McCrann monsters Joye


Terry McCrann has booked a shocker today:

OH dear. One of the Fin’s portfolio of — let’s be generous — idiosyncratic columnists, Christopher Joye, is at it again, pushing his loony line that all our banks, and indeed every bank in the world, is functionally insolvent.

Now to most normal people, the very notion is at least bizarre, if not, well, insane. To them, ‘the problem’ is surely that the banks make too much money, year in and year out — not a condition, normally associated with insolvency.

So let me state immediately upfront, while I couldn’t and wouldn’t want to speak to all the banks in the world, OUR banks are certainly not insolvent. Importantly, they were not insolvent, or even close to being so, even at the time of the Global Financial Crisis.

What our banks faced then, at the peak of what was the most chaotic and nerve-jangling global financial implosion since the Great Depression, was a liquidity challenge. That’s a challenge, not even a crunch, far less a liquidity crisis and certainly nothing remotely like insolvency.

And on it goes in the very high-handed tone that he accuses Chris Joye of abusing. But let’s not get too bogged down in cheap shots. The important claim of McCrann’s article is that Australia’s banks were not insolvent during the GFC. He ties himself in all sorts of knots defending the claim when the historical facts are quite clear. From my co-written book with Ross Garnaut, The Great Crash of 2008:

In the early days of October 2008, money poured into the big four Australian banks from other financial institutions. But life was becoming increasingly anxious for them as well. One by one they advised the government that they were having difficulty rolling over their foreign debts. Several sought and received meetings with Prime Minister Rudd. The banks told him that, if the government did not guarantee their foreign debts, they would not be able to roll over the debt as it became due. Some was due immediately, so they would have to begin withdrawing credit from Australian borrowers. They would be insolvent sooner rather than later.

To be sure, a sudden and extreme freeze on credit, perhaps enforced by the insolvency of the banks, would end the Australian current account deficit. Spending would fall sharply, and with it the value of imports. The awful reliability of the market process in removing an external deficit once financing dried up was demonstrated in Australia when domestic booms funded by foreign debt ended abruptly with depression in the early 1890s and 1930s. It was demonstrated just as clearly in the Asian Financial Crisis. But the process of adjustment would be enormously disruptive and costly.

The government quickly formed the view that the avoidance of a sudden adjustment through the automatic market process was a worthy object of policy. On 12 October it announced that, for a small fee, it would guarantee the banks’ new wholesale liabilities. This would include the huge rollovers of old foreign debt as it matured. The government also announced a guarantee on all deposits up to A$1 million. All four banks expressed their thanks and relief in a joint meeting with the Prime Minister on 23 October.

There was relatively little public comment on the guarantee of wholesale funding, with The Australian’s experienced economic columnist Henry Thornton being a rare exception. Much more attention was given to the less significant partial guarantee of bank deposits. Australia was engulfed by a different kind of crisis than that consuming other Anglosphere countries. In the United States, falling asset prices had triggered the collapse of shadow banking. In the United Kingdom, the fallout from that collapse had undermined the larger banks whose assets had been devalued, or which had depended on the continued reliability of the shadow banking mechanisms. The subsequent withdrawal of credit undermined the United Kingdom’s own housing market. In Australia, however, the difficulties were on the liability side of bank balance sheets. Banks had become heavily reliant on foreign borrowing and suddenly they were unable to borrow abroad. The non-banks had had no buyers for their securities for almost a year.

There are no degrees of insolvency. A firm is just as insolvent if it is not able to meet its financial obligations as they fall due because it cannot roll over debt, as it is if the value of the assets in its balance sheet is deeply impaired.

The difference is that the problem on the liability side is much more easily (and in most cases cheaply) repaired by a guarantee than the problem on the asset side. The sudden risk of insolvency in Australian banking was simply a more tractable problem than those experienced by other Anglosphere nations.

The banks might counter that they only needed the guarantee because other governments around the world were guaranteeing the debts of their national banks. This does not sit easily against the survival of banks without wholesale funding guarantees in many countries where banks had stayed within the old operational templates— for example Australia’s neighbours Indonesia and Papua New Guinea. In any case, this avoids the point. The Australian banks’ dependence on government-guaranteed debt was exceptional: in July 2009, Australian banks accounted for 10 per cent of the world’s government guaranteed debt. Through foreign borrowing to support domestic lending, the big four Australian banks were active, enthusiastic participants in the global shadow banking system that was now unravelling.

The act of demanding a government guarantee to avoid imminent insolvency should be enough to convince any rational observer that our banks were in deep crisis. Whether they were presently or imminently insolvent is quite beside the point. Without the guarantee, they, and we, were bust.

Indeed, five years on, after APRA has forced the banks to radically overhaul their liability profiles by pushing deposit funding much higher, they still rely on the implied guarantee for a two notch credit rating uplift.

We should be talking about how the moral hazard attached to the bailout can be addressed, not gesticulating wildly in a denial of the obvious.

David Llewellyn-Smith
Latest posts by David Llewellyn-Smith (see all)


  1. That’s a free shot with an open net for Joye.. Without even factoring in the other facilities which were available (Fed lines to westpac, aofm rmbs purchases)

  2. Does McCrann get 20 basis points off his property investment loan for his servile defence of the big 4 banks?

    From the horse’s mouth.. ”There were some white-knuckle moments there as the heads of the major banks will remember” – Kevin Rudd

  3. And with a stroke of a pen, the low-debt AAA Australian Government guaranteed the liabilities of the entire private banking system and assumed it onto its own shoulders. Who needs bank equity?

    We don’t have NINJA loans or sub-prime or any of those inconvenient problems that beset Europe and the USA. They can simply be rolled forward or slowly disposed in an orderly manner.

    I was a young family man buying a house in Brighton in 1990 as the banks were invisibly selling into the market a giant pile of stock that had defaulted to them. The scale of their secret disposals was only apparent to me because of one clue: the advertising board on bank-owned property sold at auction was removed the next day to minimize the visual evidence of the volume of properties moving through.

    In hindsight, that was the opportunity of a decade to buy (as I did).

    Don’t Buy Now!

  4. Joye is correct,banks are technically insolvent at any moment in time, except that central banks offer lender of the last resort facilities to ensure they don’t become illiquid.

    They could still burn all of the shareholder reserve capital and require nationalising or a merger with a stronger bank when all shareholders would lose all or most of their investment.

    Surely people know this.

    • darklydrawlMEMBER

      Indeed. Repo market anyone? If they call you on that and you cannot deliver – you are out of business at dawn. Just ask Bear Stearn and Lehman Brothers how easily it can turn on you.

    • ‘except that central banks offer lender of the last resort facilities to ensure they don’t become illiquid’

      So what happened in 08, when our own central bank didn’t bail our banks out and the US Fed came to the rescue?

      • As I understand it, as registered banks in the USA they had to take the money, and they probably would have been silly not to. It all got paid back.

        I think that people need to make an effort to understand banking, it’s an important part of our economy and it’s a business that is unlike any other. The government wants banks to lend, so they encourgage risk taking, and at the same time they regulate risk and guarantee depositors.

        It’s a bit like outsourcing with oversight.

      • I don’t follow that argument. The term to maturity of on call deposits is zero days.

      • And your point is? If the hold to maturity value of a banks assets is more than the hold to maturity value of its liabilities, the bank is solvent. If this weren’t the case it couldn’t report as a going concern.

        You are talking about liquidity.

      • Really? I’m shocked, deeply shocked. I’ll have a nice glass of rum tonight, a little blue pill and a good sleep.

        I promise to be my old self tomorrow.


  5. The Big Four are not technically insolvent – they have a Net Debt to Equity Ratio of around 2,000% give or take a few 100 billion here or there (that was a very early morning back of the envelope calculation)

    If they had to write off 2% of their loan book in Bad Debts, they are technically insolvent and that is when the RBA and the taxpayer or depositors step in…

    • I’m not in disagreement with that statement, but as most of their liabilities are short term, in fact most on demand, they cannot possibly pay all on demand.

      The definition is “When a person or business cannot pay all their debts when they are due, they are considered to be insolvent”

      Their assets on the other hand are by nature long term, and in fact the government has moved via regulations to make the immediate sale of security supporting those assets either difficult or impossible unless there is a default. (Note that a ‘default’ may have numerous interpretations)

  6. Perhaps 3-5% actually would be the absolute tipping point and that would only be if they used all of their surplus capital to write off debts.

    (Calcs based on NPAT of $20 bill per year and average ROE circa 20% with 2 trillion in assets)

  7. Insolvent – the inability to pay ones debts.

    How does the banking system pay back debts (deposits) without them receiving the funding at the same time (i.e.: people putting their money back on deposit).

    Trying to apply normal credit metrics to the banking system is a waste of time.

    The Banking system is about capital adequacy and asset quality.

  8. It is possibly worth pointing out that the guarantee was required to bring the banks back into line with their peers. Once the other sovereigns had guaranteed their own banks, Australia had little choice.

    The buyers of the debt weren’t interested in anything less than an explicit guarantee. Which if you consider the issue further is pretty funny, given the first country to move was Ireland, where the funding guarantee essentially overwhelmed the sovereign. I don’t think we’ve learnt the lesson – that there is no such thing as private debt in a modern CAD economy.

    • Hmmmm, I am picking that China will do a massive Iceland when the time comes…….and I think they’ll steal a massive march on the west by doing so.

      • I was thinking the same thing recently. And maybe that’s why they are buying a lot of gold.

      • casewithscience

        They won’t steal a march on the west, merely enslave their own people as their currency plummets as everyone tries to get out of stinking yuan. If they try and control the currency, then O/S investors will simply avoid doing business in china. Worse still, such a credit burst will affect employment, and this will result in social implications (which the CCP were trying to avoid with their stimulus in the first place).

        They can’t walk from a default – it is too dangerous for the kleptocrats.

    • Once the other sovereigns had guaranteed their own banks, Australia had little choice.

      You are talking about events after the fact. Before when there were no guarantees on any bank worldwide, Mr Market did not differentiate between other banks and our banks when it came to funding..

      Yet the regulators APRA/RBA and the media keep insisting that our banks are different and they are “better regulated” compared to the global peers.

      Hmmm.. who do I listen to? Mr Market or RBA/APRA?

  9. “We should be talking about how the moral hazard attached to the bailout can be addressed, not gesticulating wildly in a denial of the obvious”

    The wild gesticulation reminds me immediately of the time when Luke Skywalker attempts the Jedi mind trick on Jabba the Hutt and it fails miserably!

  10. But if the Bank of England paper on how commercial banks create money by lending which then becomes a deposit, why do we need foreign depositors/bondholders?

    In any event it is quite clear that the Australian banks, as they currently operate, would either need to have government guarantees to keep their costs of borrowing down, or the next rollover of chunky debt to foreigners would be at very high rates causing increased costs to borrowers during a recession, or the banks would fail to repay on the due date without the RBA buying substantial bank assets.

    Because the RBA is lender of the last resort I don’t believe that the Australian banks were insolvent as the asset values against which they lent had not fallen substantially and were unlikely to because the combination of school building and insulation kept employment high and Chinese stimulus had positive flow on effects to Australia.

    • @ Explorer to enlighten your discourse I thought you would enjoy this article, wake up and smell the roses is how it goes isn’t it:

      ‘Russia’s bond market is Achilles Heel as showdown with West escalates’

      found at:

      “The country’s private companies have been shut out of global capital markets almost entirely since the crisis erupted, causing a serious credit crunch and raising concerns that firms may not be able to refinace debt without Russian state support…….

      The Russian central bank has a $490bn war chest to defend the rouble but this cannot easily be deployed without tightening the money supply and deepening the downturn. The authorities are walking a tightrope, allowing the currency to slide but spending $200m of foreign reserves each day to slow the pace.

      A report by Sberbank said Russia has $714 bn of foreign debt: $427bn for compaines, $207bn for banks, and $62bn from state bodies. The oil group Rosneft relies on foreign debt for 90pc of its funding. Foreigners also own 70pc of the free-float of Russian stock market, which has not yet dropped heavily but has been held back by 15pc relative to emerging market peers since late February. ”

      Great stuff this….

      • If Russians are funding themsleves with EUR liabilities unhedged back into domestic currency then they will have problems in a crisis if they have no Euro income.

        If ECB can keep PIIGS yields on those coutries EUR debt at near zero I am sure that Russia can manage to keep Rouble funded companies, banks and state owned enterprises funded one way or another.

        But yes it wouldn’t be without big disruptions to capital markets and to imports of goods and exports of non-essentials.

        A fiat currency, an army and a population that hates an enemy gives a government a lot of power, depending on their degree of self sufficiency in essentials.

    • “But if the Bank of England paper on how commercial banks create money by lending which then becomes a deposit, why do we need foreign depositors/bondholders?”

      And furthermore, why do we “need” usury charges?

      After all, since “the loan creates the deposit”, and “it all nets out”, then why — given the argument for usury is that the usurers must be paid for their “service” — WHY can’t the usurers simply create more loans/deposits to themselves, to cover their “costs” of “production”?

      There is no “need” for usury.

      The ideas that it is “necessary” in order to pay usurers for their “production” costs, and/or, to regulate the quantity of money in the economy, are nothing more than specious pseudo-intellectual fig leafs for parasitism.

      There are many ways to deal with both issues, without usury.

  11. There really is no skill in running a banking business when you know that you are pulling ‘bank money’ out of the sky to make loans… also knowing that when the value of the assets you have loaned against rapidly fall, the government guarantees all loans and deposits.

    Wouldn’t it be wonderful if small business had the same guarantees and the same right to create its own money… Nobody would ever have grey hair !

    Imagine also that if homebuyers had to save a 30% deposit (banking buffer), the price increases in Sydney and Melbourne would have been in much smaller increments as slow motion property ensued.
    We wouldn’t be talking million dollar homes, we’d be talking $500k homes… and big-4 bank CEOs would earn a measley $6million instead of $12million.

    • rob barrattMEMBER

      This banking business is all very easy to understand. Really! You borrow X dollars from Mohammed and you lend Y dollars to Dave to buy his 1 bedroom apartment for $500,000. Now, Y needs to be very slightly less than X, because you may need to pay some pittance to your “deposit holders” , (ie, other people you’ve borrowed from to lend Pete $500,000 to buy his 1 bedroomed apartment).
      Now, all this is a swimmingly good idea. You’re doing fantastically on huge sums of money. Even better, you notice that, the more you are prepared to lend, the higher property prices (the PERCEIVED value of your “assets”) go. You are collecting from everyone at an ever increasing rate while doing FA yourself.
      However, little voices in your office begin to cause you some irritation. They’re saying that this is a good idea AS LONG AS – and this is the big AS – AS LONG AS Dave and Pete don’t get retrenched and can’t make their monthly payment. Remember, you need to pay 97% of this back to Mohammed & Co.
      And that’s the bad news. Any significant unemployment will lead to nasty rumours about your solvency, along with a fall in the PERCEIVED value of your “assets”. Now, this wouldn’t be so bad, but, you know the human race don’t you – the moment they smell something wrong the bastards are going to be at your front door demanding their capital back right now. Oh dear!
      So, in conclusion, the fail –safe barometer for how safe your money is against a bail-in or whatever other scheme the banks & government agree on is: How keen is your nose for the real unemployment rate? Remember, when things get nasty, they will do so at a rate that will make your eyes water.
      Will it happen? How could it not. The sheer rate of leverage involved and the total illiquidity of the banks “assets” make them the sitting ducks of all time.

      • Hi rob barratt,

        Yeah,know what you mean… I’m in the Greater Depression field force…the Big Grizzly Bear will eventually come back to throw out the trash.

      • robb: “Remember, when things get nasty, they will do so at a rate that will make your eyes water.
        Will it happen? How could it not. The sheer rate of leverage involved and the total illiquidity of the banks “assets” make them the sitting ducks of all time.”


  12. Two of the big four received secret bail outs from the Federal Reserve. Yep, everything was (and is) hunky dory.

  13. Vern Gowdie over at the Daily Reckoning must agree with Terry McCrann.

    His faith in the banks is so great that he advises his clients to place 100% of assets as deposit with Australian banks, despite the threat of bail-ins, and the dubious position of the government (taxpayer) guarantee.

  14. Behold, dear reader. A classic example of the risible regulatory standards viz. Australian ADI’s —

    April 11, 2014.

    APRA, Letter to all authorised deposit taking institutions (ADI’s)

    “Changes to liquidity reporting arrangements

    Currently, 23 ADIs provide APRA with monthly liquidity, funding and contractual maturity data using a spreadsheet template specified by APRA. APRA intends to discontinue this report with immediate effect

    In addition, 30 ADIs currently provide APRA with twice-monthly liquidity, funding and contractual maturity data using a spreadsheet template specified by APRA. Again, APRA intends to discontinue this report with immediate effect. However, APRA expects that ADIs will retain the operational capacity to produce this data until such time as they have the operational capacity to produce the daily liquidity report proposed below.”

    Got that? APRA has cancelled the monthly and bi-monthly liquidity, funding and contractual maturity data reporting requirement of ADI’s, “with immediate effect”.

    In their place, does APRA have something else, another reporting mechanism ready to roll?


    They are merely seeking “submissions” to a “proposal”, which might be implemented (if the ADI’s agree) from April Fool’s Day next year

    “Daily liquidity report

    APRA’s need for a set-format summary liquidity report, lagged one business day, was set out in
    its September 2009 Discussion Paper, APRA’s prudential approach to ADI liquidity risk. APRA indicated its intention to consult on the details of this report in its November 2012 Discussion Paper, Liquidity reporting requirements for authorised deposit-taking institutions…”

    Things move veeeeerrrrry slooooooowwwwwly in usury regulation land.

    … A further update was provided in APRA’s December 2013 Response to Submissions paper, Implementing Basel III liquidity reforms in Australia…

    This letter and attachment begin these consultations. APRA is proposing that an ADI be able to submit to it, on request, a completed report in Microsoft Excel format using the template set out in the attachment, with no more than a one business day time lag…

    An ADI would not need to produce the report every day but would need to have the operational capacity to do so on APRA’s request – potentially for a number of consecutive business days. APRA proposes to run a programme of periodic and random ‘fire drill’ exercises to test an ADI’s operational capacity…

    To allow a suitable timeframe for implementation, APRA proposes that the daily liquidity
    report become effective on 1 April 2015.”

    Errr … who’s the real boss here?

    • Yeah Op8,
      I think you are right about the implementation date too… deep significance.

      They’re a bit like the big rating agencies… waiting for insolvency before giving any warning to the plebs.

  15. PlanetraderMEMBER

    When our banks took the Fed reserve money in 2008, what announcements were made to the stockmarket about this?

    Yep… none!

    As I recall, the banks when asked, stated that the amounts were immaterial and essentially not worth mentioning.

  16. I could be wrong, but I don’t remember Joye claiming that Australian banks were insolvent.

  17. “The rule with runs on the bank is that there is no penalty for being very early, but one could suffer massive losses if one is a minute late”
    —Keith Weiner