reward anyway”

        They need to be eliminated because they are performing poorly.

      • McPaddy says:

        Alex, I don’t think it really works like that. It would be great if we could all just “manage through this” and nobody gets hurt. The reality is that there is going to be pain all round. The sooner the better so we can get on with building a real economy and put the houses and holes mania behind us.

    • V says:

      But the bond holders need to take haircuts as well, otherwise we are reinforcing the same cycle where creditors are protected (yet again).

  5. briefly says:

    I am in principle opposed to a Commonwealth guarantee of banks’ foreign liabilities as such. This lets both the banks and their lenders off the hook and will not impel them to wind down this debt, but only increase taxpayer risks. Considering there are underlying currency risks involved as well, I think this would be very dangerous.

    I think it would be better if the Commonwealth were to guarantee bonds issued to the domestic market that would fund the banks to exit their foreign positions.

    I really like the idea of fixed-coupon, inflation-protected perpetuities subscribed by the public. They are great for savers – especially for Superannuation accounts – and build in price incentives to keep inflation down.

    The single most likely outcome of the European situation is implosion of their currency – either sooner or later, this is utterly inevitable unless they undertake very far-reaching reforms more or less immediately.

    I agree we should really get right out in front as soon as possible, but I really think the scale and duration of the problems in the global markets are intrinsically unknowable. It is therefore highly hazardous to commit the Commonwealth to what would be an open-ended guarantee.

    It is not only hazardous, it is unnecessary, and should be avoided at almost any cost.

  6. Skoptimist says:

    Is any other business likely to receive such favorable treatment from the government?. Will the local bakery, or small manufacturer, that gets into trouble get a tax payer funded guarantee from the government?. I strongly doubt it.

    If the government is going to bail the banks out then there needs to be some real reform in the banking sector. After all the fact that they need a bailout screams that there is something fundamentally wrong at present.

    How about banks having to pay annually for a license to operate with the cost of the license being tied to the size of their loan book. (In line with the great suggestion someone offered here some time ago, that miners should only get a license to extract a certain amount of material per year, with anything above that costing extra).

    briefly’s idea of the government guaranteeing domestic bonds for the banks to exit their foreign positions sounds good, although I suspect most of the money buying these will come out of bank deposits in the first place. However, under this approach at least the higher bank funding costs would indicate that risk is being more reasonably priced.

    • Alex Heyworth says:

      ” After all the fact that they need a bailout screams that there is something fundamentally wrong at present.”

      True, but is that something wrong with the Australian banking system or something fundamentally wrong elsewhere? My money’s on the latter.

      I don’t think we’re going to find the answer to the current problem by fiddling with our banking system. It’s not even really our problem. The effects may be felt here, but the cause is (largely) elsewhere.

      • Skoptimist says:

        “True, but is that something wrong with the Australian banking system or something fundamentally wrong elsewhere? My money’s on the latter.”

        I think there is something fundamentally wrong with the banking systems in most countries world wide. Our banking system clearly has a problem though, because if it didn’t then it wouldn’t need any bailouts. In general I think the problems world wide are poor lending standards. As Rusty Penny has clearly articulated we seem to have salesmen rather than bankers.

        “I don’t think we’re going to find the answer to the current problem by fiddling with our banking system. It’s not even really our problem. The effects may be felt here, but the cause is (largely) elsewhere.”

        Our banks have lent money irresponsibly and they have not adequately assessed the risks involved in relying on offshore funding to operate. So the problems are theirs and theirs alone.
        Some mechanism that punishes failure and acts to prevent it from reoccurring is exactly what we need. If these guys were happy to be generously rewarded by market forces then they should be severely punished by them as well. If the seek to avoid punishment then serve regulation should be their only option.
        Banks should be like utility companies. Stable and reliable, not gamblers.

      • flawse says:

        Skoptimist

        In this Alex is fundam,entally right. The banking system is one hell of a problem but we have more fundamental problems elsewhere.

        We don’t save

        We consume more than we produce

        Our economy has largely been directed to growth of service industries for 50 years. Hoever these were not REALLY service industries…they were debt creation industries.

        We have fundamnetal imbalances in pay and returns between those who produce things and those who largely consume things.

        Even more fundamentally we no longer respect the right to private property. If we haven’t bothered to save we think it is OK now just to steal from someone else who has saved.

        Our education system is almost totally screwed in terms of allowing people to come out as members of a PRODUCTIVE society.

        Even more fundamentally we have a lost society. People everywhere are searching for a lost identity. Witness the proliferation of tattoos…the ‘badge of validation’. We are in a poor state when our youth require a tat to feel that they have an identity.

        We are in DEEP trouble. The Banks are just a symptom.

  7. briefly says:

    For the sake of a comparison, having the Commonwealth commit to a new guarantee in the preset situation would be like committing the Defence Force to a possible new conflict against an unnamed opponent in an unknown theatre for an indefinite period.

    The situation in Europe is really completely unprecedented. To just ante up coz it seems like a good idea is just madness.

    We got away with it last time. This time we may not be so lucky.

    Even the Germans have backed away from such measures for their own big banks. We should take good note of this.

  8. Ronin8317 says:

    The problem is not so much the guarantee itself, but the price. Charging an insurance premium merely pushes up the cost of credit, which means the RBA needs to lower their rate even more for the same effect. Instead, the government should receives preferred stocks options from the bank in exchange for the guarantee, and a randomly selected politician will head the bank’s executive remuneration committee. At the very least, it’ll make the board meetings ‘interesting’ :-P

    • Skoptimist says:

      Bob Katter would be an interesting choice :)

    • Jon says:

      Banks are now guaranteed for about $140B and cost quoted by CBA for its part is about $1B. Other banks probably similar.
      Would not mind if I thought they were responsible, but I don’t get that impression.

      “12.8 Under the Funding Guarantee Scheme, the Government provides a guarantee, for a fee, on deposits greater than $1 million, and wholesale funding with maturity out to five years. At its peak in mid 2010, the amount of guaranteed debt was almost $160 billion.”
      (Chart 12.1: Government guaranteed bank debt)
      http://www.aph.gov.au/senate/committee/economics_ctte/banking_comp_2010/report/c12.htm

      Agree, Katter would be excellent choice.

  9. SCM says:

    They’ve already started the help with the rushing of covered bonds, and all this budget surplus at all costs business.

  10. Peter Fraser says:

    If the PM made a statement that simply said the government would be willing to re-issue the bank guarantees that existed during the GFC that would placate the market, and probably avoid the need to actually make the guarantees at all.

    Most investors would presume this, but a reassuring word gives much confidence.

    A little jawboning now would save the hard work later.

    • littleguy says:

      “…and probably avoid the need to actually make the guarantees at all.”

      Don’t count on that. It may just encourage them to push it even further and when it does crash down it will be even worse. Look at how well Paulson’s Bazooka worked.

    • briefly says:

      Politicians should only make promises they are going to be able to keep, imo.

      The Irish would not be in so much trouble now if their Government had not leaped to making a guarantee in 2008. Really, we do not know what burdens might be dumped on the Commonwealth and they should not be making open-ended promises they may not want to keep.

  11. littleguy says:

    Wouldn’t any guarantees just encourage them to take even bigger risks?

    • Peter Fraser says:

      No.

      • littleguy says:

        Oh? Why not?

      • Peter Fraser says:

        BAD loans are NOT profitable – and banks exist to profit.

        We are not talking about some fat boy being given the keys to the lolly cabinet here – we are talking about institutions that want to make a profit, so writing a loan just for the sake of writing a loan and wrecking the economy, is not the goal.

        The government guaranteed depositors, and the RMBS issues (investors in the banks mortgages) they did NOT guarantee bank profits.

        Bank shareholders in this country have become used to getting very nice fully franked dividends every 6 months – if that run of dividends is halted due to poor lending practices, then you can kiss the management team and board goodbye, the shareholders will be quite unforgiving.

        There have been several very interesting questions asked in this thread. One of them was your question, which was also asked by others in slightly different ways.

        Be aware that banks are “special” for one reason – our economy absolutely relies on a strong banking system, whether that fact is politically palatable or not – a country without them is not where you want to bring your children up.

        If the government sets the rules and encourages lending within those rules, there is an onus on them to come to the aide of banks in times of need.

        If that wasn’t the case very few of us would ever be able to own our own home with “Medici” style banking on very low LVR’s and punitive interest rates. The rich would get richer, and yoou and I would scrap for a living.

        In a society that bans lending over certain rates (Qld it is 24% – I don’t know about the other states) then lenders need volume to make money.

        It’s the difference between “Tiffanys” high end jewellery that very few can afford, or “Michael Hills” $100 counter.

        Low volume at high margins as opposed to high volume at low margins.

        The Medici’s are not the lenders that a nation needs in the modern era.

        It’s the governments job to manage the economy which includes the banking system.

        Someone has already mentioned that most here own bank shares via superannuation, but we also have an ownership in the futures fund that was started using the sale of CBA and Telstra shares – having sold those business’s the Government can hardly “crash” one and buy it back for zip. They would never sell another business with that reputation.

        We all profit from a strong banking system, even though that is not the mantra we hear today.

      • Alex Heyworth says:

        Well said, Peter. Nobody else on this thread seems to want to consider what the consequences of destroying our banking system would be.

      • Rusty Penny says:

        BAD loans are NOT profitable – and banks exist to profit.

        And this is where theory deviates from reality.

        There are no bankers today, there are only salesmen. ‘Bankers’ sell loans regardless of the credit worthiness because they are remunerated by volume, not quality.

        Be aware that banks are “special” for one reason – our economy absolutely relies on a strong banking system, whether that fact is politically palatable or not – a country without them is not where you want to bring your children up.

        If the government sets the rules and encourages lending within those rules, there is an onus on them to come to the aide of banks in times of need.

        Right from the banking playbook of ‘fear life without us’.

        No one is advocating the elimination of banking. That is why the government should be able to assume ownership instantly and capitalise it to service performing loans.

        What is to be eliminated is the bankers, and bank owners who fail.

        Government takes all the equity for nothing, sacks bankers and throws a few of the senior ones in gaol, then sells to a bunch of new owners who hire new, and hopefully competent, bankers.

        The insitute of banking remains, failures are purged.

        There is no need for aide, competency alone prevents failure.

        then lenders need volume to make money.

        Looking at the wages of Admiral Norris, Gail Kelly, etc… it’s hard to say they don’t have rom for pruning.

        It’s the governments job to manage the economy which includes the banking system.

        Purging poor performers is part of that management process. You’re advocating an entitlement of existing owners to own banks for perpetuity, and current managers to continue to manage.

        Someone has already mentioned that most here own bank shares via superannuation, but we also have an ownership in the futures fund that was started using the sale of CBA and Telstra shares – having sold those business’s the Government can hardly “crash” one and buy it back for zip. They would never sell another business with that reputation.

        Another strawman argument.

        They will only ever crash if they fail to assess their risk. External forces occur, decisions are made to adjust.

        And in the event of a bank failing, and thinking lenders worldwide with act petulant and never lend again, rubbish. As long as there are sound borrowers, lenders will always seek them out.

      • Peter Fraser says:

        RP – trust me I tell the banks what I think of them everyday, today it was Suncorps turn, and they didn’t like it.

        But I’m afraid your emotional arguments lack substance completely. I can’t trade in myths, only facts.

        I’m not prepared to spend time debating with folk who refuse to listen to reality, but I’m more than happy to discuss this another time when you have re read what I wrote a few times, and tried to understand my point of view.

        I understand your argument perfectly, so it’s only fair that you take all the facts into consideration, and try to take a broader view.

        I’m not the type to “Nuke” the whole neighbourhood including my own house because I have a grudge against my neighbours. It’s an illogical response.

        Please think about that.

      • Peter Fraser says:

        Hi Alex,

        They don’t want to know, it’s much more fun to pretend to yourself that you have the high ground, and then point tut tutting fingers at banks, politicians, the police force, the judiciary, who ever.

        Rolling up sleeves and doing something constructive is left to the invisible amongst us.

        I’m afraid we are all guilty of turning ourselves into the victims and rolling in the assumed pain and agony of our miserable existence.

        And then we have a few beers, and go home to a full meal, a roof over our heads, and a warm dry bed safe in the knowledge that we have it tough by any third world standards.

        Did I miss anyone?

        Cheers…

      • Rusty Penny says:

        But I’m afraid your emotional arguments lack substance completely. I can’t trade in myths, only facts.

        O dear, this is quite unbecoming. You preface your counter agument by using shaming language for what purpose?

        Then your subsequent post addressing Alex is what, deitifying yourself as the ‘invisible amongst us who creates something constructive’?

        Your reponse is farcical.

        Now as far as myths go, I raised 6 points. Two of them could perhaps be construed as ‘myths’, the one one bankers being salesmen, the other about the likes of norris and kelly being able to afford lower remuneration.

        However you did not raise anything prior or after my post to counter that, or offer what should be viewed as reality, regardless of any mythical qualifiaction on my behalf.

        The other points are nowhere near a myth, they are just describing my ideal of how debt and ownership is restructured.

        I’m not prepared to spend time debating with folk who refuse to listen to reality,

        By planting fear about Medici style banking?

        but I’m more than happy to discuss this another time when you have re read what I wrote a few times, and tried to understand my point of view.

        I understand your point of view, and that is without the current bank owners owning banks, and current bankers managing banks, that we will have a poorer banking system.

        You also conject that existing lending volumes are required because existing profit levels are required to avoid substandard banking.

        You also reinforce that I am proposing destruction of the banking system, instead of the purging of the banking class and restricting the pain to bank owners.

        I understand your argument perfectly, so it’s only fair that you take all the facts into consideration, and try to take a broader view.

        Now a patronising brief….

        I’m not the type to “Nuke” the whole neighbourhood including my own house because I have a grudge against my neighbours.

        Living in a neighbourhood is not an enterprise. Private banking is, there is a BIG difference.

        It’s an illogical response.
        Please think about that.

        Just because you don’t like the reponse does not deem it illogical.

        I am advocating the purging of poor performing bank managers, with the pain of failure being borne by owners. bankruptcy in other words. Under this guise, the crippling debt is repdiated, and banking functions continue as normal.

        A financial crisis does not leak into the wider ecnomy and plant an economic crisis.

        The financial crisis stays in the world of finance.

      • Peter Fraser says:

        RP – I see that you have backed away from your nationalise banks argument.

        Look if there was a badly managed bank that deserved to be taken over by the state, I would be in there boots and all calling for that, but there isn’t as yet.

        Governments really don’t want to be in the banking business, but there is an unholy wedlock of sorts that cannot be avoided.

        So we have bankers who are forced to lend under certain predetermined criteria that isn’t strictly a pure business decision, a shotgun marriage, and yet they still get it right more than 98% of the time, exactly what is your strike rate in finance or any other field of endeavour?

        None of that means they are beyond reproach, in fact they should take on more risk by lending more in the business and commerce sphere, but risks are greater, and people need to understand that.

        Risks means bad loans, and that erodes profits in a BIG way.

        Any lender who hasn’t written a bad loan just isn’t doing their job, it goes with the territory. It’s like a motoGP rider who hasn’t slid across the tarmac at 300kph at some point in their career, slow cautious riders win nothing.

        There is a balance between risk and reward in all areas of business. Taking the Gomer Pyle road in business only works in movie scripts, it takes some real skill in business, banking included.

        Anyway I’ll leave it at that for tonight.

      • Alex Heyworth says:

        RP, you seem to have a strange theory that if a company becomes insolvent, ownership of it automatically reverts to the state. Let’s check this against reality. Does the state own HIH? No. Does the state own Hillgrove Gold? or Hills Motorway Group? No to both. As you might have noticed, this is a sample taken from one page of a very extensive list of delisted companies.

        What does happen, of course, is that the company goes into administration or receivership. In either case, the administrators or receivers will try to come to some arrangement with the company’s creditors for a deferral of debt obligations so that the company can continue in business. If those negotiations do not succeed, the company’s assets are sold and the proceeds distributed to the creditors. Receivers, who are appointed by a creditor when a loan is defaulted on, might be less inclined to negotiate with creditors. Administrators are appointed when directors form an opinion that the company is insolvent.

        The end result if our major banks became insolvent and had to be wound up would be that we would have no domestic banks, our mortgages would be flogged off to foreigners at fire sale prices and our international reputation would be mud.

        As you can see, there is no role for the government in this. If the government were to step in, it could only be by guaranteeing the banks’ loans. Which is what others on this thread (and the original post) were arguing should happen in the first place.

      • wiseguy says:

        Great discussion guys, but honestly…aren’t banks on the governments/RBA’s teat anyway?

        What’s all this fuss about responsible banking/lending etc etc. – the system has moved on from that two decades ago. Responsible banking was when bank managers had relationships with their clients and knew their situation and when people had to qualify for a loan by having a 20% deposit and not through having a credit history with zillions of loans with the bank.

        The problem is fractional reserve banking…

        Peter Fraser: “Governments really don’t want to be in the banking business, but there is an unholy wedlock of sorts that cannot be avoided.”

        They are, or who do you think prints all this money so our banks can lend out $10 for each dollar in deposits? Yes, right the RBA! And don’t say they are independent of the government, pleaaaase.

        As someone else on this thread implied, banks are a protected species all around the world. No other business gets a license to print money and gets bailed out when things go wrong. Plus, in some countries (U..) they even get immunity from prosecution through special laws if they behave fraudulently. Their own legal depts can investigate and then simply pay a (minor) fine to get off Scot free!

        A great business model this TBTF thingy!!

      • Skoptimist says:

        “Be aware that banks are “special” for one reason – our economy absolutely relies on a strong banking system, whether that fact is politically palatable or not – a country without them is not where you want to bring your children up.”

        No, the country requires a competent banking system full of competent people who know how to assess risk.
        We clearly don’t have that despite the generous salaries those in the banking system enjoy.
        If the banks can’t operate under the same market rules as any other company (i.e. those not seeking or being considered for government bailouts) then they need to have their own rules.

        The way to ensure that we get this is by regulating them to the extent that they essentially become utility companies. Rather like the postal service (which coincidentally provides many of the banking services that the banks used to provide), or the gas or electricity companies.

      • Peter Fraser says:

        Wiseguy -

        “Responsible banking was when bank managers had relationships with their clients and knew their situation and when people had to qualify for a loan by having a 20% deposit and not through having a credit history with zillions of loans with the bank.”

        Yes I worked in banking when that was so, but it’s not now and the new model is what is favoured by government – move on, they aren’t going back to that model. I can assure you that you wouldn’t like that style of banking, although it is much better for small business. PS – you are over emphasizing good borrowing history, a good credit file is not one full of borrowings, in fact that pulls the scores down. Go to mycreditfile.com.au and get a copy of your own file, it’s only the cost of two stamps if you write in. Paid all of your bills? You may get a shock…

        “The problem is fractional reserve banking… ” Not really. See answers below.

        Peter Fraser said: “Governments really don’t want to be in the banking business, but there is an unholy wedlock of sorts that cannot be avoided.”
        They are, or who do you think prints all this money so our banks can lend out $10 for each dollar in deposits? Yes, right the RBA! And don’t say they are independent of the government, pleaaaase.”

        Well I will say they are largely independant of government. In the banking model, money isn’t printed. First they take deposits, and then they lend that money out. Because the funds are large and pooled it appears that the depositors money is still there, and the new borrower has the same funds as well. In a banking crisis, that deposit may be frozen until the loan has been repaid. It’s all an illusion that works well until we get a crisis. It’s often described as money creation, but really it is just the illusion of money creation.

        “As someone else on this thread implied, banks are a protected species all around the world. No other business gets a license to print money and gets bailed out when things go wrong. Plus, in some countries (U..) they even get immunity from prosecution through special laws if they behave fraudulently. Their own legal depts can investigate and then simply pay a (minor) fine to get off Scot free!”

        Absolutely banks are protected, for the reasons that I outlined. But you are now transposing events and problems that happened elsewhere, on the local situation. Do you understand how completely wrong that is. You can’t blame local banks for events that happened as a result of another banks actions in another country.

        I’m happy to hear genuine criticism of any financial institution, but I’m not going to support claims that are just untrue.

        Lets get a little reality into the debate, don’t trick yourself into a false belief.

        Could our banks be better – hell yes, Could they be worse – hell yes.

      • Merk says:

        PF – I see you have backed away from your argument that you were done posting for the day.

        “We all profit from a strong banking system, even though that is not the mantra we hear today.”

        So Peter what would you consider a fair price for the Australian Treasury to pay for a strong banking system? Could a strong credit rating be paid for by cuts to public services like health and education? Or is the solution to impose an inflation tax on those rare gems who work hard in the community and save responsibly.

        Protected species are fundamentally a feature of a failed free market. Shovelling public money into a bad banking system does not magically turn it into a good banking system, it simply removes the incentive to manage risk responsibly.

        If anyone should eat austerity, it should be poorly performing bankers. Dismiss the rhetoric of envy all you want – it will always provide a powerful counterweight to the rhetoric of greed.

      • littleguy says:

        Well if the banks are so well run they don’t need any government guarantee or taxpayer bailout then.

      • Peter Fraser says:

        Merk – you probably won’t read this, but just for the record this is what happens in a failed banking system.

        http://www.zerohedge.com/news/pictures-latvian-bank-run-mf-global-commingling-comes-town

        Banks must be protected by leglislation, and depositors must be protected. When a bank falls, everyone falls with it.

      • Merk says:

        Hi Peter, wrong again. I’m well aware of what a bank run looks like.

        For the record, this is why a debt problem can’t be resolved by issuing more debt:
        http://www.zerohedge.com/article/guest-post-death-debt

        And this is what can happen when the state prioritises financial obligations over social obligations:
        http://www.youtube.com/watch?v=oOvwMRVI9Rk

      • Peter Fraser says:

        Merk – wrong – that is what happens when politicians put re-election above fiscal responsibility, and voters happily comply with their criminal behaviour.

        Mate the voters knew what they were doing, they just hoped that the good times would outlast them, but the party had to stop someday.

        In Greece there were no innocent victims.

        When no one pays tax, but everyone has their snout in the trough, it can only end in one way. The Greeks deserve Greece, and vice versa.

      • Merk says:

        I think you conveniently ignore your own bias here – you advocate bottomless taxpayer bailouts for irresponsible banks, but say that fiscally irresponsible societies deserve whatever misfortune befalls them. It’s not a big stretch from that to accuse you of valuing financial institutions over the welfare of your fellow man. It’s only my opinion, but I think that’s the attitude of a sociopath.

      • Peter Fraser says:

        Totally incorrect Merk – I look for the best possible outcome for the whole of society, I don’t think that is the aim of a sociopath.

        When banks fall over it is the people who get hurt. The bankers only lose their jobs and then collect welfare

        Every case of course would be different. If nationalisation is needed, then that is what should happen, if just a little modest support is needed to restore confidence, then that is what should happen.

        If a total collapse is beyond the states capacity to stop, then a collapse is what should happen, but be warned the cure can be worse than the disease, especially when the disease is merely contagion caused by a lack of confidence.

        Merk I don’t think you have thought through all of the consequences of a bank collapse.

      • Rusty Penny says:

        What?

        How can you say that?

        We are clearly in a housing bubble, yet tell me which of the big 4 has reduced their book exposure to residential property in any material way?

      • Alex Heyworth says:

        I thought all of them had. Certainly their lending criteria are quite a lot tighter than they used to be.

      • V says:

        Banks have been getting high on the hog of residential mortgages. They say lending standards have been tightened, but to what degree? Does anyone know? I would say there is still plenty of 90% LV stuff out there.
        Then the question is how reliable is the ‘valuation’.

        Agree with all the sentiments above. If banks are having issues, would it kill them to dial back the dividend stream for more stability? Equity and debt holders must take the pain of a restructure, you simply can’t saddle it onto the backs of the taxpayer it is morally and ethically wrong. Convert debt>equity, there is your recap.
        I have no doubt the failure to do this sufficiently in the US and the hairbrain schemes to ‘prop’ up housing have induced much of the stagnation as ultimately the economy grinds to a hold and you get secondary effects, ie people can’t move to where the work is etc.

  12. Mav says:

    In case of a banking crisis, I would prefer a Swiss + GM style hybrid solution.
    .
    1. First off, let the banks shrink their balance sheets. After the GFC Phase I, weren’t they were all over the news claiming how well managed they were.

    Now there are news articles claiming the banks have no immediate need to raise funds as they have $200 billion of liquid assets. Well, liquidate it first and then we’ll see.

    2. If the yard sale is not enough, then perhaps we can have a General Motors style bankrupcty and rebirth. In they went into bankruptcy and out came New GM with government as majority shareholders + shirtless union pension funds + trouserless bond and shareholders. In the mean time, government guaranteed the warranties on the GM cars.

    We have the Financial Claims Scheme to guarantee depositors and APRA probably has powers to seize the banks before they go belly up anyway.

    Of course, a few car dealers hit the wall during the GM saga, so will a few depositors during any banking crisis. Well, that is creative destruction for ya.

  13. monsieurbarso says:

    Being ruefully pragmatic, you would say – ‘guarantee’, and depending how risk averse you are – ‘and fast!’. The domestic bond guarantees mentioned above are a good idea, but I wonder if Super funds’ appetite for inflation protected bonds has already been exhausted since 2009 ? I don’t doubt there is the capacity for them to be taken on, particularly as the super guarantee gets ramped up to 12%

  14. macros says:

    Great comments Rusty Penny. +100

    Agree 100%.

    Enough of the socialist pandering which has killed capitalism. Alex, enough of your too big to fail comments. The whole reason why we are still in this ongoing crisis is because of socialist agendas which prop up failed institutions and allow continual mis-allocation of capital.

    It is so bad now that we don’t have free markets, we don’t have capitalism and everything is falling apart.

    • Alex Heyworth says:

      “Socialist pandering”? That’s a good one. My position is simply one of pragmatism. Having created a banking system which relies on overseas credit, we have no rational choice other than to prop up the banks if overseas financing becomes impossible. The alternative, as I outlined above, is to let them become insolvent, following which their assets (ie mortgages and business loans) get flogged off to foreigners at the best price the administrator can get. We would end up with no domestic banks, even more indebted to foreigners, and the laughing stock of the world. Great result!

      There are some like RP who seem to think that if the banks become insolvent the government can just take them over and that would be that. It doesn’t work that way. If the government did that they would have to recapitalize the banks to meet the Basel III criteria. That means stumping up the equivalent of current shareholders’ funds. At about $20 billion plus per bank, that’s over $80 billion for a start. And they would still be liable to pay off the banks’ loans as they became due. So the result would be that the taxpayer would be $80+ billion worse off than if the government had just guaranteed the loans in the first place. Again, great result. Not.

      You have to follow these things through to their conclusion to work out what the right option is, not just look at step 1.

      • Jason says:

        ““Socialist pandering”? That’s a good one. My position is simply one of pragmatism. Having created a banking system which relies on overseas credit, we have no rational choice other than to prop up the banks if overseas financing becomes impossible”

        Rubbish. The banks claim to have significant assets backing their liabilities. Our banks are not as ridiculously overleveraged as Lehman was. To suggest that they will immediately go insolvent if the government doesn’t guarantee them is nonsense.

        “Propping them up” with an open ended guarantee is the wrong message to send. It essentially exonerates those managing the banks from having ANY responsibility for the shitty state of their books. It kicks the can further down the road and it amounts to government sanctioned moral hazard.

      • Alex Heyworth says:

        If they can’t pay their loans when they become due, then they are insolvent. It doesn’t matter if they have significant assets. They could even have assets double their liabilities and still be insolvent. Solvency is not an issue of how leveraged you are. It’s about whether you can obtain new funding to replace loans that fall due. If overseas credit markets are closed, that’s what will happen. The assets are irrelevant because they can’t be sold off instantly to make loan repayments.

  15. macros says:

    HnH,

    Any Government involvement should be avoided.

    Guarantees just lead to further socilialism and we perpetuate the whole problem of inefficient allocation of capital and massively mispriced market signals.

    Too. Big. Too. Fail. – NO MORE

    Capitalism works, just let enterprise fail quickly so we can reset the system with a fresh start and with a sound base. The faster it happens, the better it is and the less pain overall.

  16. Buzz says:

    I have a few friends at NAB who deal with home loans, they are actually becoming quite aggressive albeit they have a smaller share of the mortgage market compared to CBA and Westpac. Definitely still giving out loans at 90% LVR, although there was a period before this year that they were a bit tighter, but as the lending growth slowed the LVR grew out again.

  17. Congratulations to all for this brilliant thread. This is what media should be and I’m incredibly proud to be a part of it.

    One point, though, which many seem to have missed is this: you already guarantee the banks foreign liabilities, like it or not. The ratings agencies are basing their assessment of the banks ratings on that FACT.

    I am arguing we might as well make it explicit so then at least it’s in the open and can be dealt with by an appropriate redefinition of the rules that make up the political economy of finance in Australia.

  18. [...] Should Australia move to shore up bank funding in a more explicit way? [...]