The AFR has a no worries, be happy piece this morning about bank funding in the current environment. It begins:
Commonwealth Bank of Australia group treasurer Lyn Cobley has shrugged off renewed concerns over Greece’s sovereign debt problems, saying European funding markets remained open for high quality Australian banks, albeit at a higher price.
Ms Cobley said CBA was well placed to ride out the ructions engulfing the European financial system.
…“I don’t think there is a problem with markets being opened, I think it may just be a little more expensive than it was a week or two ago.”
Ah, yes. Here’s today’s CDS chart, which, thankfully, showed no further rise yesterday:
Ms Cobley is right, as I wrote yesterday. Whether that issuance would be economic is another question entirely. The AFR goes on:
Her comments appear to contradict ANZ Banking Group chief executive Mike Smith, who said last Friday that European funding markets were “essentially closed”. Ms Cobley is in Europe on business but is not seeking to tap bond investors.
If Greece exits the euro zone, Australian banks would not escape unscathed.
…“Funding costs would go up, but for those banks like CBA that have positioned themselves well to cope with any uncertainty like that, we’ll ride it out,” Ms Cobley said. “What really causes market disruptions is the really surprising events. I don’t think people will be as surprised about Greece falling out of the euro zone.”
Hmmm. It’s possible, if the ECB were to move quickly enough, it could stabilise European funding markets before contagion went global. It would need to do all of the things that the Fed did in 2008, backstopping sovereigns, banks and corporates – basically the financial system – before sovereign defaults spread across the periphery, bank bad debts became deposit runs and a generalised credit crunch followed into households and trade. I think it likely that the Fed would also need to reactivate many of its own programs to prevent counterparty contagion in the US. If executed quickly enough, these many central bank actions could overcome the wave of counterparty suspicion that will clog the arteries of global finance the moment Greece defaults. I sincerely hope so.
But the following from Ms Cobley is patently false:
She said the fact Australian banks had a small exposure to European banks and sovereigns was a positive. The Reserve Bank of Australia noted in its financial stability review in March that Australian banks had “very limited” direct exposure to the sovereign debt of euro area countries, representing about 1 per cent of their total asset base.
Australia has limited exposure to European assets but not liabilities. As the IMF warned last year:
While financial institutions (mainly banks) have reduced their external borrowing, disruptions in global capital markets could still put pressure on their funding. Financial institutions external borrowing has fallen from a peak of 70 percent of GDP in 2008, to less than 60 percent of GDP in mid-2011 (Tables 6 and 7). Short-term debt (mostly issued by banks) has also declined, but remains sizable at 42 percent of GDP (on a residual maturity basis). Funding from European banks was just over US$300 billion at end 2010, about ¼ of gross external debt. If offshore funding markets were disrupted, the cost of bank funding would likely rise.
Then again, we all know that liability management is no longer a part of Australian banking.
The AFR goes on:
CBA has already completed $27 billion of term funding for its current financial year ending June 30. “We are well ahead of our task and can actually sit on the sidelines for a period of time if we want to,” Ms Cobley said.
Mr Smith last week said ANZ had completed its 2012 funding task and had planned for two years for the scenario that is unfolding in Greece. Westpac and NAB have both taken care of about two-thirds of their respective $27 billion and $21 billion estimated funding needs for their financial year ending September 30, based on figures from Nomura.
That’s good news. And it is clear that bank funding profiles have improved a lot since the Lehman bust. But there is another flaw in the article. When Lehman went bust short and long term funding markets were frozen. If that transpires again then the banks need for cash will be much more pressing, especially since we’ll no doubt also see a big run of deposits from the country.
