Fitch, ANZ warn on offshore debt


From ANZ CEO Mike Smith today via the AFR:

“It is not just about banks, it is about the real economy – about corporations, business and individuals,” Mr Smith said. “It is one thing for a bank to ­complain about regulation but it is another thing for a corporation to say we are not getting finance because of this regulation that is being imposed on the banks.”

…Asked whether tighter capital rules on mortgages would restrict ANZ ­lending to small business, Mr Smith said: “No, I don’t think it would.”

But the potential for a “bail-in” system, which was also proposed by Mr Murray, could force up banks’ funding costs, he said. Such a system is designed to deal with the “too big to fail” conundrum by ensuring investors wear the full cost of a bank failure and avoid the need for government bailouts.

What would likely happen is that the bank’s ratings will be cut and access to offshore funding will get more expensive. But that’s what we want. That will make credit more expensive for consumers, which is also good given they’re currently operating on a false economy, with all of the distortions that that entails (like too much mortgage debt).  Deposit rates would also rise as banks sought more local funding, also good.

If it got out of hand in some way, which is unlikely, the RBA would lower interest rates but because the banks are an oligopoly they wouldn’t pass on the cut, widening their margins. But the cut would still reduce pressure on the Australian dollar and start to shift growth from useless houses to the external sector.

It does involve shifting your growth orientation from one sector to another, which has winners and losers, but it doesn’t necessarily hurt growth overall.

Indeed, what Mr Smith doesn’t say is that continuing the current model will also lead to debt downgrades and more expensive credit, only via a careening towards pro-cyclical problems rather than buffering the system via structural change. From Fitch today:

Fitch states in its APAC Chart of the Month report that Australian bank funding and liquidity improvements are likely to continue, albeit at a reduced pace. However, a sharp increase in demand for credit may pressure the ability of banks to fund the growth without potentially reversing some of the recent gains.

Houses and Holes
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  1. He talks about a bail-in involving investors, but methinks it really means involving the depositors and the taxpayers.

    Or has living in an age of unashamed corruption and rent seeking made me overly cynical?

    • Your not cynical at all! The RBA will like as not follow in the footsteps of the RBNZ – yet again. We have had the OBR since last year that notes:
      “If a bank fails, it is placed under statutory management and closed. An assessment is made of the bank’s liabilities. If losses cannot be covered by shareholders and the bank’s available capital, then in addition a proportion of depositors’ funds are set aside and frozen for the purpose”. (ie: Portion could be anything up to 100% of depositors funds.)
      4. Do I get back funds frozen under OBR?
      Possibly. Depositors still have a legal claim to their frozen funds as unsecured creditors”

  2. I am not sure what he means by investors. It does of course include equity holders, but the bail in doctrine is clear in that it does not mean taxpayers but does include depositors. This was clearly stated in a joint paper by the World Bank or IMF and the E U.

    I could not believe it. It is implied that the state has to bail out a bank – first level of theft. Next, depositors have to cop the bill by being bailed in as pseudo equity holders – second level of theft – to avoid the burden on taxpayers.

    These clowns will do everything immoral to avoid a bank run and divert any attention from what looks like a fragile bank or banking system. The poor depositors in the Bank of Cyprus learned the hard way that one’s money is not safe with a bank (though this does not suggest any and all banks).

  3. I will be seriously filthy if the tax payer (you and me) has to bail out the banks.

    I’m talking paint a placard and march in the streets angry.

    • JamesTheBearMEMBER

      I’ll be a damn sight angrier, if they confiscate my savings – time for me to throw the towel in, and plunge headfirst into the debt game.

      Convert all my savings into a deposit for an over-priced dogbox….

  4. If you’ve lost shares to a company folding, or were caught up in Storm, etc you’ll know excruciatingly well just what being deemed ‘unsecured creditors’ really means – The feeling is unwritable……..! The effect on your psyche & your future standard of living are profound.

    Now it’s extended to depositors that believe the inculcated meme that their money is safe, it’s ‘their’ hard earned money being kept safe – & it’s effectively just been stolen by the people who they trusted, & who have sneakily redefined what a deposit is without telling anyone!

    Imagine the uproar from a nation that’s gone from sheer smug greed to irreconcilable grief.

    Just how are these shiny spivs going to sell this one?