The Australian bank funding cost rocket is still refusing to cool off. Yesterday CBA CDS prices were unchanged at 120bps: Meanwhile, our US and European cousins are seeing enormous relief: Australian banks continue to lead developed market funding stress in this cycle now with an eye-popping spread to the US and Europe. This may mean
Australian interest rates are set by the Reserve Bank of Australia, an independent body established in 1959. It is guided by an inflation targeting regime that seeks price stability in the 2-3% consumer price index band. The RBA originally also governed prudential policy but following several large scandals and bankruptcies in the late 1990s that role was separated into a discrete entity titled the Australian Prudential Regulation Authority.
The RBA is widely well-regarded despite a recent history of buried corruption allegations and a board of business rent seekers that, in more ethical nations, would not have their hands anywhere near monetary policy levers.
In 1990, Australian interest rates were set at 17.5%. But during the Great Moderation, interest rates consistently fell alongside inflation and oscillated in a band between 1.5% and 7.5%.
Owing to an endowment of resources that proved very attractive to China during the Global Financial Crisis, Australian interest rates did not fall to the lows experienced in other developed markets. Indeed, Australia was the first developed market to raise interest after the crisis though it has subsequently had to lower them again as the commodity boom subsided.
During the 2000s, Australian interest rates began to be influenced by external economic pressures much more than previously. This process was driven by the huge offshore borrowing of Australia’s big four banks in wholesale markets. As their offshore liabilities ballooned, the banks were increasingly exposed to the vicissitudes of far flung markets and investors. This reached a head in the global financial crisis of 2008 when banks faced much higher demands from offshore investors for better risk-adjusted returns, forcing them to break with the Australian cash rate in setting local interest rates.
Ever since, Australian bank have regularly adjusted lending and deposit interest rates unilaterally and independently around the cash rate set by the RBA. These interest rates moves were a constant source of political friction as politicians sought to protect the Australian property bubble.
In 2015, Australian interest rate policy was forced to return to a defacto shared responsibility arrangement between the RBA and APRA. With the lowest interest rates in fifty years, the Australian property bubble inflated to new dimensions even as a global yield trade drove up the value of the Australian dollar, threatening economic growth. Eventually the solution found was to apply macroprudential policy to some mortgage lending so that interest rates could be lowered to take pressure off the currency.
MacroBusiness was the most accurate forecaster on Australia interest rates in the market from 2011 forward. It predicted both the turn in rates downwards in 2011 and has had the most dovish outlook ever since. It also lead the debate around, and implementation of, macroprudential tools in 2014. MacroBusiness covers all apposite data and wider analysis of these issues daily.
The Australia bank funding cost rocket is back after just one day’s relief. CBA CDS recovered most of its losses from the day before to end up 8% to 130bps: Global spreads continue to out-perform Australian: I still think we’re likely to see improvement before things get worse again. It’s really all about oil. From Banking
From the WSJ: For some investors, the Fed’s caution might bring to mind the late 1990s. Back then, traders became convinced that if stocks fell too hard, the Fed under then-Chairman Alan Greenspan would cut rates and stem losses. This earned the moniker the “Greenspan put.” It was as if the Fed had provided investors
Reserve Bank Governor of New Zealand Graeme Wheeler earns $600k per annum. But that’s only in kiwi dollars. If he replaced Glenn Stevens he’d virtually double his salary. That’s got to be tempting even for a Bledisloe Cup tragic. And we need him really badly. The mooted successor to Glenn Stevens is Phil Lowe who,
Yesterday saw a step change in the CBA CDS price which finally contracted materially by -9% to 120bps: This is tracking improved global credit spreads as the bear market rally in commodities eases fears of bad loans flowing into banks: However, very steep up-trends remain in place and Australian banks are still clearly leading the widening.
A few readers have asked me if the wholesale funding squeeze Australian banks are caught is any worse here than elsewhere. Well, here is your answer in a chart of 5 year CDS prices for CBA versus Wells Fargo in the US and Credit Agricole in Europe (data from Bloomberg): These three banks are all too-big-to-fail
It’s the fly in the ointment that just won’t go away. Despite the iron ore rally, rampant RBA barracking, above trend GDP, wall-to-wall bullish triumphalism and the big move in for global credit spreads, the CBA CDS price just does not want to fall. In fact, yesterday it rose 2 points to 132bps and is
From a now rampant Kouk: Could the next move in interest rates be up and could it happen relatively soon? The short answers are ‘yes’ and ‘yes’. As things stand, Australia is currently in the midst of the longest period in modern monetary policy history without an interest rate hike. It is, of course, clear
From Deutsche some good news for savers before the RBA snuffs it out again: Average term deposit spreads for the majors (on “best rates” within the broadly defined short term and medium term categories) improved slightly during the last month. In both the short term and medium term categories spreads improved by 5bps. These trends
Amid the now wild bear market rally in everything commodities, one price is proving to be surprisingly resilient to the downside. It is the CDS spreads for Australia’s major banks with CBA CDS widening on Friday 3% to 130bps: The major bank CDS price has so far missed out on the entire spread compression transpiring
From Robert Mead of PIMCO: While travelling this week to Newport Beach for PIMCO’s upcoming Cyclical Forum, I was pleasantly surprised to see “The Big Short” was one of the movie options on the plane. The story of a few bold investors who successfully bet against the U.S. housing market before the financial crisis hit,
From the AFR: Short positions in the banks have skyrocketed over the past 12-months – and are now worth more than $8 billion. While that $8 billion is still only about 3 per cent of the Big Four’s combined market capitalisation, it is the biggest short position since the corporate regulator started compiling data in 2010.
From Banking Day: According to comparison site Mozo, 13 lenders increased their owner occupier variable rates last month and five reduced them. Six lenders increased their investor variable rates and one reduced it. The link between the cash rate and mortgage rates has been well and truly severed. Aussie Home Loans increased owner-occupier variable rates
Cross-posted from Martin North. Recent media coverage about mortgage brokers has been quite negative, with allegations of poor ethical standards and false application data being used by some to bolster loan applications. So in this post and in our latest video blog we look at data from our household surveys to portray the current state
From Moody’s today comes an update on securitisation delinquencies. Auto asset-backed securities (ABS) are deteriorating in a rising trend: That trend looks likely to trouble GFC highs pretty soon. Auto loans are fixed interest so a falling cash rate does not help directly. They are therefore a more pure read on credit stress. Here are
From our Bill: As expected, the RBA Board decided to leave the cash rate unchanged at 2.0%. In recent statements, its easing bias was expressed with the sentence “continued low inflation may provide scope for easier policy, should that be appropriate to lend support to demand”. This sentence has been moderated to replace the “may”
The RBA has held interest rates and done nothing to help the dollar: At its meeting today, the Board decided to leave the cash rate unchanged at 2.0 per cent. Recent information suggests that the global economy is continuing to grow, though at a slightly lower pace than earlier expected. While several advanced economies have
From The Australian: While Deputy Governor Philip Lowe appears to be the shoo-in appointment for most economists and central bank watchers, the government could still look beyond the bank or even the shores of Australia for its short list of candidates. …One name that crops up as a potential RBA candidate and semi-outsider is Warwick
From Macquarie comes some good news for savers (except the RBA will snuff it out): Given tightening in the wholesale funding markets we expected to see a step-up in deposit competition. While banks appear to be competing more aggressively for deposits, it appears that competition has remained contained. Our analysis on special deposit spreads suggests that ANZ’s deposit
The RP Data leading indexes for the week are out and show a moderate slowdown in activity year over year. Mortgages are down solidly from 145 last year to 135 this year: But activity is still much higher that 2014 when it was 120 in the comparable week. Thankfully there is evidence that listings are
Always one to drag the chain on dovish policy, the Shadow RBA is falling behind the rates curve today along with Captain Glenn: More of the Same: RBA Should Hold Rate After last month’s rout, global stock markets bounced back but financial markets remain edgy. The unemployment rate rose to 6%, and inflation, at 1.7%,
While Captain Glenn is still plumping for a smooth retirement, recently telling parliament that the banks have no reason to raise interest rates as funding costs rise, Deutsche has more clear-eyed view: Inside the Bank Vault this week, we take a look at indicators of wholesale funding costs. Over the past month we have seen
Well…that escalated quickly. CBA CDS prices launched on Friday as markets digested the news of the Jonathon Tepper and John Hempton Western Sydney mortgage sting. Climbing as high 142bps it settled at 137.34bps up 11.4% on the day: CBA is out this morning with a rebuttal at The Australian: Chief executives of the big four have