Will Canada lead an Australian bank downgrade?


From Shapiro at the AFR:

Global ratings agency Standard & Poor’s has lowered the outlook on Canada’s banks from stable to negative in response to the government’s “bail-in” consultation paper that seeks to ensure that bondholders rather than taxpayers stump up the costs in the event of a bank failure.

The move could portent ratings actions against Australia’s banks as the Murray led financial system inquiry explores solutions to the “too big to fail” challenge that would prevent taxpayer funds being used to save failed institutions.

S&P stated as much in February of this year:

…the potential move by the Australian government toward an alternate resolution regime being one that embraces a concept of senior creditor bail-in–which we believe is by no means a foregone conclusion and may not be imminent because of other regulatory developments that are likely to be more proximate and higher priority–could sit uncomfortably with Standard & Poor’s current “highly supportive” assessment of the Australian government toward the domestic banking sector. This could result in us changing our views concerning government support, which, in turn, could be accompanied by downgrades of “systemically important” Australian banks.

Back to the AFR:

…Macquarie analyst Mike Wiblin said a credit rating downgrade would push up the cost of Australian banks’ borrowing overseas, inflicting a hit to earnings of between 3 per cent and 5 per cent.

And, all things equal, reducing credit availability.

Houses and Holes
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  1. “And, all things equal, reducing credit availability.”

    the only way our banks can still keep their profit up is to issue more credit or in other terms, make credit looser

    • I guess we will then see what happens when an irresistible force (the effect of a credit downgrade on borrowing costs) meets an immovable object (the banks’s mandate from shareholders to maintain current profitability), refereed by APRA, although it seems intuitive that taking on riskier debt in response to being deemed risk doesn’t lead to anywhere good.

  2. This is the real issue for the banks and the Aussie economy. That is, the willingness of foreigners to continue lending to us at cheap rates.

    The RBA can’t lower too much further without creating the risk of capital flight. Maybe not full-blown capital flight (absent some other global issues) but enough to send our dollar much lower…which would then risk us importing inflation to go along with our chronic domestic inflation.

    Then we’ll have a problem.

    • The imported inflation if/when it happens will be interesting to see – Will the RBA raise rates or look through the inflation? Will wage hikes be demanded by the population?

      • Andy They’ll ‘look through’ JMO This thing will go so far out of control the RBA will never see a time when it can raise reat rates. Nominal rates maybe but that will be limited. Inflation will spin wildly out of control – a great hurricane of enti9tlement claims with continuous energy being fed in from imported inflation.
        It will be the last 50 years in reverse!
        What that means for nominal house prices I just don’t know.

    • greg
      ” That is, the willingness of foreigners to continue lending to us at cheap rates. ”

      I dunno….We’ll just sell more assets..mines, farms, food processing, real estate. It might be a good thing! We might be getting short of mines to sell so we would need to really open up the RE market to foreigners.BOOM! This could be really great!!!!!

      (P.S. Your comment is SPOT ON! )

      • ‘.We’ll just sell more assets..mines, farms, food processing, real estate’

        Mate, we have gone one better, even than that….. we have sold them our children as a cash flow (and we sold them cheap).

  3. I thought the banks create money out of thin air when a loan is made. Do banks really take from one party and pays x% interest rate and then lends out to another party at x% interest rate+costs+bank margin.

    • Yes and no.

      They lend out to party a @ x+costs+profit. Then they search for a deposit to cover their shortfall.

      Therefore they create out of thin air but the money always comes back to banks …

    • Hi Labrynth,

      Banks don’t create ‘money out of thin air’ as such. They create it based on your ‘credit’. A loan is like the monetisation of your credibility. They create the deposit (the liability) and the loan (the asset) at the same time.

      From there the borrower draws on the loan (the deposit) spends the cash on overvalued house, and the recipient might nick off overseas, taking their $$ with them to deposit in a foreign bank…or whatever. The point is the bank loses control of where the money goes once it makes the loan.

      Over many years (thanks to the CAD) this has created a situation where there are not enough deposits (liabilities) to back the assets on the banks’ balance sheets…so the banks need to borrow from offshore to plug the gap.

      I’m probably missing some detail, but that’s basically how it works.

      • Thanks Greg
        It’s amazing that most people don’t seem to be able to make that connection between the CAD and our need for foreign borrowing for houses.

  4. “Standard & Poor’s has lowered the outlook on Canada’s banks from stable to negative in response to the government’s “bail-in” consultation paper…”

    S&P right on top of things, as timely and ahead of the curve as per its performance viz. the GFC, I see.

    The Canadian government flagged it was introducing bail-in in its March 2013 Budget …


    … per its G20 obligations to go along with the Goldman/FSB mandate, dating right back to November 2010



    Risible … and questionable … that it is only now responding to what has been formally agreed to for nearly 4 years, by the entire G20.

  5. S&P are pretty basic and average analysts. They come up with such timid analysis because (a) these same banks are their clients when they issue debt and seek a rating and (b) because S&P have zero skin in the game. Of course a AA- rating on these over leveraged banks is a joke. No doubt when the proverbial starts hitting the fan S&P will sharply revise and downgrade and then say how prescient they were.

  6. “Fischer has been an outspoken advocate of aggressive central bank involvement….. (but) falling rates of productivity and labour force participation in the US among other factors may have scarred the country’s ability to generate economic growth.(This) he said, (was) forcing central bankers to recast their understanding of inflation, employment and growth in general….. Macroprudential and regulatory tools should be a country’s first line of defence for financial stability, regardless of whether those measures are employed by the central bank or other agencies. The blunter tool of monetary policy…..should be a last resort, he said.”

  7. Janet

    I don’t think first/last should come into it eh? Just good policy on all fronts leading to a sustainable economy and world (so far as we can make the world sustainable). I guess it requires a bit more thought than economists and government are used to exercising these days!

  8. Hmmmmmmmmmmmmm from Zero Hedge ( Maybe this has already been posted)

    In his keynote address, former governor of the Bank of England Mervyn King gave the Australian mining industry some hope for a brighter future, arguing world insecurity could have a positive impact on the price of gold and other commodities. He said the geopolitical and economic uncertainty will boost commodity prices. But he argued globally countries would have to face up to mounting debt, while warning central bank adjustments were not the answer.

    “We are beginning to discover that the reason the world recovery is so slow is that monetary policy isn’t the answer now, and other policies need to be put in place to rebalance the world economy,” he said.
    “No one country on its own will find it easy to do this.
    “It will require a recasting of relationships between different major economies and that requires an acceptance that trade surpluses will have to diminish in order to allow the countries that previously borrowed a great deal to to reduce their trade deficits, and gradually reduce their indebtedness.”

    Gotta love that last one…It’sa those damned trade surplus countries that are the probvlem not us. Could it not be just possible that it might be a damned good idea for the western world to reduce its bloated self-indulgent spoiled brat consumption????