Frankly it was a boring night in financial markets. Oil was up. Stocks were down. And Comrade Obama unveiled his grand plan to remake the American financial system. The Fed will become a systemic risk regulator and capital and liquidity requirements will be strengthened for banks.
The Fed as a regulator for systemic risk? Right. Because that’s worked out so well since 1913. Clearly the world is doomed.
Australia is probably doomed too, especially the banks. Our colleague Kris Sayce at Money Morning waved a copy of today’s Australian Financial Review in our face when we entered the Old Hat Factory this morning. “Bank chiefs warn on funding gap” screamed the muted headline.
The article made three basic points. The deposit base of Aussie banks is “too low.” Aussie banks are over-reliant on offshore money. This entire situation is a “threat to economic recovery.” So it appears Aussie banks are addicted to foreign borrowing and are currently suffering from withdrawal symptoms.
In case you missed it a few months ago we’ll say it again: Australia’s property boom was bought with borrowed money. Both residential and commercial property values soared with the credit boom. If you think the banks are fine because they don’t have a subprime problem, think again. The banks have a property problem, and you can find it on the asset side of the balance sheet.
The banks are rightly worried about having to borrow money in the wholesale market. National Australia Bank’s CEO Cameron Clyne says, “We are reliant on the willingness of others to lend to us, domestic demand for credit significantly exceeds our capacity to save.”
There’s nothing enigmatic about that statement, is there? Lending can be funded from savings (the domestic deposit base) or from borrowing internationally. The latter route is the one Aussie banks have taken to finance the property boom. Even if this property market somehow avoids the fate of all other property bubbles in the history of the planet (and the banks don’t face big write downs on assets that would eat up shareholder equity) they are still likely to lend less if the real cost of capital is going up globally.
As a carpetbagger with a modem, as one reader once described us, we don’t feel too bad about pointing out that Australia’s banks are not nearly as rock solid as everyone likes to think. This isn’t to suggest that they will fail or that your deposits aren’t safe. It’s just to point out that in a credit depression (which we are currently in), lending money will be neither a big nor a very profitable business.
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