are our banks all doomed?

[boz]

When i bumped into this update of Spanish banks and then think what would be the equivalent data of Australian banks I just thought our banks are all doomed (just matter of time). Would be good to have a professional opinion (like from TF)

...
Immediate Provisions

Under the proposals, banks that take on property from developers unable to pay back their loans would have to make provisions for at least 30 percent of the value if they keep the assets for more than two years, the regulator said. Banks must immediately provision for a 10 percent drop in value of the assets when they’re acquired and 20 percent after 12 months.

The Bank of Spain said a study of the impact of the changes estimated that a 2 percent increase in provisions for 2010 would lead to a 10 percent average drop in pretax profit from the lenders’ domestic business.

Bancaja, a Valencia, Spain-based savings bank with assets of 111 billion euros, has real-estate risk of 4.5 billion euros, an amount equivalent to 116 percent of equity, according to a report published today by Nomura. Bancaja is betting on staying independent, El Pais reported today, citing managers who attended its board meeting in the town of Castellon.

CajaSur, a savings bank seized by the central bank on May 22, has 992 million euros of real-estate risk, equivalent to 411 percent of equity, according to Quinn. Other “cajas’ with a high exposure to real estate include Catalan lenders such as Caixa Catalunya and Caixa Terrassa, which are already involved in merger processes.
...

I think those number for australian banks are way worse and more leveraged

 

[craigb]

No! just extremly difficult to get money out off!

 

[DanielG]

As long as the local economy is strong they should be ok. I have heard that banks are desperate for capital which is why they are offering high interest returns on deposits. I think over the next few months there are going to be some pretty good deals.

 

[whatever123]

As long as the local economy is strong they should be ok. I have heard that banks are desperate for capital which is why they are offering high interest returns on deposits. I think over the next few months there are going to be some pretty good deals.

I hope so, but I'm not seeing much at the moment. 6 months ago westpac was offering 6.8% for 12 month term deposit and a few other banks followed.
Four rate rises later and the term deposit rates have dropped to only 6% !!

Doesn't sound desperate to me. Perhaps the banks aren't getting the demand for loans as much as we hear?

 

[boz]

I don't think the problem is weather they lend or not, they pretty much can get all the money they want from RBA or from markets or from increasing leverage.
The problem is do they have enough equity to withstand bad loans that could come in a downturn? I think they are very far from having enough money if they use the Spanish proposal

 

[Ausprop]

would kinda be satisfying, especially eastpac. like the day Allco collpased - oh joy

 

[Intrinsic_Value]

As long as the local economy is strong they should be ok. I have heard that banks are desperate for capital which is why they are offering high interest returns on deposits. I think over the next few months there are going to be some pretty good deals.

i think this is the key to your answer.
Banks are essentially leveraged plays to the economy.

Its interesting to note that NAB and i think it was CBA have full filled their current year funding requirements, WBC and ANZ still have to fund part of their requirements. How important this is i dont know with the exception that the move in spreads will effect their borrowing rates.

 

[Intrinsic_Value]

would kinda be satisfying, especially eastpac. like the day Allco collpased - oh joy

Not really. I remember non-recourse talking about reading the fine print in your borrowing contracts.

When push comes to shove, it can get pretty nasty out there.

 

[Ausprop]

Not really. I remember non-recourse talking about reading the fine print in your borrowing contracts.

When push comes to shove, it can get pretty nasty out there.

i wouldnt stress, the govt would just nationalise it, which it pretty much is anyway. only diff is that taxpyers would get to keep the profits. plsu we could deport the chief dragon back to where she came from and save that big fat salary.

funny hey... banks are too important to fail, but lets shove it righ up the miners. one does stuff and leaches cash, the other takes huge risks and actually produces something that we need. any brown suited govt egg head could do what a banker does.

 

[Intrinsic_Value]

i wouldnt stress, the govt would just nationalise it, which it pretty much is anyway. only diff is that taxpyers would get to keep the profits. plsu we could deport the chief dragon back to where she came from and save that big fat salary.

funny hey... banks are too important to fail, but lets shove it righ up the miners. one does stuff and leaches cash, the other takes huge risks and actually produces something that we need. any brown suited govt egg head could do what a banker does.

hey firstly i am where she came from, as Sunfish is fond of reminding me, given that i dont like investing in resource shares
(dont worry i dont take offence)

Its funny your comment about a brown suited govt egg head. I actually agree with you. Its not because our banks had good 'foresight' that protected them from the GFC (just look at NAB, they were just starting to go into this CDO,CFD, C what ever crap, when the **** hit the fan). It was become of the unique banking system we have in australia. An oligopoly actually proves a sought of protection in times of risk, because margins are higher (due to imperfect market competition).

Miners are an essential part of our economy ( i just cant value them, so i find it very difficult to invest in them, people on this forum would have a heart attack if they new the share price at which i would start to invest in BHP, that doesnt make them wrong and me right, it just means that because i dont know how to value them, i want a bigger margin of safety).

You should down load the 'accent of money'. I think it was produced by the BBC. Fascinating to listen to it. I think it provides the 'source' of our love/hate relationship with banks. Except over time it has moved from the 'jewish' source to an institutional source. (it also provides me with further reinforcement about my belief of popularity vs intrinsic value)

 

[WinstonWolfe]

For some time, I have been trying to get my head around the repercussions of bank credit on the economy.

I don't think this is a subject well understood by many, including the RBA that has only just decided asset price inflation might be something it should take an interventionist interest in, in addition to general price inflation.

Bank credit has a critical influence on the current account and net foreign debt, that his not well understood. This is due to the floating exchange rate, which is meant to control the balance of payments.

However, in controlling the BoP when there is a trade deficit, bank credit becomes inflationary by causing national expenditure to exceed national income, which fuels CAD and higher NFD.

I don't have the relationship crystallized in my mind, but if anyone understands it well, I'd love to hear a simple explanation. Leigh Harkness is an Australian economist I have been reading in the last few days, who elaborates the relationship.

edit: this stuff is important to this thread, because it has been proposed bank credit be restricted when there is a CAD, so as to curtail monetary growth which fuels the deficit.

 

[Rolf Latham]

i wouldnt stress, the govt would just nationalise it

Dunno

Depends on how fast they want things to heal

USA late 1980s Many a savings and Loan went bust and the govt in the end sold up much of the investors property stock when they coukld not survive.

havent looked inot it in detail, but something I recall from one of Keith Cunninghams seminars. Could be an interesting research project.

ta
rolf

 

[boz]

For some time, I have been trying to get my head around the repercussions of bank credit on the economy.

I don't think this is a subject well understood by many, including the RBA that has only just decided asset price inflation might be something it should take an interventionist interest in, in addition to general price inflation.

Bank credit has a critical influence on the current account and net foreign debt, that his not well understood. This is due to the floating exchange rate, which is meant to control the balance of payments.

However, in controlling the BoP when there is a trade deficit, bank credit becomes inflationary by causing national expenditure to exceed national income, which fuels CAD and higher NFD.

I don't have the relationship crystallized in my mind, but if anyone understands it well, I'd love to hear a simple explanation. Leigh Harkness is an Australian economist I have been reading in the last few days, who elaborates the relationship.

edit: this stuff is important to this thread, because it has been proposed bank credit be restricted when there is a CAD, so as to curtail monetary growth which fuels the deficit.

The ripercussion of bank credit on the economy are that if credit contract bank contract at exponential level, this happen to Japan for the last 20+ years with banks like Zombies (and hiding their losses).
Here in australia we have banks lending alone in excess of 1.5 tril$ (of which 1 tril$ just home loans). The major 4 banks are capitalising around 250-260 bil$ on the market.
If Spain and europe are in trouble to stand behind few banks with tricky assets that are just a fraction of gdp, what is the long term prospect of australia and its banks? EU PIGS gov bond yield has been soaring to 1.5% above the german (in Spanish case), what would be the aUS gov bond yield if the gov need to fork out hundreds of bil to stand behind our banks?

 

[WinstonWolfe]

Boz, I think the RBA's new focus on asset prices has no option other than to restrict bank credit.....Harkness believes excessive bank credit is not only the cause of asset inflation, but our growing nfd. The only way to stop this trend is to throttle bank lending.

Hopefully his explanation in this post to the Economist helps explain the options available.

"Under the old fixed exchange rate system, countries created money from foreign reserves and from bank credit. To ensure stability, bank lending had to be regulated. Let me explain.
One of the functions of money is to restrict our spending to what we have earned: to restrict what we can buy to what we produce. If we produce something and sell it, the money we earn enables us to buy the equivalent of what we have produced. If the only money we spend is what we earned, we can never buy more than we have produced and cause a current account deficit."
...

<edit>This has been copied from another source- and the link given is not the same as what has been given. Most of the quoted text has been removed. You may wish to provide a link.

 

[boz]

don't think that is a good post, foreign debt is not necessarly related to the amount of credit. for example you get increased credit in the economy if someone we call A get paid to take money from B to give them to C, that doesn't increase foreign debt but increase spending as A has got an income. also when you increase spending in the economy it is not necessary you get increase in NFD (or inflation), depend what is the industry capacity, for example today in USA or Japan or Europe the industry can increase the output greatly without putting pressure on import and on inflation.
also if someone say china has positive external position, if they can do everyone can do it, well, reality is that people in china work for few$ an hour, can western world afford that?
western world countries already live beyond their mean (including australia), there is not such a scenario where you can grow out of debt, you would need massive productivity improvement that I don't see coming in the near future. I think EU decision to cut spending is the right one. The alternative to give more drinks to make you sober doesn't work

 

[boz]

I think the RBA's new focus on asset prices has no option other than to restrict bank credit.....Harkness believes excessive bank credit is not only the cause of asset inflation, but our growing nfd. The only way to stop this trend is to throttle bank lending.

I think RBA realise that credit can't grow forever more then gdp, when that happen for long time you have the Japanese Chrisis of late 80's and the GFC and the great depression etc. those chrisis where not because of NFD.
NFD is cause of country implosion like Iceland (or greece that has nearly all his debt coming from outside greece)
This doesn't mean RBA want credit to go down as that would start a deflation scenario that will be very difficoult to control and stop.
I think central banks around the world don't really know what they are doing, their actions in the last few years are like a Giant experiment. RBA because fundamentals in australia are ok at the moment they have a easy job, but this can change very quickly as we saw during the GFC and the AU$

 

[WinstonWolfe]

for example you get increased credit in the economy if someone we call A get paid to take money from B to give them to C,

that's not an example of bank credit....that's just transferring A's ability to spend to C. It doesn't create additional expenditure.

Bank credit is when banks increase money supply by increasing lending on a fractional reserve basis. If increased money supply does not generate additional production, you get asset inflation and increased net foreign debt. Increased money supply without increased production, leads to increased trade deficit, which feeds cad and nfd. Why? because the additional supply gets spent on inflating asset prices and buying more imports.

that doesn't increase foreign debt but increase spending as A has got an income. also when you increase spending in the economy it is not necessary you get increase in NFD (or inflation), depend what is the industry capacity, for example today in USA or Japan or Europe the industry can increase the output greatly without putting pressure on import and on inflation.

I agree increased spending when accompanied by an equal increase in production, doesn't cause increased nfd. However, increased spending in developed nations always increases imports, because we are so reliant on imported goods, and doesn't necessarily increase exports.

Increased imports without increased exports, lowers the value of domestic currency via the free float exchange, which leads to higher cad and nfd.

Harkness is saying it is very difficult for a country to increase production and exports, when it has a free float exchange. As you increase exports, the free float works against you by increasing the value of local currency, thus making your goods more expensive and imports cheaper. China has been able to run CAS because it artificially undervalues the yuan. A free float would have curtailed that.

Harkness further argues when a country is running CADs, bank credit compounds the problem, because expenditure preferentially favors imports.

The problem is that not all bank credit is spent on increasing productivity. If it did, we wouldn't generate a CAD. The productivity surplus would be exported. The problem is in bank credit increasing expenditure (on imports) rather than increasing productivity to match the new level of money supply created by the banks.

 

[WinstonWolfe]

A free float exchange rate mechanism makes it essential that increased bank credit be accompanied by an equal increase in domestic production.

If production increase doesn't match bank credit increase, then consumption of imports increases more than exports, fueling a CAD and NFD.

 

[boz]

Bank credit is when banks increase money supply by increasing lending on a fractional reserve basis. If increased money supply does not generate additional production, you get asset inflation and increased net foreign debt. Increased money supply without increased production, leads to increased trade deficit, which feeds cad and nfd. Why? because the additional supply gets spent on inflating asset prices and buying more imports.

This is not necessarly true, look at Japan case you had excess of money supply during their boom and Japan had massive trade surplus, then the bubble burst and credit in Japan start contracting (total credit) and they still have trade surplus (and NFD positive)

Harkness is saying it is very difficult for a country to increase production and exports, when it has a free float exchange. As you increase exports, the free float works against you by increasing the value of local currency, thus making your goods more expensive and imports cheaper. China has been able to run CAS because it artificially undervalues the yuan. A free float would have curtailed that.

That is also not necessarly true, look at the case of Germany and Japan, they have a free float exchange and they have been able to sustain production and export. Why? simply becasue they had better improvement in productivity and they are more competitive then other country. This is also the solution PIGS need to adopt, they need to increase productivity or decrease the cost of labour, you can increase productivity with higher unemployment or investment and you can decrease the cost of labour by wage cut or by a drop in exchange rate (not practicable for PIGS, but the cheap euro is of a big help).

EDIT:in China case as I said they have a trade surplus because they have cheap labour. If they want they can balance their trade without moving the exchange rate, they can just buy excess resources and they can buy chunks of companies outside china (I think they work that out and in the last few months China trade position is pretty neutral)

 

[WinstonWolfe]

This is not necessarly true, look at Japan case you had excess of money supply during their boom and Japan had massive trade surplus, then the bubble burst and credit in Japan start contracting (total credit) and they still have trade surplus (and NFD positive)

OK, thinking of all the possibilities, bank credit can be used to
1. inflate asset values,
2. buy more imports,
3. expand production at least to the level of the credit injection,
4. increase investment/ownership of foreign assets or production and/or move means of production offshore to cheaper labor economies.

I'd say Japan did a lot of 1,3,4 and Germany did a lot of 3 and 4.
Australia, NZ, UK, US, PIIGS are doing more of 1 and 2.

That is also not necessarly true, look at the case of Germany and Japan, they have a free float exchange and they have been able to sustain production and export. Why? simply becasue they had better improvement in productivity and they are more competitive then other country. This is also the solution PIGS need to adopt, they need to increase productivity or decrease the cost of labour, you can increase productivity with higher unemployment or investment and you can decrease the cost of labour by wage cut or by a drop in exchange rate (not practicable for PIGS, but the cheap euro is of a big help)

It is hard for Greece to reduce the relative cost of labor when they're on a free float of a currency tied to stronger economies.
I'd argue Germany and Japan's strength has much to do with shifting manufacturing offshore to exploit cheaper labor in SE Asia. But they still have majority ownership of those foreign operations. This would have the same effect as reducing domestic wages.