Inside the banks’ offshore borrowing binge

By Leith van Onselen

The release of the Australian Bureau of Statistics (ABS) National Financial Accounts yesterday revealed a large $53 billion (7%) jump in Australian banks’ gross external liabilities (offshore borrowings) in the September quarter, with borrowings now at all time record levels.

This surge in offshore borrowings was driven by a giant increase in Bonds (+$33 billion) followed by Deposits (+$18 billion):

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In the year to September 2015, bank offshore borrowings jumped by an enormous $139 billion (19%) to a total outstanding balance of $855 billion on the back of increases in Bonds (+$62 billion), Deposits (+$46 billion) and One Name Paper (+$21 billion):

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The surging growth in bank offshore borrowings over recent years has been driven primarily by bond issuance, with growth in offshore deposits also strong:

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When compared to GDP, Australian bank offshore borrowings are at unprecedented levels (53% of GDP), and have been a key ingredient behind the banks’ growing loan books – mostly mortgages – which hit a record 210% of GDP as at September 2015:

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Indeed, Australia’s banks would never have experienced anywhere near the same degree of asset (loan) growth without this access to offshore funding markets. Accordingly, the total value of Australian mortgage debt would never have grown so strongly, and Australian house prices would be materially lower as a result.

And if you are wondering why Australia’s net foreign debt is so high, look no further than the banks’ heavy reliance on offshore borrowings to pump housing:

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The danger in all this is that the banks’ ability to continue borrowing from offshore rests with foreigners’ willingness to continue extending them credit. This willingness will be tested in the event that Australia’s sovereign credit rating is downgraded (automatically downgrading the banks’ credit ratings), there is another global shock, or a sharp deterioration in the Australian economy (raising Australia’s risk premia).

The Budget, too, is now hostage to the banks’ offshore borrowing binge as it cannot borrow to spend on infrastructure or other initiatives for fear that Australia will lose its AAA credit rating, potentially leading to an unraveling of the private debt bubble created by Australia’s banks.

Of course, all of this would be far less of a problem if these borrowings were used by the banks to fund productive investment. But they aren’t. They were used instead to pump-up the value of unproductive houses:

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It’s a case of epic mal-investment that will cost the economy over the long-term: either through lower productivity growth or some form of banking crisis.

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Leith van Onselen
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