CLF – The RBA’s Pre-emptive Bank Bailout

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We ended yesterday’s Daily Reckoning 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?

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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6 Comments on "CLF – The RBA’s Pre-emptive Bank Bailout"

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Rick W
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As you mention Steve Keen I provide the following link to his recent lecture series:
http://www.youtube.com/watch?v=KWUG1n1jEJI&feature=list_related&playnext=1&list=SP0A21A329D01D0CFE

It takes about 15 hours to work through the 21 videos but they give tremendous insight into the current state of macroeconomics and his analytical method that enabled him to predict the current debt deflation predicament.

These insights have enabled me to personally position my finances to be in a good place. It has helped me to separate nonsense from substance in all the noise associated with the financial mess.

Biker
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DD: “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… ….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.” Yet Steve Keen predicted _zero_ interest rates, not rising rates. For some reason, God-only-knows-why, he thought we are Japan… Doc Keen: Wrong on the Big Property Crash, wrong on rates, wrong on unemployment figures. If Keen’s insights… Read more »
Nexus789
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Well Biker…it is ballsy to make such dismissive comments re property crash, etc. I think the opposite as China slows Australia’s dirt digging economy slows (as will Canada’s and Brazil’s), unemployment rises, flows through to housing, etc. The effect of private debt which is 160%+ of GDP will be felt. The notion that an economy always grows and a debt fuelled bubble will not have unintended consequences is not a view that I would agree with.

Biker
Guest
One of the reasons I’m here is to consider and evaluate worst-case scenarios such as those you describe, Nexus789. The ‘ballsyest’ of property bears are really specific about their predictions.* Take one such prophecy, which stated that within a year the Australian property market will be worse than those of Ireland or the US. That little gem turns to carbon this coming Tuesday, 6th December 2011. The prophet, ‘ballsyer’ than most, undoubtedly foresaw this as a special date, an alignment of two planets, perhaps. Or maybe he calculated a possible rise in interest rates into his disaster scenario? ;) *… Read more »
GeorgeK
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Dan What’s you call on the mortgage rates in the next 12 months and would you consider a fixed rate for 3 to 5 yrs ?

Biker
Guest

Good question, Dan. How about a down-to-earth call on interest rates for 2012; or, better still, as George infers, 2012 – 2017?*

Remember, Keen predicted 0% l-o-n-g ago.

* We’re with the ‘angels’ on that one, George.
(Variable rates have won out for us for 30+ years… .)

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