NAB warns on offshore funding risks

The Australian banks’ heavy reliance on offshore funding has received limited coverage in the press lately. On Thursday, the Australian Financial Review (AFR) ran a story entitled Clyne sounds funding alarm, where NAB’s CEO warned about funding challenges facing Australia’s banks and the risks inherent to the Australian economy. Surprisingly, however, Clyne’s comments were not picked up in the more widely read mainstream papers. Here’s an extract from the AFR article:

Australian banks’ annual funding task is set to double to $300 billion annually in the next decade, leaving the sector and broader economy vulnerable because of its dependence on offshore credit markets, National Australia Bank chief executive Cameron Clyne has warned…

“Australia’s banks are very, very reliant on offshore funding. The [big] four banks this year will probably source in order of $140 [billion] to $150 billion”, he said.

Mr Clyne estimated that figure could double to about $300 billion annually in 10 years. This presented the economy with “massive challenges” and left Australia exposed.

“You expose yourself to potential shocks [and] the shocks can come in many forms”, Mr Clyne said. “It’s one of those issues that we need to recognise, that it is a vulnerability and we don’t have to look back too far to see what a vulnerability looks like”.

As I have said on multiple occasions, Australia’s housing bubble has been fuelled by:

  1. an increased emphasis on mortgage lending relative to other forms of lending (e.g. lending to businesses); which has been funded through
  2. heavy offshore borrowing by Australia’s lenders, led by the big four banks.

The first point is illustrated brilliantly by the below chart from, showing how in 1990, Australia’s banks lent around two-thirds to businesses and one-thirds to households. However, over the past 20 years, the banks have increasingly focussed their lending on housing such that business loans now account for only around one-third of total bank lending.

On the second point, the banks’ increasing reliance of offshore funding is shown clearly by the below chart, showing a sharp increase in external liabilities by Depository Corporations over the past 20 years [note: the below chart also includes offshore borrowings by building societies, credit unions and registered financial corporations, although the banks account for the lion’s share].

Now consider the below chart from fellow MacroBusiness blogger, Deep T., showing three indexes starting at January 2000 representing the growth in residential loan assets, bank deposits and offshore borrowings. It also includes a ratio to compare residential housing loans and deposits.

What should become increasingly clear is that the growth in Australian housing values has been funded, to a large extent, by foreign borrowings, much of it short-term.

The key risk is that the banks’ ability to refinance their borrowings rests with the willingness of foreign investors to continue to lend them money. When times are rosy, perceived risks are low, and credit is freely available – such as prior to the onset of the GFC – the banks are able to refinance their foreign borrowings easily and cheaply. But in times of heightened risk-aversion – such as when Lehman Brothers collapsed – foreign investors are less inclined to continue extending credit, leaving Australia’s banks, house prices, and broader economy exposed to a sudden liquidity shock. This is the pro-cyclical nature of modern finance. During good times, asset prices become inflated by easy credit. But when circumstances sour, credit is pulled-back, potentially causing debt-deflation.

Clearly, the vulnerability that Clyne was referring to in the AFR article is the roll-over risk relating to the banks’ heavy offshore funding, which came to the fore during the GFC when the banks were unable to refinance their maturing wholesale borrowings. This necessitated extensive Government (taxpayer) support in the form of: (1) the wholesale funding guarantee; and (2) unprecedented liquidity support from the RBA via the repo market, which ensured that the banks remained solvent and credit continued to flow into the Australian economy (mostly housing). Let’s also not forget that the Government provided support to the asset-side of the banks’ balance sheets – i.e. the home values providing collateral against mortgages – via the temporary increase to the first-home buyer’s grant and the temporary relaxation of the rules on foreign ownership of residential property.

The extend of taxpayer support provided to Australia’s banks is evident from the below IMF chart, showing that the Australian Government guaranteed the second highest level of debt in the developed world behind Ireland.

Whilst these Government interventions worked well to reflate the housing/credit bubble after the GFC, we now appear to have reached a situation where the banks are facing difficulty growing their offshore borrowings. In spite of Clyne’s prediction that Australia’s banks would increase their foreign borrowings to $300 billion annually over the next decade, earlier reports suggest that the banks will be loath to raise additional offshore funds as this could put their prized AA credit ratings at risk. Each of the big four banks are amongst the world’s heaviest issuers of wholesale debt and they are already in the sights of regulators, ratings agencies and investors for their heavy reliance on wholesale money markets.

So unless the banks can replace this funding with another source, their ability to support further house price growth appears to be limited. And without continued increases in debt issuance, there is little prospect of continued growth of housing values. A prolonged period of price stagnation, therefore, appears to be the best case outcome for the Australian housing market.

Cheers Leith

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Unconventional Economist
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  1. The_Mainlander

    So, they rivers of off-shore gold are turning to lead as the weight of our foreign dependency now becomes clear.

    The NAB waving this flag is of no surprise their CEO was waving the flag about the other banks’ having too big a retail mortgage book.

    And the NAB have been focusing on Business Lending… to a point.

    Looks like we a are firmly headed for correction and you have to wonder if the big off-shore money started to slow down what the communication loop of this change could bring.

    It may will bring an abrupt halt to foreign cash being sent our way… there certainly is less cash washing around these days excluding the USA Peso.

    Leith, you suggest a “A prolonged period of price stagnation…” I think you may well be being kind.

    If the off-shore funding which I think is at circa 60% did start to dry up that would be a catastrophic hard landing!

    Complete Australian property implosion, negative equity and serious bankruptcy on a scale not seen in Australia since 1890 when we had the worlds most expensive land in Melbourne! (Fact: 1891 economic bust – link to Wikipedia here:

    Let’s hope that Australia is indeed different as would ‘they’ (RE, RBA, MSM, Banks, Local Gov, Fed Gov) like us to think.

    Thanks Leith keep up the excellent work.

  2. How true about the mainstream going quiet on offshore funding problems. We wouldn’t want to scare the sheep off further credit fuelled consumption would we?

    It makes you wonder what Clyne’s motives are considering Gail Kelly’s recent claim that funding won’t be a problem.
    They’re obviously not all using the same strategy or crystal ball.

    And don’t you love the forecast doubling of offshore funding requirements over the next 10 years. Considering the dominance of housing’s credit share, it shows us the banks are true believers when it comes to prices doubling every ten years!

    Your last paragraph sums it up to perfection Leith. Is it any wonder sectors of the real estate industry are already calling for further Government intervention.

  3. Yeah, good article – the only points / questions I would make are:

    1. Why is NAB trying to steal home loans from other banks (through the ‘breakup’ marketing) if they are so worried about funding ( I would be getting rid of loans especially marginal ones), and,

    2. Maybe with PIMCO pulling out of U.S Treasuries..maybe they will purchase some Aussie mortgages..?

    • A possible answer to your first question, Nick, is that loans “stolen” from other banks may in fact be lower risk than new loans, overall. New loans (particularly to first home buyers) would generally be the highest risk, with the highest loan to valuation ratio.

      • Great point, Alex.

        I was wondering that exact same thing as I read Cameron Clyne’s comments, but it now makes perfect sense…

        Banks can’t afford to scale back their loan books, because shrinking assets would have an obvious impact on profits and bonuses. But, as you point out, this aggressive competition for existing customers lets them keep expanding, all the while hoping that new customers pinched from elsewhere in the system will be better placed to pay their mortgages than bring new customers who walk in the door.

    • Yup, steal the premium stuff. Above avge incomes, secure job, <15% of family gross in loan repayments and <70% LVR.

    • I think NAB will be cherry picking the home lending sector of their competitors.

      AAAA only need apply.

      Pimco’s boss knows well what a bubble looks like, not a likely source of support there.

    • I think PIMPCO’s boss throwing a hissy fit probably has more to do with a front running operation badly gone wrong – his annoyance that the Fed’s QE2 doesn’t include buying up MBS, just like they did with QE1.
      If someone can look at PIMCO’s buying habits just before QE2 was publicly announced, you may find dud MBS purchases that they probably planned to dump on the Fed – a nice tidy profit by paying a pittance and then getting every cent on the $ back from the Fed.
      Taibbi had a interesting post on this:

    • And PIMCO was buying Aussie mortgage bonds back in June last year because they are “bullet proof”
      “Pimco’s Australian unit, which manages about A$28 billion ($23.4 billion) of assets, is buying the securities in its second-largest credit-market bet behind bank debt guaranteed by Australia’s government, head of portfolio management Robert Mead said in an interview in Sydney.”
      Reading between the lines, it seems to me that “bullet proof” is an euphemism for “moral hazard”.

  4. I guess that is the biggest question of them all is not if its going to happen but when. I think before any collapse happens in Australia it will need to happen or start in China first. Then the effects will be felt in Australia.


    • I disagree. A China collapse is not necessary. The truth is it’s already started. Gold Coast, Sunny Coast and FNQ have seen significant falls and there isn’t a lot to stop it. Nobody is prepared o admit that Melbourne and Perth are following suit. China slowing down will just speed up the inevitable.

      A recession will be triggered by falls in home value not the other way round.

        • When houses prices across the nation have fallen 15 – 20% then lets talk about a bubble popping. The only thing holding up Australia is China. When it pops the rest of the countries like Australia, Brazil and Canada will pop but probably worst.

          • When prices have fallen 15-20% everybody will know that the bubble has popped… prices are heading there right now… irrespective of what China does… the bubble has popped because the psychological cascade has progressed… if China pops then prices will go south quicker and probably overshoot fair value sooner and by a greater degree…

          • I was speaking to an RE agent last weekend at an open….(I don’t particularly like this agent)he actually admitted that prices have been falling up here for a few years. Wow! (or as I thought “no sh1t Sherlock!) you actually admit it. That’s not what it’s been saying in the Cairns Post weekly RE comic!! (Nice link Dud!) the weekly editorials (like that one) make for fun reading every week. The RE agent had started by telling me that I really should be buying NOW…we are at the bottom…gonna be up 5-10% by the end of the year!! Just to top it off he actually said that he was only telling me for our benefit, because it was in our interest to buy now or it will cost us! I was unable to discuss this with him because my wife has barred me from such conversations because she says it’s embarrassing…I think she feels sorry for them!
            Seriously…I think we are coming out of the denial stage now. A friendly RE agent, who does have some integrity,told me a RE friend of hers in MELBOURNE said to her that “they cannot see a bottom down there”… MELBOURNE I wasn’t aware prices had been falling there……

          • [email protected]

            Trust me the aircraft schedules are coming now, the tourists are here (Cairns/Sunny Coast/Gold Coast – cross out as applicable)

            Its Boom Boom time. You’ll miss out. Cheaper prices and same rents is higher yields you know.

  5. Hail to the Great God Growth.
    Bow down all ye faithful
    Each night in thy 5x3s
    Worry not about the fate
    Of thy wide screens and SUVs
    Great God Growth will save thee

    • Materialism, once considered the virtue of the rich and wealthy. Now a vice of the poor.

      But behold Monorina, Ross Greenwood has just blasted the airwaves this morning courtesy of 2GB radio, that Australia’s debt to GDP ratio is a healthy, not to worry about 6%. Someone should whisper in his ear saying, “”.

  6. The offshore funding won’t be any problem. We’ll just do what we’ve always done and sell off some assets. Sell Rio…oh! wait we’ve already sold 85% of Rio. Oh well! We’ll just sell ’em BHP…oh! haaaanng on! We’ve already sold 70% (from memory)or so of BHP…Well we’ll find some other mines to sell….but wait 80% of our mining reources are already sold! Well we’ll just sell ’em the food chain…Ah! It’s already gone as well….Well we’ll sell ’em……??????????????

  7. Stupid question perhaps, but if the Fed decides on no QEIII, will that affect banks offshore borrowing ability?

  8. Hi Leith,

    That is quite a turnaround in the business/housing ratio. What do you see has been going on here. Does this mean business has been getting their funds elsewhere or not at all?

    • G’day meandring40. Many larger businesses have probably accessed funds directly via the capital markets (e.g. via bond issuance), whereas many smaller businesses might have accessed credit via there homes (e.g. via a home equity line of credit). But I am only guessing.

  9. Does this mean that there’s not enough AUD in existence to fund our own mortgage market (!!), or is this more of a profit optimisation issue for the banks given offshore borrowing is cheaper?

  10. Why isn’t the likely possibility of the RBA printing more money to lower rates if o/s lending gets more expensive being discussed?