Aussie Banks are Scrambling to Raise Their Tier 1 Capital Ratios

Aussie banks are scrambling to raise their Tier 1 capital ratios, according to yesterday’s Financial Review. Before this arcane financial knowledge induces you into a drooling coma, consider what it means. Banks are shoring up the quality of their assets so that when they go into the equity markets to raise new capital, investors greet them with open wallets instead of cold shoulder (or a punch to the face).

But if the banks are hogging up all the new equity capital-and who would deny that Westpac certainly looked piggish as it raised $2.5 billion-won’t that make it harder for other publicly listed companies to raise new money? Maybe this is why Rio Tinto announced 14,000 layoffs and a 50% reduction in spending yesterday. It’s going to be very hard for miners to borrow money in 2009.

Besides, the banks are supposed to be lending, not rebuilding capital through the equity and debt markets. Using their government-backed guarantee, Aussie banks are floating bonds in the offshore market. They’re raising money locally too. It might save the banks, but further down the debt food chain, how much local capital is left for other borrowers? It’s looking more and more like 2009 will be survival of the least leveraged.

On the lighter side, when you look at the list of firms hoping to raise more capital by selling new shares, maybe it will remind you of this scene from Airplane. Money for the Reverend Moon…more nuclear power…Jews for Jesus. There are so many outfits that want your money right now. Maybe you’re better off holding on to it.

You should at least reconsider whether you want to loan money to the American government. The U.S. Treasury is practicing its serious face in the mirror this week. It needs to raise US$2 trillion in 2009. Try asking for that while retaining your dignity. A nice suit might help.

“Treasury needs to be prepared to meet additional financing needs if necessary,” says Assistant U.S. Treasury Secretary Karthik Ramanathan. Bloomberg reports that Treasury is considering “conventional” ways to borrow the money. Thos include more and bigger debt issuance, i.e. begging the Chinese, Japanese, and Petro powers.

But the funding gap is likely to grow with each new Obama-nation-building plan. So Ramanathan says Treasury will have to consider “novel” ways to raise the money. What does he have in mind? A bake sale? How about auctioning off a date with Ben Bernanke? Before it turned over the Mint to Isaac Newton a few years later, the English Government even tried a lottery, promising a big payout to those who were daring enough to loan the government money.

There is always organ harvesting. If the U.S. government were a person, it could consider selling off vital organs. Black market kidneys are hard to come by, we hear. But instead of dismembering itself to raise cash, the government will probably consider selling weapons and assets.

What assets? How about mineral, oil, and gas exploration rights, both on-shore and off? Or, if that is too hydrocarbon-centric, maybe the Treasury should just start looking between the sofa cushions. Every penny counts.

How about some reader mail? We made a slip yesterday. It got noticed.

“I noticed a little Freudian slip in your email newsletter today. In Dan Denning’s comments, in the paragraph just above the monetary base graph. It notes: “It implies there will be hardly any inflation at all over the next yen years.”

Those “YEN” years will be full of deflation, not inflation I would think.

Simon C.

Mea culpa. Japan fought hard against deflation and is still losing. Monetary policy went to zero. Fiscal policy went to the moon. But the bubble in real estate and Tokyo stock prices could not be rebuilt. Instead, it moved on to other shores and other asset classes. Today, it’s bloating comfortably in the U.S. bond market.

Hello Mr Denning,

There is an interesting typo in your opening paragraphs. Regarding negative yields on US, ‘yes…that’s how much investors currently prefer govt backed bonds to equities at the moment. It implies there will be hardly any inflation over the next YEN years.’

The reason the yen typo is of interest is that I wonder how long the deleveraging impetus to JPY vs. USD will run. Japan had negative interest rates for far longer than the US, there is probably still some Uridashi bond renewals to come, in light of the NZD/AUD interest rate reductions. I also wonder if the leveraged players borrowing USD also didn’t show up at the JPY window and leverage their leverage. Any thoughts you have regarding this would be of interest to readers.

Like they say at the Guarniad, spend some money on a proof reader.

Kind regards,

Jack S.

The unwinding of the short USD/long commodities trade has taken much longer than we expected. It suggests there was a lot more leverage involved than we first imagined, and that the Yen played an integral role. If there IS more leverage to be unwound, that probably means more selling. It might not, however, mean reduced appetite for risk.

In fact, it already looks the U.S. dollar rally is losing some of its steam. This could, we think, mean reduced demand for U.S. Treasury bonds, a rebound in commodity prices and shares, and probably even a rally in high-grade corporate bonds (assuming such instruments still exist).

As for a proof reader, the Old Hat Factory is in lean mode. You will have to accept our occasional errors as the price of the free daily. But if you’d like to start paying for the DR, we can probably direct some of the proceeds to a proof reader.

Dan Denning
for Markets and Money

Dan Denning
Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.

Leave a Reply

Be the First to Comment!

Notify of
Letters will be edited for clarity, punctuation, spelling and length. Abusive or off-topic comments will not be posted. We will not post all comments.
If you would prefer to email the editor, you can do so by sending an email to