European crisis ends for banks

Banking Day this morning reported that:

Commonwealth Bank tapped into the resurgent mortgage-backed securities market, with a deal that was upsized from A$750 million to $2.3 billion.

On Friday, the bank priced its latest RMBS issue, Medallion Trust Series 2013-1. It will pay 80 basis  over the bank bill swap rate on the $1 billion of A1 notes, which have a weighted average life of 2.3 years.

Crikey! 80 points over swap is starting to look pretty decent.

Meanwhile, CDS prices for five year debt has fallen decisively below the European crisis threshold of 100:

This is all enough to have prompted Jonathon Mott at UBS to forecast out-of-cycle rate cuts by the banks. From the AFR:

“If the global economy continues to improve, funding markets keep rallying and deposit competition continues to ease we believe banks will come under pressure to initiate out-of-cycle rate cuts,” he said.

“If this scenario eventuates and the banks do not move to pass though funding benefits the risk of ‘political interference’ is real. This may be to the long-term detriment of shareholders.”

“New entrants without the baggage of a back-book of expensive wholesale funding are also likely to enter the mortgage market.”

Here are Mott’s two key charts:

Still, quite a few ‘ifs’ there. It’s not easy to see where this improvement in funding ends. While debt markets have given up on risk since the ECB stepped into the breach last year, the global economy is not, in my view, on the road to some new boom. Hence actual economic conditions will lag the hopium that is loose in markets.

More to the point, banks have virtually no incentive to cut rates out-of cycle. To do so will end there primary defense for fattening margins and the first to move will risk the wroth of shareholders as there is no need to do so in an oligopoly.

Moreover, the RBA is happy with where rates are now. It put them there. What is the point of the banks giving up margins for market share when the RBA will take it straight back from the market?

The best I can see happening is the banks not passing on a full RBA hike, if it comes to that.

Competition may force it in time but we are still some distance from that.

Houses and Holes
Latest posts by Houses and Holes (see all)


  1. With auctions results reaching ‘boom’ percentages it is probably just as well the banks are finding a ready supply of foreigners eager for some exposure to the one global asset that keeps on giving. – Oz housing (aka the Australian Banks).

    Booms are not kept booming with expensive local term deposits.

    RBA – Take a bow for working so hard on that interest rate lever to keep the dream alive and household debt expanding.

    Just in case anyone thinks it is a clever plan to get foreigners to fund our housing follies, remember that they are betting that should their investment go sour Mr Swan (and no doubt Hockey) will, without hesitation, pledge your taxes to repay them to protect our national reputation with the international Merchants of Debt.

      • I gather by implication that you are comfortable with the current levels of household debt (using whatever measure you prefer) as you seem very resistant to any attempt no matter how slow or moderate to actually reduce the % of household of debt.

        That surprises me as you seem very aware of the risk and vulnerability that the current levels of household debt pose to the stability of our financial system.

        Clearly, if you consider an economy with 5.4% unemployment, the tail end of a mining boom of epic proportions and reasonable GDP growth still too feeble to allow any attempt to reduce household debt as % of disposable income or GDP, it is hard to imagine any scenario where you would consider an attempt to reduce household debt feasible.

        If we have too much debt it follows that we should try to do something about it and taking some action (higher rates possibly with MP and with fiscal policy if necessary) when the economy remains healthy seems prudent.

        • Don’t be absurd. I invented the word “disleveraging” for just such an outcome.

          But if we had rates higher the dollar would almost certainly be above $1.10 which would be hollowing out the very production you purportedly defend so that debt can shrink.

          As I’ve said many times, cutting rates is the least worst option. Far better would be MP, fiscal changes etc…

          • Trying to manage the exchange rate using interest rates is like trying to manage a bushfire with a water pistol.

            The exchange rate can be managed but only if you are prepared to tolerate higher interest rates as you deny foreign purchasers of $AUS access to $AUS financial asset transactions.

            Fiscal policy is the appropriate (and democratic) tool for managing the economy and providing work and income for people in the event private demand shrinks (which is to be expected as a chunk of it is debt driven growth).

            Certainly, I am seeking to limit the role of monetary policy and expand the role of fiscal policy (if required) but the status quo merely reflects the inadequacies of the economic orthodoxy of the last 30 years.

          • On which we agree.

            But it’s not right to say monetary policy has no effect.

            If rates were 1% higher there is no doubt in my mind that the dollar would be more like $1.15.

          • If interest rates were 1% higher but foreign investors were severely limited as to the transactions for $AUS assets they could enter into wouldn’t the dollar fall?

            If foreigners were limited in their ability to purchase govt securities or bond issues by banks and there was a tax (tobin) to reduce purely speculative plays, the $AUS would be lower even though interest rates were higher.

            This is not some much as intervening in the floating exchange rate as limiting who can be a party to the more significant and market moving exchange rate transactions.

            A free floating exchange rate for trade but less freedom for certain capital transactions.

          • We seem to be in perfect agreement except as to whether the RBA should actively seek to drive a move to the use of other policy measures (fiscal, exchange rates etc) to manage the economy or it should continue to accept prime responsibility for running the economy by yanking increasingly more desperately on the damaged if not broken interest rate lever.

            As for what will happen we are likely to be complete agreement.

            The RBA will not change course in an election year and will continue cut rate/stimulate debt to drive the economy, if it wilts, so Mr Swan can appear ‘responsible’.

            Central Bank ‘independence’ – one of life’s little fantasies.

          • I am with you gents in general – we need Macro Prudential or non orthodox monetary policy tools, but arent likely to get it, so the real game is about the least worst alternatives. These differ depending on the time perspective.

            I see Pfh007 and the disaster path of the status quo and have respect for HnH’s points about disleveraging bring about severe pain and that lack of interest rates going higher will have pain too…..

            ‘Just in case anyone thinks it is a clever plan to get foreigners to fund our housing follies, remember that they are betting that should their investment go sour Mr Swan (and no doubt Hockey) will, without hesitation, pledge your taxes to repay them to protect our national reputation with the international Merchants of Debt.’

            Just imagine what the AUD looks like out near that scenario, and what sort of global rate environment might be rubbing our noses into the ground at that point (given our uber debt load).

      • Rubbish, it is here, the run back to housing is going to hollow out the economy more than a increase of a few cents in the exchange rate.

    • “…they are betting that should their investment go sour Mr Swan (and no doubt Hockey) will, without hesitation, pledge your taxes to repay them to protect our national reputation with the international Merchants of Debt.”

      Yep. That’s the play.

  2. Yeah well done RBA for properly messing up the economy, boost housing speculation and increase debt, and stuff everything else productive.

    • There does not seem to be any interest in dealing with the high dollar not to mention any impacts, real or imagined.

    • Reveal the truth of how fiscal policy is destroying Australia. Tell the people that monetary policy is limited.

      They have the credibility, people will believe them.

      Tell them to start their own political party that advocates for small government with an emphasis on reducing taxes, hand outs and crushing all rent seeking business’s.

      Create the circumstances that created the boom in America post civil war. We have the resources and the smarts to do it.

      We just lack the vision.

  3. Unless CBA can show that there are New investors from offshore, its just reshuffling the deck chairs from unsecured to secured debt, admittedly at a cheaper price

    • They raised much more than they needed, so I don’t get the feeling that this is all just rollover of existing facilities.

      So they either took the opportunity to refinance additional rollover or they think they see expansion.

      What is the talk?