The AFR has really good article today about bank funding. It begins:
The favoured euphemism for Australian credit growth is “anaemic”….despite the pressure this puts on bank earnings, it should be good news for the ranks of usually foreign analysts who fly over Australia at 30,000 feet and put out reports about a housing bubble, banks desperately vulnerable to offshore funding markets and an economy about to blow as China returns to a pre-Deng society. Another of these reports surfaced last week.
Before you stop reading, this ‘hyperbowl’ actually introduces some very good analysis by the banks themselves (which, strangely, debunks this intro). Westpac Banking Corp chief financial officer Phil Coffey said in a speech on Friday:
“A further driver of a bank’s balance sheet [that is, capacity to lend] seldom discussed outside the senior management of banks is a bank’s ‘appetite’ with respect to liquidity and funding risk,” Coffey says.
“The primary liquidity-risk-management objective of a bank is to secure a very high degree of resilience against market disruption. As you know, the GFC brought such risks into stark reality, with various high-profile offshore examples of failure including Northern Rock, HBOS, Dexia, Countrywide, Washington Mutual and others.”
This is the first time that I have seen a major bank take responsibility for Australian bank liability management. Since the GFC it has been ceaseless excuses about prudence, great regulation and most importantly, that the banks were blameless when global markets froze and they needed government guarantees.
This is a breakthrough in the public debate about banking and it is a shame that Andrew Cornell (who wrote the story) buried it with his intro. Coffey went on:
“The consequence of maintaining an appropriate wholesale funding risk appetite is that there is ultimately a limit to which we will use wholesale funding to support growth. No matter how cheap wholesale funding may become, it may not be acceptable given its implications for future risk.”
Exactly right. There is always a shock. You never know what or where it will come from so the only way to avoid a repeat of last cycle’s quasi-nationalisation is to prudently manage your liabilities.
To his credit, Cornell goes on to rightly conclude that any new Wallis Inquiry faces a tension between the needs of funding and stability, which are not sufficiently addressed by the vested interest campaign for a return to non-bank and mutual cowboy competition.
