Sunday, October 12, 2008

The international financial crisis - the ANZ pre-emptive strike

Watch the international responses to the Australian Government's decision in coordination with New Zealand action not just to guarantee all Australian bank deposits but also wholesale term borrowings by Australian banks from international banks.

The international ramifications will be fascinating. International banks can now lend to Australian banks backed by a triple A Government guarantee.

Australia can do this because of the country's position. Other countries will have to decide whether to follow. The competitive implications are enormous. Watch what happens!


In writing this brief post, I think that the thing that I really missed in terms of focus was the extent to which the Australian Government's response was itself a competitive response especially to the UK moves. In some ways this forced the Government's hand because it placed Australia's banks -some of the most secure in the world -at a disadvantage.

For someone like me interested in competitive dynamics, it all remains a quite fascinating if somewhat depressing.


Anonymous said...

This is mind blogging indeed. Frankly, I would not have thought that the Labour Government would do something like this. Amazing.

Jim Belshaw said...

The Australian Labor Government is very pragmatic in its approaches, Ramamna. Not much ideology here.

Winton Bates said...

It will also be interesting to see how this affects the behavior of lending institutions if the guarantee stays around in the longer term. The collapse of the Pyramid building society provided a salutory lesson about the dubious attractions of high interest rates being offered by non-bank intitutions. With deposit guarantees there will be nothing to stop depositors from chasing high interest rates.

Unknown said...

Not much to stop much of anybody, I'd say.
The Australian government is guaranteeing deposits and wholesale lending, which pretty much turns the banks loose to do whatever they wish.
Regulatory coverage can't withhold such an onslaught. There just is no way.
Aussie banks just became Venture Capitalists with the government as the backer.

With an economy dependent on consumer spending, the banks can do whatever they choose. The whole nation is at their disposal, literall.
65% of the aussie economy is consumer spending. The resources sector, which is already stressed because of the AUD decline and falling international markets, only makes up 15% or so of the GNP.
The banks can hold the whole nation hostage over consumer lending.

And then there is that small problem of $400-$600b a year that comes in loans from the US.

Jim Belshaw said...

Good point, Winton. I have seen some discussion round this - the counter put forward relies on the combination of regulation, the insurance premium plus the three year time limiting.

I will be interested to see what happens at the end of three years when the guarantee comes to be phased out.

Jim Belshaw said...

Hi again, amoranthus. I should have mentioned your comment in my reply to Winton.

One further issue on the moral hazard point is that the tendency to excess is reduced when the economy is down. My present worry, and this links to the concumption point, is that Governments may over-respond to the downturn in the real economy.

Unknown said...


The costs of this insurance have not been determined yet. Whatever the fee, it will simply be passed on to the consumer: the borrower and depositor.
The idea of making such a sweeping guarantee without setting the regulation in place is only asking for trouble. Banks employ teams of lawyers who will seek to influence the development of regulation, and seek out the loopholes that appear.

For example, in order to make a loan, a bank will want the borrower deposit the funds into the lending bank. This is common practice already.
Will there be regulations that require a borrower deposit the funds in a guaranteed account?
From that requirement, will there be regulations that require the money be used within Australia?

Since deposits are guaranteed, will this drive down credit card interest?
The banks are no longer at risk of losing much so long as the money is used within the guaranteed system.
One of the reasons for making the guarantee is to maintain the already-bloated consumer component of the Australian economy. Consumer spending accounts for 65%, or 2/3rds of the economy.
The problem is most of that consumerism is spent to buy imported goods and services.
If the guarantee is used to require more 'Buy Australian' spending, it could quickly drive prices up since there is little manufacturing within Australia.

This guarantee could easily be the basis of isolationism.

Jim Belshaw said...

Just focusing on one issue, amoranthus, I am not sure that there is any magic figure re consumption as a % of the economy.

I would agree in the Australian case that we have been spending more than we can afford. We have funded this by saving less over time while increasing personal debt. Taking business investment into account as well, this has flowed straight through to the trade deficit. This has been funded by overseas borrowings. Here our banks have played an important role, hence the initial local impact of the sub-prime crisis.

I need to think about your other points.

Unknown said...

You know, Jim, there's an age old question about whether the investor owns the company, or does the company own the investor?
The answer usually is put in terms of who controls the cash flow to whom.

In Australia, the government has taken a position of guaranteeing, with its AAA rating, all deposits and interbank loans. That pretty much means Australia owns the banks.
Banks can't do business without the guarantee. There is little more to nationalizing the banks.
I don't see that even with Australia's extreme consumer market exposure such a move was warranted to preserve a free market.
In fact, the move seems to be intended to close down the free market.

EU, UK, and US governments have taken a preferred stock position in some of the respective nation's banks. Preferred stock is a non-voting position, meaning the funds are essentially capibtalization. The dividends paid on preferred stock might be construed as an additional reinsurance cost until the government can sell out of the position.
That seems like a more sutiable financial position.

Jim Belshaw said...

On the surface there is a cost issue. Assuming that the Australian banks are sound, a gurantee in return for a payment involves no cash out, some cash in.

If the Government put cash in on UK lines, then there is a direct budget impact. The Government may or may not make a real profit on the transaction.

I do not think that either method will really affect outcomes in terms of increased controls on financial institutions. The only issue now, and one of my real concerns, is the form of those controls.

Unknown said...

Hi Jim,

Well you got part of your answer in today's papers. Rudd is seeking to construct regulations to tie executive compensation to the level of risk in investments.
There are some important terms left undefined, of course, like "unacceptable risk"...

If the government controls regulations, can set the interest rates, and guarantees the deposits and loans to banks, what's the difference between that and full nationalization of the banks?

Jim Belshaw said...

Sorry for the delay in responding, amoranthus. Just tied up.

I suppose that one difference with the full nationalisation case is the continued presence of shareholders. This does create different dynamics.

A second difference is the fact that the support arrangements are intended to be time limited. What we do not know at this stage is the extent and nature of the proposed new regulatory arrangements.

Unknown said...

Hi Jim,

I don't see why a shareholder role is required for nationalization.
Whoever controls the money inhouse,
money coming in,
the actions of the company
and its officers,
and how much the company will pay for the money to do anything,
.. is a much more effective way to control a company than the legal limitations of a shareholder position.

Any lawyer will tell you they'd prefer a situation not defined in the law.

I think that's why the US, UK, and EU offered a grant and preferred stock profile.
Preferred stock, you'll recall, is not voting stock.
These positions, combined with limited guarantess, allow banks to make their own decisions.
Obviously, Mr Rudd doesn't feel the banks here should have that sort of leeway.
-- Maybe that says a great deal about the level of regulatory mismanagement already in place?

Jim Belshaw said...

In haste, amoranthus. There was an interesting post on Club Troppo -

More later.