Westpac: Falling deposits to keep bank funding costs elevated

By Elliot Clarke, Senior Economist at Westpac

Overview:

The significant increase in short-term wholesale interest rates and associated volatility has been a key topic of debate in markets throughout 2018.

Initially linked to higher borrowing costs in the US, a further spike in only Australian rates as the June quarter drew to a close saw participants’ focus shift to domestic drivers of this pricing activity.

There are many market factors that have played a part in the surge in short-term interest rates. All are worthy of discussion, but in this instance we focus on the real economy’s effect. Specifically, the broad-based deceleration in deposit growth.

While we believe that there is insufficient evidence to label the decline in deposit growth as the prime catalyst for higher short-term interest rates, deposit growth’s persistent underperformance is critical to our view that the abnormally large market spreads present will, by and large, be sustained.

Put simply, if (in dollar terms) retail deposits increase at a lesser rate than credit, then Australian lenders’ reliance on wholesale funding must increase. This looks likely over the remainder of 2018 and 2019 if, as we anticipate, national and household income growth remain soft, led by weak wages growth; a downturn in employment growth; and the terms of trade. Consumer saving and investing decisions are unlikely to provide a meaningful boost to deposit growth absent a shock because consumers already favour deposits (and super) over other asset types.

For superannuation deposits, weak income growth is not the only headwind. Over the past year, households’ capacity to make voluntary contributions to super has been further reduced, limiting the flow of new fund inflows. A falling allocation to domestic cash (in favour of offshore investment opportunities) amongst the industry has further restricted the flow of new deposits to Australian banks and other depository institutions. With the Australian economy expected to register growth at or below trend in 2018/ 2019 as global growth remains near its post-GFC peak, Australian investors’ appetite for offshore assets is likely to persist.

The final point of note is the significant tightening of lending standards underway. This policy shift, yet again, is a negative for households’ ability to accrue deposits. Specifically, those switching from interest only to principal & interest face a much higher total monthly payment. Meanwhile, those who remain on interest–only terms will pay a higher interest rate now, and the majority will still inevitably have to move to principal & interest later to pay down the loan. The longer that interest only terms are relied upon, the more rapid the required paydown becomes over the remainder of the 30-year term, unless a borrower is successful in refinancing the loan with another counterparty.

Drivers of elevated short-term interest rates are plentiful:

Australian short-term wholesale interest rates have been a point of debate throughout 2018. Into March quarter end, the move higher in the Australian 90 day BBSW spread to OIS mirrored the move in the US’ LIBOR spread to OIS. However, going into June quarter end, Australian funding spreads exhibited another spike higher as LIBOR eased back. Attention then turned to potential domestic factors.

The lift in Australian short-term rates is not limited to BBSW. Secured funding in the repo market as well as the premium to borrow AUD in the FX swap market (cross currency basis) have also risen and exhibited greater than usual volatility. Pressures have been most acute around quarter end, but spreads have also remained more elevated than usual through the middle of the quarter. The key question that follows is whether these pressures will be sustained. Increasingly the market believes that they will, with the forward curve spread between domestic bill futures and OIS flattening out around 50bps versus the 35bp spread priced during the first bout of funding pressures in March.

A number of potential drivers have been identified by market analysts as relevant, and we agree with many. But from the real economy, decelerating deposit growth and a consequent widening of the deposit gap is critical.

Weak deposit growth is a structural factor…

As the market has sought to understand the jump in short-term Australian interest rates, the sharp deceleration in money supply growth (M3) has come into focus. Notably this decline has come as a result of softer growth for all deposit products sustained through the year.

We believe there is insufficient evidence to label the decline in deposit growth as the prime catalyst for higher interest rates – particularly as net issuance of certificates of deposits (wholesale deposits) has been little changed over the period. That said, the underperformance of deposit growth is central to our expectation that these abnormal circumstances will endure.

Put simply, if (in dollar terms) retail deposits increase at a lesser rate than credit, then Australian lenders’ reliance on wholesale funding must increase. Some of this funding will come from offshore, but as the hedging cost of swapping foreign currency into Australian dollars has also risen sharply (shown in chart 2 on the previous page), new issuance will likely be balanced across offshore and domestic markets. Higher demand for funds at a time of restricted supply will sustain upward pressure on the cost of funds from both jurisdictions.

Why do we anticipate deposit growth will remain subdued?

… that will only reverse as income growth lifts

A marked slowdown in nominal income growth has been crucial to the broadbased deceleration in deposit momentum. With the exception of a spike to 8% in March 2017, nominal GDP growth has experienced a protracted period of subdued growth since mid-2012, restricting the flow of new corporate deposits. Here, Australia’s terms of trade have been key, particularly over the past year, as growth fell from +25%yr at March 2017 to –3%yr at March 2018.

Wages have consequently also come under sustained pressure as firms maximised the pass-through of revenue to profit. Interestingly however, for households, income’s effect on deposit growth was not seen until late-2015. This is because prior to that, strong growth in house prices and subsequent high turnover (property sales) boosted deposit growth. Looking ahead, with momentum in the housing market to remain muted, income is expected to be the dominant factor behind household deposits. For household income, stronger growth will be challenging owing to the lasting headwinds of labour market slack; technology and globalisation.

Growth in super fund deposits face additional challenges because of households’ reduced capacity to make voluntary contributions and super funds’ allocation out of domestic cash in favour of offshore investments. Each of these factors are also likely to have a lasting effect.

The risks for deposit growth are negatively skewed

In addition to the rate of growth of income, household saving, investing and financing decisions are also important for deposit growth.

Evident from the national accounts, households’ capacity to save is dwindling. This is a consequence of weak income growth rather than strengthening spending as consumption growth has maintained a sub-par pace for a number of years. While a sentiment shock could see households reduce consumption and save more, in ordinary conditions this is unlikely.

Moreover, from our Westpac–MI consumer sentiment survey, it is evident that deposits and super remain the focus for household savings. Hence, we are unlikely to see a sustained reallocation from risk assets to deposits. Within super, as above, the more likely outcome is that growth opportunities offshore are taken up, to the detriment of the asset allocation to domestic assets.

Regarding financing, the switch from interest only to principal & interest repayments will, at the margin, detract from households’ deposit accrual. Though principal & interest loans come with a lower interest rate, the total repayment is much greater than the interest cost alone. While this switch sees debt repaid more quickly, all else equal, it also slows deposit growth.

Comments

  1. He doesn’t explain how it’s possible for credit growth to outstrip deposits

    The only explanation I can think of is increased bond issuance

    Does anyone else know ?

      • What does that mean ?

        New credit (loans) should create deposits, which need a home in the banking system
        I dont understand how the shortfall is created

      • Having re-read this morning, I think a story that fits is that, basically, loans are being paid off a bit more quickly than before and are being created a bit more slowly than before. This destruction of credit also means destruction of deposits.

        The machine has been tuned to run at a high rate of credit growth and is lurching and lugging a bit when running at a slightly lower pace.

      • But then surely credit contracts as deposits do , and equilibrium is maintained

        The only way I can think of that deposits reduce independently of credit creation is bond purchases

        Am I just dumb? Or is he dumb? Or is he obfuscating

      • Coming – it’s a bit of obfuscation/different pockets situation.

        Mortgage loans aren’t the only thing happening in the system. Sometimes the money leaks out into the rest of the economy, for instance as corporate profits or reserves or whatever. These moneys are not out in ‘deposit’ accounts but “invested” through the ‘wholesale’ markets.

        Corporates (sometimes) aren’t quite the idiot punters that mums and dads are, so banks need to pay them more, (sometimes).

        I think the trick is to ignore the distinction constructed between “deposit” and “wholesale” – this is really just customer segmentation speak for the banks.

      • ResearchtimeMEMBER

        Dude, not all loans align with deposits. Thats like first year 101 economics and its bunkum. The reality is, much of the funding for Australian banks and others come from other sources, mutual funds wanting a safe low rate of return, sovereign wealth funds, even major bond holders who want to hedge risk…

        Australians are exceptionally high savers if you include superannuation. Hence our banks among the biggest globally. Not so good in after-tax savings terms…

      • ResearchtimeMEMBER

        A case in point, AEP on Turkey nears point of no return as lira crisis spreads to the banking system (https://www.telegraph.co.uk/business/2018/08/09/turkey-nears-point-no-return-lira-crisis-spreads-banking-system/)

        key points:
        (i) Turkey’s banks are dangerously reliant on short-term foreign debt and risk a full-blown crisis unless drastic measures are taken to stabilize the plummeting Turkish lira. President Recep Tayyip Erdogan has refused to accept austerity measures or call in the International Monetary Fund to restore credibility, falling back on defiant rhetoric as the financial meltdown threatens to metastasize.

        (ii) The currency weakened to a record low of $5.57 to the dollar, crashing over 5pc on Thursday in a capitulation rout. The lira has lost 37pc since late February… The lira slide has combined with an incipient debt crisis. Yields on five-year sovereign debt surged 47 basis points on Thursday to a crisis-high of 21.2pc. “Erdogan has run out of luck: it is a perfect cocktail. When yields spike like this, public finances become unsustainable very quickly,”… “Putin has always understood that in the end an economic crisis could threaten his rule, and must be avoided,” he said.

        (iii) The plunging currency has left banks and large parts of the corporate sector scrambling to cover dollar debts. The country has built up $180bn of foreign loans on maturities of less than one-year. Much of this is benign intra-company debt or trade finance, but a large chunk is not. The current account deficit has reached 6.5pc of GDP… Many of the companies with dollar debts operate in real estate, construction, or the local power sector. They do not have a revenue stream in dollars to offset their hard currency liabilities, and only half have protective hedges.

        (iv) The US Federal Reserve is raising rates briskly and reversing QE, draining the pool of worldwide dollar liquidity… Argentina and Turkey were living the furthest beyond their means on foreign funding, and were the most exposed. The question is whether Indonesia, South Africa, Lebanon, Colombia and Hungary, among others, risk the same fate as the global cost of borrowing ratchets relentlessly upwards.

      • As I said originally, the only way a shortfall of deposits can exist is if there is excess bond issuance

        The total capital available is the same however, just in different forms

        The example you have given of Turkey proves nothing with regards to bank funding: it simply demonstrates the effects of foreign capital flows and currency

        The turkish banks decided to secure some funding in foreign currency, and were unhedged (presumably because they thought it would be profitable – they were simply taking bets on currency movements)

        Doesnt change the fact that loans and deposits exist in equilibrium

      • Let me clarify, please explain what is incorrect

        Banks issue bonds because they are mandated to do so by APRA/basel etc
        This gives them a capital buffer in case their assets (loans) have to be written down

        Banks are generally imprudent and don;t desire to hold excess capital, as it reduces their profitability (and bankers only think of short term bonuses, they can walk away if it all blows up)
        So bond issuance will only occur because it is legislated

        Therefore, the only way deposits can leave the banking system is through bond issuance
        If there is a deposit shortfall, it only exists because there has been regulator-mandated increase of bond issuance

        Failing to see how an excess of bank capital in the form of bonds is a problem – why do the banks need more deposits now?
        When they say deposits, I presume they mean for term: I don’t see why this is any different functionally from a bond

        So they have just shifted from one source of capital to another

        With regards to researchtime: I don’t think you fully understand what you are talking about
        Foreign purchase of bonds may occur in the native currency, or presumably some countries banks may issue them in alternate currencies.
        If Turkish banks have issued US denominated bonds, I presume the bond coupons are also paid in USD and I can understand how this is a problem if the lira falls

        A currency crisis is very different from a funding crisis though

      • Coming – you are confusing “capital” with “liability” (or “funding”).

        Bonds are not capital. They are a liability/funding.

      • “peachy you are completely wrong

        Bonds are capital, in fact the banks main form of capital”

        Not right mate. Read or own link carefully.

        Ordinary capital is share capital and retained profits. Only special (broadly – convertible) bonds count as capital…. because they convert to equity.

        Bonds are notcapital. They are borrowings. They are liabilities. They are just like deposits, but worth a different term structure (and often different price).

      • Not true at all

        It’s all a buffer for deposits

        it very clearly states

        A bank’s capital is made up of certain loss-absorbing bonds, as well as its equity. These bonds include additional tier 1 bonds and tier 2 bonds. These bonds have equity-like features, which is why regulators allow them to count towards a banks’ capital.

        These are the capital that the bank raises that reduces available deposits

        If bonds are a liability how could they possibly be used as capital and why would APRA force them on the banks?

        Can we please sort this out and agree because one of us is completely wrong

      • why on earth would a bank issue bonds, if they were considered a liability?

        What other reason is there for them to do so?

        They don’t need to fund loan creation – loans create deposits
        The only thing that constrains their ability to create loans and create new money is capital adequacy requirements

        The only reason they would pay money to bondholders is because they need more capital to meet these requirements.

        I don’t understand what you are even saying

      • Coming: “It’s all a buffer for deposits

        it very clearly states

        A bank’s capital is made up of certain loss-absorbing bonds</b<, as well as its equity. “

        It’s only “certain” bonds that are loss-absorbing. the VAST MAJORITY are not. The vast majority are plain debt.

        The special loss absorbing bonds are triggered by a “non-viability” event, which results in the bonds either converting to shares or being cancelled altogether.
        You can read about it here a bit: https://www.apra.gov.au/sites/default/files/120928-aps-111_final1.pdf

        I’ll see if I can link you to some CBA accounts that show how much of their balance sheet is these sorts of bonds and how much is regular bonds.

      • Coming – refer to CBA’s accounts for illustration.

        Note 4.3 shows the “regular” bonds on issue. $172b for the group.

        Note 8.2 shows the bonds that have a capital component – $22b for the group. (Some people wouldn’t count the PERLS, because they are a preference share, not a bond, but I count them, to be generous).

        Bonds are a liability, mate.

      • Ok, I’m going to ask you again – why would a bank issue bonds other than for the purposes of meeting capital adequacy requirements

        What is the purpose of it

        You can’t tell me it is to fund new branches
        Bank profits are enormous, so there is no reason they need to raise money to invest in expansion or service provision
        In fact, they pass on profits as dividends – why would they do this then issue bonds at a cost?

        Banks are not like a regular business that needs to borrow money to fund expansion
        They do not need to borrow to fund anything.
        Banks create money out of thin air.

        So what possible reason would there be for issuing these if not for capital adequacy?

        You say “bonds are a liability/funding”

        a) what does “bonds are a …. funding” mean?
        b) why would banks want to take on additional liabilities?

        Furthermore, the question is what produces the funding gap – if these “majority” of bank bonds as you say are not for the purposes of meeting capital adequacy requirements, then how do they create a funding gap?
        The bank exchanges bonds for deposits, the deposits presumably now pass to the bank – how does a funding gap arise from that mechanism? No deposits are removed from the system they simply change hands to a different owner

      • Coming, it’s very clunky for me to correspond ont bear matters while typing on my tiny Nokia.

        But the summary response is that banks issue bonds for the same reasons that banks take deposits. Bonds are just like term deposits by a slightly different name.

        Yes, PERLS are capital. But they are not structured as bonds, per se. That’s the point I was making. The pds for PERLS is publicly available – you can have a read yourself.

      • Ok, I can accept that they are term-deposits by another name

        The bank wants term deposits because it provides reserves at a lower price than the overnight rate and reduces liquidity risk, so presumably they may want these “term deposits by another name” for the same reason

        But again, how is a deposit shortage created by this transaction ?
        This was the original issue I have with the author – he states that if retail deposits increase at a lesser rate than credit, then Australian lenders’ reliance on wholesale funding must increase.

        Is he basically saying that retail depositors are stupid and will accept lower rates, whereas when money gets out of the hands of retail and into the hands of institutions (capital ascendent over labour) who will instead buy bonds that crimps bank spreads and reduces profitability?

        What does “wholesale funding” even mean?
        Funding what?

      • “Is he basically saying that retail depositors are stupid and will accept lower rates, whereas when money gets out of the hands of retail and into the hands of institutions (capital ascendent over labour) who will instead buy bonds that crimps bank spreads and reduces profitability?” – yes – this exactly 🙂

      • Why would banks collude to maintain low rates for retail deposits, but not for bonds or wholesale?

        There is nowhere else for anyone (retail or large-scale) to put AUD

      • Yes, nowhere except the banks to put AUD. But there are many banks.

        So cumulatively, they have the money captured, by individually they don’t.

        Imagine you are MediumBank. Little old ladies will keep their deposits with you because @0.5% that’s what they’ve done for the last 60 years. They don’t care about Interest rates.

        That provides you with only so much funding (getting hundreds of thousands of new little old lady customers is impractical).

        So you turn to the bond market, and you can’t offer sh!thouse rates 0.5% because corporate treasurers/fund managers/etc won’t buy your bonds (not at face value anyway). And they will put their money in OtherBank or MegaBank which offers, say, 3.2% over 3 years.

        Simples.

    • Coming,

      I think the issue is what they are referring to as a ‘deposit’.

      If a bank issues a bond and it is paid for with ‘deposits’ the structure of the liabilities of the bank change.

      Dr. Deposits
      Cr. Bonds.

      Deposits fall and bonds increase.

      So the loans are still creating deposits but some of the deposits are now bonds.

      Happy to be corrected on this.

      • yes i understand that

        but that suggests that it is the bank itself that is reducing available deposits, by issuing bonds/securities
        If the banks want more deposits, they simply need to reduce their bond issuance

        So this is presumably an APRA driven deposit shortage
        and the funding/capital is simply shifted from deposits to bonds

      • It’s not apra driven, it’s driven by price and by hoe much of the “excess” money is sitting where, currently.

      • Coming,

        A single bank might be able to think like that but if the competitor banks do issue bonds that pay more than deposits and depositor holders are active they will shift their deposits to those banks and buy their bonds.

        What all the banks love are lazy sleepy at call deposits that stick around in deposit accounts and accept whatever meager rations the banks dish up.

      • Fine I can accept that

        But the combined amount of deposits and bonds never comes out of equilibrium with credit/loans

        So the shortfall of deposits can only be manufactured by an excess of bond issuance

        Is this correct or not?

      • Let me clarify, please explain what is incorrect

        Banks issue bonds because they are mandated to do so by APRA/basel etc
        This gives them a capital buffer in case their assets (loans) have to be written down

        Banks are generally imprudent and don;t desire to hold excess capital, as it reduces their profitability (and bankers only think of short term bonuses, they can walk away if it all blows up)
        So bond issuance will only occur because it is legislated

        Therefore, the only way deposits can leave the banking system is through bond issuance
        If there is a deposit shortfall, it only exists because there has been regulator-mandated increase of bond issuance

        Failing to see how an excess of bank capital in the form of bonds is a problem – why do the banks need more deposits now?
        When they say deposits, I presume they mean for term: I don’t see why this is any different functionally from a bond

        So they have just shifted from one source of capital to another

        With regards to researchtime: I don’t think you fully understand what you are talking about
        Foreign purchase of bonds may occur in the native currency, or presumably some countries banks may issue them in alternate currencies.
        If Turkish banks have issued US denominated bonds, I presume the bond coupons are also paid in USD and I can understand how this is a problem if the lira falls

        A currency crisis is very different from a funding crisis though

      • Coming,

        “..So the shortfall of deposits can only be manufactured by an excess of bond issuance

        Is this correct or not?..”

        Yes that is correct but I think you might be getting caught up with the language of “short fall”.

        There is only a short fall in the sense that the banks would love cheaper funding and deposits are cheap. But they are unstable because of the absurdity of the concept of an “unsecured loan terminable at call” which is what a deposit really is.

        When you think about bank deposits that way the absurdity of our banking / monetary model is immediately apparent.

        How can a bank lend deposits that are merely loans that can be terminated without notice without engaging in fraud?

        Simple answer. It can’t.

        It is the recognition of that which is why the regulators require the banks to convert deposits “loans that can be terminated at call” into things like bonds that cannot.

        If a bank wishes to offer a service of accepting ‘loans’ that are terminable at call it should maintain 100% reserves for them.

        If it wants to lend to people for extended periods it should acquire the funds to do so on similar periods.

        There is nothing difficult about this except that people have got used to thinking that the insane and fraudulent is NORMAL.

        There is no short fall in a real sense because as you say they must all add up.

      • I understand what you are saying, but as I said: the scenario is purely a result of APRAs decisions to increase capital requirements
        There is no other way to change the amount of deposits available

        So you agree that there is no “shortfall”
        Therefore the author of the article is either
        a) an idiot
        b) a liar

        The issue is that increased capital requirements means the bank has to issue more bonds which means they have to pay more in bond coupons which reduces their profitability
        This in no way causes a funding deficit, and is purely manufactured by the regulators (and can be undone if desired)

        https://www.rba.gov.au/publications/bulletin/2017/jun/5.html

        his increase in capital has had a direct effect on banks’ return on equity (ROE). Australian banks’ ROE remains high by international standards, but the rise in bank capital since 2008, combined with lower profit growth, has reduced ROE to below its pre-crisis levels (Graph 3). While this increase in capital has reduced banks’ leverage and should make them more resilient, this does not appear to have been reflected in a lower implied risk premium demanded by investors (Norman 2017). As a result, banks’ price-to-book ratios have also declined. Looking ahead, ROE will probably remain below its historical levels as banks accumulate more capital to meet previously announced future requirements. In acknowledgement of these developments, some banks have either moved away from or lowered their explicit ROE targets.

      • Coming,

        “…Therefore the author of the article is either
        a) an idiot
        b) a liar…”

        There is a third alternative.

        He means shortfall in the sense I have described. Less than the banks would like.

        As you say if APRA has forced the banks to convert the structure of their liabilities from at call deposits to bonds then APRA can soften those requirements.

        Perhaps that is what is going on between the lines.

        If we want to reduce pressure on mortgage rates APRA should let the banks buy back their bonds and replace them with cheap at call deposits.

        From the TBTF banks perspective this would suit them fine as they know if there is a run on the banks in the form of people seeking to convert their unsecured terminable at call loans the taxpayer stands ready to save the day.

      • No!!

        Read the article properly

        “Specifically, the broad-based deceleration in deposit growth.

        While we believe that there is insufficient evidence to label the decline in deposit growth as the prime catalyst for higher short-term interest rates, deposit growth’s persistent underperformance is critical to our view that the abnormally large market spreads present will, by and large, be sustained.

        Put simply, if (in dollar terms) retail deposits increase at a lesser rate than credit, then Australian lenders’ reliance on wholesale funding must increase. ”

        He has put it completely backwards
        It is the rise in wholesale funding that causes the reduction in deposit growth!!

        Please explain

        “A falling allocation to domestic cash (in favour of offshore investment opportunities) amongst the industry has further restricted the flow of new deposits to Australian banks and other depository institutions.”

        AUD cannot leave the AUD banking system!! (except in the form of bond purchases perhaps)
        Someone has to either hold AUD deposits, or bank bonds!!

        “Regarding financing, the switch from interest only to principal & interest repayments will, at the margin, detract from households’ deposit accrual. Though principal & interest loans come with a lower interest rate, the total repayment is much greater than the interest cost alone. While this switch sees debt repaid more quickly, all else equal, it also slows deposit growth.”

        No sh!t!!! But as loans are repaid, credit contracts and less capital is required!!!!

        “A marked slowdown in nominal income growth has been crucial to the broadbased deceleration in deposit momentum.”

        Total nonsense! If wages are reduced, it means profits are increased and these must still be held as deposits by someone (shareholders receiving dividends).
        The only way deposits can fall is by contraction of credit
        .
        .
        .
        .
        I could go on and on – the whole thing is filled with lies or mistakes

      • Coming,

        “…I could go on and on – the whole thing is filled with lies or mistakes..”

        Well it is written by a banker minion.

        Anyway I am not going to try to make any more excuses for the author as defending the works of the banking sector is the job of Skippy and Sweeper.

        I need to go take a Dettol bath right now before sepsis takes hold.

        🙂

      • So are we acknowledging that the funding gap and this entire article is pure nonsense ?

        This raises two more questions

        1. Is this deliberate disinformation from the author and the bank ? Or just some idiot hired by other idiots

        2. Why is this being reproduced unquestioned on this website?

        This is the reason I didn’t renew my membership, of the owners care at all

      • Coming,

        I appreciate the frustration but what you are talking about is the central incoherence of our current public / private PPP monetary system.

        As much as I would like everyone to be singing it from the trees I do understand why many do not.

        If you call out something as large and pervasive as the current banking / monetary model most people will simply find it impossible to believe that something that important could be little more than historical accident and a barbaric relic.

        The general assumption is that if it really was nuts someone would have fixed it by now.

        They just accept it as one of the facts of life – even though its track record of failure is so magnificent that it is impossible to ignore.

        I don’t expect MB to run hard on this issue directly plus many of their positions are consistent with acting to minimise the damage of the current defective banking / monetary model.

        That they tolerate others (including you) running hard is to be commended.

        You realise that if you keep this up people will start calling you a “money crank” and saying your are obsessed with the idea that a fundamentally dishonest and defective monetary system might be a problem.

        🙂

      • I’m not really interested in changing it, until I can actually understand it

        But this website publishes total misinformation
        Probably because they don’t understand it

        I would pay money to subscribe to a site where these things are explained from basic principles

        How can MB make these predictions about house prices, interest rates and currency fluctuations when they don’t even understand the basic structure and mechanisms involved?

        No wonder they are constantly wrong about everything?

        The ignorant peanut gallery in the comments is even worse

    • Yes, that is one possibility. Bonds remove both deposits and reserves from the system.

      The other thing that does that is if the Government is taxing more than it’s spending over some period (i.e. surplus) where there is also a trade deficit. By the sectoral balances formula (accounting identity that must hold with the national accounts) that must reduce the net financial assets of the private sector.

      • Yes and we know the government is not in surplus

        The causation in the article is completely wrong

        In fact it doesn’t even make sense

    • MediocritasMEMBER

      @Coming: they’re talking about domestic deposits and credit.

      Credit can be extended in Australia (creating an equivalent amount of deposits). Those deposits can then be moved out of the Australian system (becoming AUD Eurodollars in the process). A common way this happens is to sell AUD for a foreign currency then buy foreign assets with the foreign currency. The foreign buyer of AUDs doesn’t have to domicile those AUDs in an Australian ADI, meaning that they don’t count as domestic deposits anymore (Eurodollars), but the domestic debt remains. Theoretically, free movement of the AUDs international valuation is supposed to counteract this flow, in reality it doesn’t seem to work.

      • “A common way this happens is to sell AUD for a foreign currency then buy foreign assets with the foreign currency. The foreign buyer of AUDs doesn’t have to domicile those AUDs in an Australian ADI, meaning that they don’t count as domestic deposits anymore (Eurodollars), but the domestic debt remains.”

        Where do they domicile the AUD then?
        How would they get a return on them?
        THe foreign institution domiciling the AUD deposit would then need to have reserves at the RBA ?

        I know foreign central banks will sometimes hold AUD currency, but not foreign commercial banks – do you have any documentation of this?

        Thanks

      • Normally I share your pessimism but I am a bit more hopeful about the prospects of access to deposit accounts at the RBA.

        For one thing at least one party, the Greens support the idea.

        Secondly, it is a difficult proposal to argue against considering the RBA already offer accounts to the private banks.

        The RBA could offer such accounts without difficulty and it will be a matter for the public whether they use.

        Initially usage may be quite modest but that is likely to pick up when the public guarantee over deposits at private banks are reduced then withdrawn.

        The RBA will not be offering loans so that will not complicate the proposal. There are legitimate questions about the RBA offering loans.

    • This a bit crashist but I wonder if banks have actually run the numbers on what will happen to their clients / loan books if they start raising rates, and have decided it looks very ugly, so they are instead prepared to wear the reduced NIM…?
      (and maybe a few more rats ie C Suite will leave the sinking ship?)

    • Yes! Thank you. I keep bl00dy asking this question.. the whole “deposits are leaving” cry is a bit bullsh1t if my deposit rates keep going lower and lower.

      Is it that if they are having to pay for higher rate overseas, one way they can make up the additional cost of funding is to lower the deposit rate locally.. assuming they are still higher than overseas so cash isnt going to take flight??

      Where’s my higher deposit rate if deposits are running low?

  2. [Put simply, if (in dollar terms) retail deposits increase at a lesser rate than credit, then Australian lenders’ reliance on wholesale funding must increase.]

    Banks use *your* deposits and leverage it x20 to allow other bidders to bid *against* *you* at auctions.

    They are using *your* money *against* you to pump up the property bubble, corrupt government with lobbying, and make australia uncompetitive with the flow-through to high wages and land prices. Superannuation in banks also works against you in the same way.

    Banks benefit from the immigration crush loading of suburbs of $600k dog boxes, which is the kind of dwelling the banks are only permitting you or your kids to afford with your now worthless money.

    It is in the national interest to ditch the banks.

    Buy assets outside the banking and property ponzi safe from bank bail-ins that will hold value through GFC 2.0

    Depleting the banks of *your* money helps send them down the death spiral where they truly belong, via having to source funds from more costly international markets.

  3. Australian Housing Market Downturn A Major Headwind For Banks … Fitch Solutions

    https://www.fitchsolutions.com/country-risk-sovereigns/australian-housing-market-downturn-major-headwind-banks-07-08-2018

    … extract …

    … Housing Market Downturn Has Further Room To Go

    Following years of rapid increases in residential property prices, the Australian housing market peaked in September 2017, and we expect the ongoing downturn to persist over the coming quarters. According to Corelogic, prices have recorded a cumulative 1.9% drop in value since September 2017, and have been mainly driven by Sydney and Melbourne, which are among the world’s least affordable markets, according to Demographia. Demographia stated in its 14th Annual Report that Sydney is ranked the second most unaffordable city (just behind Hong Kong), with its median house price-to-median household income coming in at 12.9x, while Melbourne is the fifth least affordable major housing market, with its median house price-to-median household income coming in at 9.9x. With overall house prices still 31% higher than they were five years ago, there is therefore still room for a further correction. … read more via hyperlink above …

    … CONSIDERING THE 2007 IRISH EXPERIENCE …

    The unweighted average median multiples of its metros in 2007 was 4.7, which crashed to 2.8 in subsequent years … putting all its Banks to the wall and requiring bailouts of in excess of 70 billion euro … about $NZ109 billion.

    Currently the average Median Multiples for the Australian and New Zealand metros overall are about 5.9 and 5.8 respectively … refer …

    Demographia International Housing Affordability Survey: All Editions

    http://www.demographia.com/db-dhi-index.htm

    Research post – 2007 by the Central Bank of Ireland found high lending multipoles was the greatest problem (more so than loan to value ratios) … and subsequently imposed a general mortgage cap of 3.5 times annual household income.

    A year earlier the Bank of England had capped at 4.5 times annual household income …

    Mortgage Measures | Central Bank of Ireland
    … access extensive background research via link …

    https://www.centralbank.ie/financial-system/financial-stability/macro-prudential-policy/mortgage-measures

  4. Are these the early stages of banking slash currency crisis? I assume that the above must be a necessary precursor to some kind of crisis or crisis averting read can kick response such as QE

  5. just wait for construction boom to end and overpaid treadies start pulling money out of banks to fund their exuberant lifestyles

    • DocX, down my way (Sydney south) young tradies won’t pull money out of the bank because they don’t put it in. It gets spent on immediate consumption – top end utes, skiing in Japan and so on because everyone knows the current boom will never end. The concept of risk is foreign to them.

      • +1, wouldn’t surprise me if they have also used excess funds to leverage back into the very ponzi from which they draw sustenance…doom loop guaranteed.

      • Mate. Putting it in a bank means that it will be taxed.

        That ~40%-50% immediate hit is much greater than the remote risk of the kind you are alluding to.

        Tradies is not dumb, mate.

  6. Looks like the beginnings of a Liquidity Crises.
    Seems to me we should expect to see a significant reduction in imported goods showing up in the Trade figures. Logically this should trigger local Aussie inflation as imported goods shortages start to become evident at the retail level, but than again inflation could remain in balance through lower demand, in which case wholesale and retail margins will be squeezed unmercifully. I suspect we are already seeing this happening wrt the new car segment.
    Fun times ahead that much is certain.

  7. no shortage of demand for the bonds

    ** CBA A$MTN – BOOK UPDATE 2 **
    + Combined books in circa A$[3.5]bn
    +Breakdown across tranches as follows;
    +3YR FXD: >A$220m
    +3YR FRN: >A$1.7bn
    +5YR FXD: cA$165m
    +5YR FRN: cA$1.4bn
    +Price Guidance unchanged; as follows;
    +3YR: s/q ASW/BBSW + [75 bps] AREA
    +5YR: s/q ASW + [95bps] AREA
    + Timing unchanged with books expected to close SYD Lunch but may close at short notice