The SMH has very important story this morning on the funding crisis that is bearing down on the major banks:
Australian banks are preparing for a potential freeze in global funding markets as Europe’s worsening stresses threaten to send the world’s financial markets into a tailspin.
Renewed funding pressures for the big banks, which need to raise $16.3 billion over the next two months, are likely to make it tougher for business and some consumers to access credit.
But the upside is that economists are now tipping the Reserve Bank could slash interests rate into next year.
Nobody really knows what the funding needs and time frames are for the major banks so we need to take these figures with a grain of salt. However, the numbers are plausible in the context of an accepted annual wholesale funding need of $120-140 billion.
There is also another problem with this argument. There is no upside. Credit flows are determined by both price and availability. They are linked of course but if one gets taken out, in this case availability, then the other becomes irrelevant. By that I mean that if the major banks cannot refinance their $16.3 billion then the lack of availability of credit to them will mean they must sell assets to repay maturing bonds. In short, their balance sheets will begin to shrink. Any rate cut by the RBA will immediately be seized by the banks to widen margins to offset the fall in profitability. They will be unable to reduce the price of credit (at least, not to full extent of official cuts).
In 2008, when the banks were under similar pressures, they managed through the crisis by refinancing maturing bonds at short durations and therefore cheaper rates. But that, of course, exacerbated the very shortening of the their funding profiles that meant when the Lehman moment hit, and everything froze, the banks were all the more vulnerable and all the more quickly sucked under. This time around APRA is insisting that long maturity bonds remain just that so banks will need to to meet the market prices.
This is a credit crunch coming. In a sense, we’re already in it and it’s only set to get worse. The rising cost of funds for the banks has been happening all year and low credit growth has been the result of some mix of both slack demand and rising cost. As Banking Day discusses today, even without European issues, the drive more a liquid system may lower credit availability. The SMH has more:
Finance executives from at least two of Australia’s big banks have reviewed forward funding plans. This has involved shelving scheduled raisings, with the focus to remain on ”opportunistic” fund raisings in US and Australian capital markets.
Australia’s four major banks need to refinance a total of $48 billion in bonds by June next year, according to figures prepared for BusinessDay by Deutsche Bank. Of this, $16 billion needs to be refinanced by the end of January, the figures show.
I don’t know if there’ll be further opportunities. If the ECB flips over and elects to print more money then you would think so. But if not, the European liquidity squeeze and its faltering economy now look locked into a feedback loop to the death. I have no idea how they are going to rescue themselves beyond the ECB panic button.
The big contingency question for me, then, is when does the government step in with a renewed wholesale funding guarantee? It can avert the credit crunch quite cheaply by doing what it did in 2008 – offering the banks a bailout. But it did that in 2008 after the Lehman credit event and in response to other governments guaranteeing their banks. If left to advance, the European crisis will inevitably throw up a similar moment and there were rumblings of renewed guarantees to European banks a month or so ago, which seem to have dissipated for the moment. Would the Australian government step in without the political cover of other governments?
In the mean time, our own credit crunch will advance and interest rates look likely to fall sooner rather than later.