Aussie Banks Addicted to Foreign Borrowing

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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.

Dan Denning
for The Daily Reckoning Australia

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.
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18 Comments on "Aussie Banks Addicted to Foreign Borrowing"

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Dan
Guest

Dan, it’s a relief to read a couple of paragraphs of sanity on here every now and again, in the face of the flippant and baseless rubbish that’s all over the daily papers. People are too quick to forget where money comes from when they see shiny politicians polishing shiny dung.

Diggin it!
Guest

Dan lets say i have a million dollars,which bank can i rely on NOT losing it[government promises aside]

TheGoat
Guest

Dan do you have any insight into Rabobank Australia which is my bank. Being the worlds leading Agribusiness bank would you consider this agri-sector focus to be of benefit going forward. I’m told they have next to no exposure to global residential real estate – what have you heard about their global RRE exposure?. (Deposits are also covered by fed govt like the big 4).

Pete
Guest
Dan: I’m with you there. So many times I have heard “I like Kevin Rudd, he gave me $900” from the younger people I work with. Clearly they don’t realise that it was their money to begin with, and it will be taken back again too (in any number of ways). But in regards to the article – our banks are in big trouble. And if the Gov. insists on bailing them out, then our Gov. is in bigger trouble too. Our banks have very low reserves as it is…without factoring in the foreign debt as the article points out.… Read more »
prozak
Guest

Pete,
Um No.
Governements do not compete with private enterprise for funds.

This is and has been a fundamental economic principal since the 1800’s… I could be wrong but I believe it was Ricardo who established this.

TheGoat
Guest
Howdy Prozak, you are right the government doesn’t have to compete for funds they have taxation. So at the end of the day governments always get some of our money. What I think Pete is talking about is raising capital through borrowings (in this case the government selling bonds to obtain cash). Consider anyone that might have some money to invest (the global money pool) an individual, co-op of Japanese house wifes, a super fund, an insurance company, Chinese bank etc etc. They will put their money to work (invest) in the best place they can based on, their knowledge… Read more »
Pete
Guest
Prozak: “Governements do not compete with private enterprise for funds.” As Goat says, yes they can raise money through taxation. Question: Where do you think our deficit comes from? Tax in leiu? Any lender is really an investor. They are lending based on risk and rate of return. All of these investors can pick and choose who they lend to, by: – buying shares (lending money to a company to use as capital in an IPO) – buying bonds (lending to a company or more likely a Gov.) – lending cash directly through a contract Oh now that I read… Read more »
Pete
Guest

Sorry “If our Gov had no deficit and taxed us all” should read “If our Gov had no deficit and taxed us for all the money it needed”

Most Gov’s appear to be against raising taxes in a recession – due to the negative impact it would have on business, the general population and approval ratings.

Greg Atkinson
Guest
Pete, governments have already started raising taxes or started to hit those who will be the target of future tax rises. In the UK the government has taken measures to increase the tax burden on high income earners, in Australia the pension age will be pushed back to 67 (a tax by another name) and in the U.S. Obama is going after companies and has made so secret that he will go after the top earners as well. Oh then we have the Emissions Trading Scheme which is… simply a tax. This is just the beginning because there is no… Read more »
Pete
Guest
I agree Greg, but please don’t imply that you are offering a counter-argument when in fact both our points are equally true. I was merely disputing prozak’s claim that a Gov’s only revenue is through tax. If a Gov needs money, sure, they can tax the people. But they also run the risk of hindering any economic recovery by doing so. Also there is only so much you can tax a country before it starts to deplete an economies output, and therefore revenue…and therefore the amount that can be taxed in the future. I think taxing high income earners too… Read more »
Greg Atkinson
Guest

Pete I was not offering any counter view, just simply saying taxes have been raised and will be again. What the government giveth the government shall taketh away :)

Pete
Guest

I think you mean ‘what the government taketh, the government taketh away more if it wants to’ ;)

Greg Atkinson
Guest

I can’t argue with that Pete. The thing is that many people do not even realise they are being taxed! I have even met people who do not think there are any State taxes. They say quite seriously that only the Commonwealth Government taxes people!

Pete
Guest
There’s plenty of them Greg. And I suspect that most of them vote too. A surprising number of people know almost zilch about the economy. You’ll have to excuse my sexism here but I think ‘the economy’ is seen as a largely male topic and therefore ignored by a large portion of the female population. But that said, a lot of the male (esp. youth) know zilch about it too. Then you get some later generations who know plenty about the economy of the 1990’s. It doesn’t particularly help understand todays economy, but they are happy to give such advice… Read more »
Pete
Guest
There’s plenty of them Greg. And I suspect that most of them vote too. A surprising number of people know almost zilch about the economy. You’ll have to excuse my gender-ism (~I got moderated~) here but I think ‘the economy’ is seen as a largely male topic and therefore ignored by a large portion of the female population. But that said, a lot of the male (esp. youth) know zilch about it too. Then you get some later generations who know plenty about the economy of the 1990’s. It doesn’t particularly help understand todays economy, but they are happy to… Read more »
Paul
Guest

“Dan, it’s a relief to read a couple of paragraphs of sanity on here every now and again, in the face of the flippant and baseless rubbish that’s all over the daily papers. People are too quick to forget where money comes from when they see shiny politicians polishing shiny dung.”

And yet, the sheep continue to march to the slaughter.

Pat Donnelly
Guest
Australia is a continent. It has a small population but is engaged in shipping food and minerals and GOLD! to the rest of the world. Dan misses a point possibly deliberately: there is no shortage of capital for good investments. When the country has 50Mn pop then be worried if we still need foreign investment. Workers here are underpaid and property is at fair value. Hence the least affordable housing in the world. But migrants bring capital. We brought 400k and 50k a year. And five kids. You and Bill are welcome to Australia, Dan but try to understand it:… Read more »
Greg Atkinson
Guest

Pete it is also scary how little people know about the mugs they vote for as well. I would guess that more than 60% of voters could not write a half page summary of the person they voted for at the last election in terms of achievements, work experience and qualifications etc. It is even worse if at the State level. No wonder we end up with so many duds sitting in Canberra.

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