Mixed signals for financial stability

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In what looks like a co-ordinated leak to offset any Greek jitters, David Uren at The Australian today carries a simple statement that:

THE government is confident our banking system can withstand everything that Europe can throw at it without needing the guarantees that forestalled a bank run during 2008-09.

The Financial Regulators Council has assured Wayne Swan that the banks have sufficient funding to withstand at least a six-month freeze on access to global markets and that there is additional capacity to obtain funding from the Reserve Bank should a global financial breakdown last longer.

It is confident the banks’ capital position is strong enough to withstand any foreseeable deterioration in bad debts.

Australian banks have very little direct exposure to Europe.

Although the success of the Australian banking system in riding out the 2008-09 crisis is seen as proof it is equal to the toughest of stress tests, the Australian Prudential Regulation Authority has greatly stepped up its supervision since.

The remainder of this story is recycled material. Looks like Uren has become the Treasury’s chosen mouthpiece.

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Do I think it’s right? Maybe. It’s useful that Canberra has moderated its rhetoric to “little direct exposure to Europe“. “Direct” meaning assets of course. When it comes to liabilities the exposure is enormous. Still, the banks showed us in the second half of last year that they can endure a freeze in long term wholesale funding for three months without incident so things have certainly improved since 2008. Six months may be a fair figure.

Then again, it’s all rather contingent on what kind of freeze and current pricing for bank bonds shows its very chilly indeed. From Banking Day:

There was minimal issuance activity in the term debt market last week, with the countdown to the weekend’s Greek elections keeping issuance – if not markets – subdued.

ANZ provided the main interest. The bank, operating through ANZ Wealth Australia Limited (which is rated one notch lower than the group at A+) sold A$200 million of three-year fixed rate bonds and A$125 million of floating-rate notes.

The two tranches were priced at 200 basis points over swap and bank bills, respectively.

Pricing at this level provides the first conclusive evidence that spreads in the physical market have widened in recent weeks. Banks have been holding secondary levels steady on rate sheets.

But 200 bps over swap and bank bills for three-year funds is twice what ANZ paid for three-year funds a little over a month ago.

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That is some very expensive dough.

About the author
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal. He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.