Australia ramps the risk as banks borrow abroad

How long is the memory of a nation? Six years it seems. From the AFR:

…the nation’s lenders have raised more than two-thirds of a combined $51 billion of funding in the offshore markets so far in 2014, according to Thomson Reuters. At the same point in 2013, the banks had raised just $35 billion, of which just over half was sourced internationally.

The faster pace of foreign borro­wings comes as bank borrowing costs have declined to levels not seen since May 2008, before the onset of the crisis.

The boost in offshore funding could mark an early sign that the banks’ four-year long $400 billion deposit war is over, tipping the balance of pricing power in the local economy further away from savers and towards ­borrowers. With increasingly cheaper funding available in the international capital markets, banks are offering less generous interest rates to savers as the urgency of chasing deposits subsides. Borrowers, meanwhile, are expected to reap the benefits of cheaper wholesale funding costs as competition to write new loans forces banks to pass ­on savings. Australia’s banks borrow money from the wholesale capital markets to fill a “funding gap”, the difference between the new loans and deposits that finance the loans.

The funding gap is estimated to be $600 billion. In a speech on Friday, Westpac deputy chief executive Phil Coffey cited research from PwC which estimated the gap could grow to $1.325 trillion if there was a pick-up in credit growth.

Here is the latest chart from the RBA showing the rising borrowing, it’s quarterly and likely lagging:



Notice how the article is focused entirely upon the “funding gap” as a tactical challenge in which the banks are innocent players. In reality there is no “funding gap”. Rather, our financial system is addicted to unproductive mortgage-lending and that crowds out the kind of business lending that would generate income growth and local savings. The “funding gap” is created by the banks not serviced by them.

For a long time I have expected slowly rising credit growth to manifest in a tightening of local deposit markets. Instead, the global chase for yield – a complete rerun of the pre-GFC period – is bringing in yield spreads and enabling the banks to ramp up external borrowing. This is another black mark for APRA, which has done a good job until now of preventing this kind of breakout.

One line of defence remains in the credit rating agencies, which have also warned the banks that any increased external funding risk will damage their rating outlooks. I would expect those warnings to turn more serious within a year.

Where it ends is predictable:

Mr Coffey said it was uncertain how the funding gap will be closed and warned about the risks of increased offshore borrowings. “Some predict that the shortfall in deposits would be offset by higher wholesale ­borrowing by banks – but prudent bank management will be wary of creating undue financial risks, through higher wholesale ­borrowings,” he said. “Just because investors are prepared to buy Australian bank bonds today, does not guarantee they will do so in the future.”

When the next global shock comes, it is the tax-payer that will wade into global markets with a renewed explicit guarantee to the bank’s liabilities to prevent disaster. You’re not paid for carrying this risk, even though the current widespread budget pain is a direct consequence of it.

Gosh, you are  generous.

David Llewellyn-Smith
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  1. Very generous

    It sounds like APRA and RBA are working in perfect harmony to give full effect to the sentiments expressed by Joe Hockey last year.

    “Rising house prices are our economic future”

    While the RBA cuts rates and issues assurances (with some small print butt covering) that the platypus detection system has detected no problems, APRA stands by as the banks maintain the rush to residential property lending with low lending rates facilitated by the low rates required to keep the recipients of the products of off shore ZIRP printing presses happily acquiring control of local deposits.

    But it is all good of course because few question the real cost of driving unproductive domestic investment investment with off shore control of local deposits.

    Say for example:

    A higher $AUS

    inflated asset prices

    distorted investment signals

    a hollowed out economy

    But that wealth effect really is something and debt doesn’t really matter anyway.

  2. Didn’t APRA leak to the media that they were doing some stern talking to the banks about not borrowing too much offshore? Well, that worked out just fine /sarc

      • Plus they don’t borrow from overseas markets.

        Everyone knows there is no market place in Switzerland where dealers line the walls with large bags of $AUS to lend or sell to Australian Banks. 🙂

        All that happens is that foreign investors purchase/take control, via FX transactions, deposits of $AUS already in the Oz banking system and shift them to the bank who offers them a sufficiently attractive rate (that happens to be more than what the foreigners would get off shore where rates are close to ZIRP but less than our banks would have to offer locals to shift their deposits to them).

        APRA certainly doesn’t like the banks entering into too many short term borrowing arrangements with fickle foreigners (as things can get very challenging if the foreigners refuse to roll over their loans or decide to sell off their Australian deposits suddenly) and recommends that the agreements be longer term but whether it should be encouraging these arrangements at all is another question completely.

        The banks don’t need foreigners to shift around deposits in the Australian banking system – it is just cheaper if they do it that way – and cheap money means cheaper household debt – which means more suckers join the variable rate party.

      • Can someone please explain to me (or point me to a good rundown somewhere online) how these international FX transactions work?

        Every time there is a discussion about offshore borrowing by the banks someone comes in with the comment that there is no physical AUD actually sold/moved/borrowed, which of course makes sense, but I get lost in why a bank would need to borrow overseas and what is actually going on when it does. If the AUD is all here and never “leaves” the country what exactly is happening?

        Honest question from a non-economist.

      • @pingupenguin

        As I’ve just said below the example of just last week is the ANZ issueing US$2.25Bn debt.

        I guess that means the bank created bonds and swapped them for US$2.25Bn.

      • pingupenguin,

        While they may never leave or arrive where they are matters a great deal.

        A bit like a $1000 in my wallet is significantly different to $1000 in your wallet even though to someone outside our village there is $1000 in the village.

        The banks don’t need foreigners to take control of $AUS deposits and enter agreements to have them shifted to their bank but it is cheaper to do that then try and attract locals to do the same as the foreigners are comparing our rate with the zero rates they can borrow off shore.

        Regulating the banks entering these transactions with foreigners would put down pressure on the $AUS but it would of course put upward pressure on local TD rates as banks have to work a bit harder to attract deposits. Keep in mind of course that as foreigners sell of their $AUS deposits as they flee the market those deposits will end up in the hands of someone else who will seek to lend them to the local banks -probably just at a higher rate.

        Then it may become a matter for the RBA to make downward adjustments to its target rate if it considered it necessary to keep the household debt frenzy going.

  3. How’s their corresponding OTC derivatives exposures looking? Yep, up another $2 Trillion between Mar-Dec 2013.

    Not to worry. That exposure is “essentially” (note the weasel word) “fully hedged”, according to Guy Debelle (2012). Just don’t take note of the caveat / footnote 9 in the speech where he made this claim, which footnote referenced a 2 year old paper in turn referencing 3 year old bank self-reported survey data, in which the authors’ summary table actually showed the banks were net long circa $300 billion on their OTC derivatives betting.

  4. According to Doug Noland at the Prudent Bear, ANZ issued US$2,250,000,000 debt internationally just last week.

    • migtronixMEMBER

      What does that mean “issued debt internationally”? Is it exactly the same thing as issued debt to be taken up by anyone holding onto 2 . 25 billion pacpesos ?

  5. Why would the banks care about their exposure when the Australian tax payer’s on hook to bail them out when it all goes pear shaped.

    • nexus789MEMBER

      I guess that is why Hockey and the Bishop Abbott want to smash the poor and defenseless in order that they clear public sector debt so they can bail out the banks.

      Come the crisis they will need far more than could ever be saved by thrashing the poor. Building up a nice of head of steam for a perfect storm of a collapse.