Wednesday, October 13, 2010

Wholesale debt WTF

According to Banking Day:
Australian banks are operating in an environment where they face an ongoing risk of funding constraints, a leading banker said yesterday.

National Australia Bank’s group executive for business banking, Joseph Healy, said big Australian banks were reliant on offshore term debt and were among the largest global debt issuers.

Speaking at the Corporate and Business Banking Forum, held in Sydney yesterday, Healy said the banks faced the risk that the appetite from offshore investors for Australian bank paper would diminish.

“Credit growth of eight per cent a year over the next few years would increase the need for wholesale term funding among big local banks from $140 billion this year to $320 billion in 2014,” he said.

If that level of wholesale funding could not be found, the shrinkage of bank balance sheets would limit the availability of credit and have an impact on the economy.

This would be felt most strongly by business, which was already suffering from a bias towards the provision of household over business finance.

“We need to recognise that there is a bias in lending towards the household sector, which is a result of the Basel II capital rules,” Healy said.

“In 2000, for every $1000 of lending to households there was the same amount of lending to business. Now for every $1000 of lending to households there is $600 of lending to business.”

Find above a chart for total credit growth going back to 1996. 8% is not a stretch in the old world. In the new, however, it looks pretty unlikely at this stage.

Nonetheless, the chart also makes plain that 8% growth would likely be acceptable to the RBA, especially given it described the current 4.4% as "quite subdued" in its recent statement.

So then, we should take this statement from a NAB luminary seriously. What do we make of it?

First, NAB is warning that the banks are prepared to deploy the vast moral hazard that the government has handed them by stating that despite an "ongoing risk of funding constraints" they will borrow $320 billion in term funding in 2014 (assuming 8% credit growth from here). And just to make sure you didn't get the message, NAB concludes with the threat that if you don't support their borrowing, they'll "impact" the economy.

Second, this gives us some notion of just how big a bailout we're going to need if markets turn on the banks again. The last freeze resulted in a guarantee to $157 billion. Let's cut to the chase and up it on the percentage growth NAB has outlined: 129%.

We have a small projected Budget surplus for 2014, with debt stock somewhere around $200 billion or 15% of GDP

If there's a shock in 2014, or a sustained fall in commodity prices, as Goldman recently predicted, then NAB's warning is moot. There is no guarantee to offer, at least, not AAA.

Finally, of course, this is all part of the gambit to raise your loan rates.

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