We ended yesterday’s Markets and Money with the promise that we’d follow up about local banks and the RBA’s plan to make sure Australia never suffers a liquidity crisis. But our mate Kris Sayce at Money Morning beat us to it. You can read his write up of the Committed Liquidity Facility over at the Money Morning web site, where you can also sign up for his Daily e-letter if you don’t already get it.
To paraphrase Kris, the RBA has announced how the CLF – a kind of pre-emptive bank bailout would work. Of course they won’t call it that. After all, a liquidity facility is only designed to make sure banks can secure local funding by providing the Central Bank with collateral. This would presumably happen in the case where the banks weren’t able to raise enough cash by other means, especially selling assets, which you don’t want to do in a fire-sale market.
RBA Assistant Governor Guy Debelle’s speech on the CLF is scintillating reading, if you’re into banks and regulations. What we found really interesting is what was missing. The CLF is designed to keep bank lending ticking over in an Aussie credit crunch. But no one ever questions the value of bank assets in Australia. No one ever asks when bank solvency would become an issue thus requiring a bank bailout scenario.
No one asks because no one expects that Australian house prices would ever fall far enough or fast enough that the banks would be in trouble. No one except Dr. Steve Keen, of course. But it seems to us that the CLF could set up a situation where Aussie banks offload their mortgage assets onto the RBA.
At first it would just be a temporary arrangement, with a repurchase agreement to specify when the banks would have to take back the mortgages. But in a genuine crisis, there’s no doubt in your editor’s mind that the assets would stay at the RBA as long as they had to, until their presence on bank balance sheets no longer threatened the credit rating of the Aussie banks or their access to international funding.
Of course we’re making our own big assumption here: that a global credit depression will slowly raise the cost of capital to Australian banks and contribute – along with unaffordable prices – to big falls in house prices. These falls would directly affect the quality of bank assets (mortgages) and further reduce lending. But that could never happen, right?
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