{"id":31755,"date":"2012-08-20T22:19:34","date_gmt":"2012-08-21T02:19:34","guid":{"rendered":"http:\/\/countingpips.com\/forex-news\/2012\/08\/the-bloody-oaths-and-balance-sheet-imbalances-of-australian-banks\/"},"modified":"2012-08-21T06:11:31","modified_gmt":"2012-08-21T10:11:31","slug":"the-bloody-oaths-and-balance-sheet-imbalances-of-australian-banks","status":"publish","type":"post","link":"https:\/\/www.investmacro.com\/forex-news\/2012\/08\/20\/the-bloody-oaths-and-balance-sheet-imbalances-of-australian-banks\/","title":{"rendered":"The Bloody Oaths and Balance Sheet Imbalances of Australian Banks"},"content":{"rendered":"

By MoneyMorning.com.au<\/a><\/strong><\/p>\n

You\u2019ll soon think back longingly to the times when Australian banks<\/strong> were stupidly profitable:<\/p>\n

\u2018Remember the good old days when The Age<\/a><\/em> reported, \u2018the combined yearly profits of the big four banks now total more than $1000 for every person in Australia.<\/em>\u2019 Back then, people thought profits were bad. Ha, little did they know…\u2019<\/p>\n

<\/span><\/p>\n

The Australian banks might be profitable right now. But for good reason. It\u2019s their last gasp. Australia\u2019s banks are about to get hit with a double whammy. Banking is about managing the asset side of the balance sheet, and the liabilities side. It\u2019s a question of what to invest in, and how to fund those investments. Both sides are in trouble.<\/p>\n

Pretty soon, you\u2019ll be contributing to more than the bank\u2019s profits as a customer. You\u2019ll be on the hook for their government bailouts and their cosy monetary policy relationship with the central bank. You\u2019ll be paying tax, the inflation tax and the interest on Australia\u2019s ballooning sovereign debt. Then you\u2019ll wish the banks were profitable again.<\/p>\n

On the asset side, Australian banks are in trouble<\/a> because the loans they made and the collateral they took are dodgy, to the extent that the banks are now indirectly raiding retirement funds<\/a> so borrowers can avoid foreclosure. Last year this added up to $100 million taken from retirement savings<\/a> and shovelled into bank profits.<\/p>\n

On the liabilities side, Australian banks are about to go from being awash in funds to needing a central bank rescue. The kind we\u2019ve seen all around the world.<\/p>\n

Foreign Lenders About to Desert the Australian Banks<\/h3>\n

<\/center><\/p>\n

First, to the liabilities \u2013 how the banks get the cash they lend. As the Australian economy<\/a> continues to slow down, Reserve Bank interest rates will fall. That will end the interest rate arbitrage that\u2019s been going on.<\/p>\n

Foreign investors, faced with near 0% interest returns in Europe, the US and UK, have been \u2018investing\u2019 in Australia to capitalise on our higher rates. That\u2019s provided the banks with plenty of funding. And pushed up the Australian dollar<\/a>. But if all that foreign cash goes home, it will leave the banks high and dry.<\/p>\n

Ben Davies of Hinde Capital told listeners of King World News<\/em><\/a> how this plays out:<\/p>\n

\n

\u2018Australia is running out of luck. This is a country that\u2019s got an oversized banking system very reliant on external financing. They\u2019re going to have the bursting of a housing bubble. Really, this has been masked to some extent by the great resource boom that\u2019s been coming out of China… So I think what\u2019s going to happen is the RBA is going to continue to reduce rates. At some point there is potentially going to be a balance of payments crisis… I think foreigners could actually pull funding to the Australian banks. I think that the RBA will do what the European Central Bank did, which is… an LTRO type vehicle \u2013 provide liquidity \u2013 because domestic savers are not in a position to fund the banks in Australia. And obviously they can\u2019t afford for the banks to go down.<\/em>\u2019<\/p>\n<\/blockquote>\n

Davies also reckons the Australian dollar\u2019s recent strength comes from foreign central bank buying. As an aside, the Australian dollar will collapse<\/a> if Davies is right and foreign investors pull out of Australian banks.<\/p>\n

All the cash will go home, flooding the world with Aussie dollars. That is usually a good thing for exporters because their goods appear cheaper to foreign buyers. But it\u2019s tough for exporters to take advantage of that if the banks have less cash to lend out.<\/p>\n

The Australian banks know that foreign capital is about to desert them. They\u2019ve been issuing hybrid securities left right and centre to shore up their funding. And people have been buying the new securities, which have the worst characteristic of debt and the worst characteristics of equity baked into them.<\/p>\n

But this source of funding won\u2019t be enough. There aren\u2019t enough savings in Australia to support our huge financial services sector. As soon as debt begins to contract on an economy wide basis, credit bubble businesses like banks begin to struggle because there is less cash to loan out.<\/p>\n

The Festering Problem in Australian Banks<\/h3>\n

<\/center><\/p>\n

In the meantime, over on the asset side of the balance sheet, you\u2019ve got the festering housing bubble<\/a>. And Australia\u2019s secret sub-prime lenders<\/a>, who have had some success suing the banks. When loans start going bad and houses cannot be sold for more than the loan taken out to buy them, the banks\u2019 assets will be in trouble.<\/p>\n

They\u2019ll be making less money and they\u2019ll be left owning assets that are falling in price.<\/p>\n

What\u2019s really worrying, even if you\u2019re not planning on being a borrower or bank shareholder, is that most of the economy is reliant on Australian bank funding. Before banks funded just about all business, businesses funded the purchase of their inventory with equity \u2013 cash they brought into the business. Their profit would be the difference between the cost of what they bought and what they sold it for.<\/p>\n

But the Australian banks allowed this process to happen on steroids. Instead of only buying the inventory you can afford with investors\u2019 cash, you can now buy vastly more of it using borrowed cash. Once it\u2019s sold, you repay the debt and earn vastly more in profit because of the far larger amount of bought and sold inventory.<\/p>\n

Of course, everyone else figures this out. They did more than two hundred years ago. So profit margins were simply squeezed back to where they were before debt financing became the norm. But the economy can still buy and sell the vastly increased amount of goods funded by debt. That makes everyone better off.<\/p>\n

Especially the banks. But it also makes things very fragile. If the banks struggle and stop lending, inventory can\u2019t be bought. Shelves go empty.<\/p>\n

The hidden problem is that bankers don\u2019t just lend out money they borrow from someone else. They also lend out money they create out of thin air. Without real savings funding borrowing, banking becomes a Ponzi scheme. At some point, the game is up because the banks lent more than they took in. That\u2019s why financial crises<\/a> happen so easily.<\/p>\n

You Won\u2019t Believe This<\/h3>\n

<\/center><\/p>\n

Don\u2019t worry too much about all this. The bankers have a solution. It\u2019s called \u2018The Banking and Finance Oath Limited (BFO)<\/em>\u2019. You cannot make this stuff<\/a> up (our emphasis added):<\/p>\n

\n

\u2018The Banking and Finance Oath Limited (BFO), incorporated last month, will oversee and enforce a voluntary oath of conduct to be sworn by professionals employed across the Australian financial services industry.<\/em><\/p>\n

<\/em><\/p>\n

This is the oath:<\/p>\n

<\/em>\u2018“Trust<\/strong> is the foundation of my profession
\nI will serve all interests in good faith
\nI will compete with honour<\/strong>
\nI will pursue my ends with ethical restraint<\/strong>
\nI will create a sustainable<\/strong> future
\nI will help create a more just<\/strong> society
\nI will speak out against wrongdoing and support others who do the same
\nI will accept responsibility for my actions
\nMy word is my bond.”<\/em><\/p>\n

<\/em><\/p>\n

\u2018Unlike other professions, such as medicine and law, where practitioners are bound by professional oaths for the duration of their careers, the banking and finance oath may endure for only 12 months<\/strong>. If members don’t renew their annual subscription to the company their oath lapses as a binding commitment.<\/p>\n

<\/em>\u2018Under the BFO\u2019s constitution, members are also free at any time to terminate their obligations<\/strong> if they believe they are no longer able to adhere to each of the oath\u2019s nine tenets.<\/em>\u2019<\/p>\n<\/blockquote>\n

Can we read from that that if any banker doesn\u2019t renew membership they\u2019re admitting that they won\u2019t<\/em> serve all interest in good faith, they won\u2019t<\/em> compete with honour, they won\u2019t<\/em> pursue their ends with ethical restraint, they aren\u2019t<\/em> interested in a sustainable future or a more just society, and they won\u2019t<\/em> speak out against wrongdoing or accept responsibility for their actions?<\/p>\n

It seems their word is their bond, but only for 12 months at a time. And even then, \u2018members are also free at any time to terminate their obligations<\/em>\u2019.<\/p>\n

Best of all, the people running this thing are the bankers who it\u2019s supposed to be protecting you from. And the very same ones who will be held responsible when their company is doing something wrong. What do you think they\u2019d do if any whistleblower was dumb enough to come to them?<\/p>\n

Until next week,<\/p>\n

Your mortgage-free editor,<\/p>\n

Nick Hubble<\/strong><\/p>\n

Related Articles<\/strong><\/em><\/p>\n

Market Pullback Exposes Five Stocks to Buy<\/a><\/p>\n

A Housing Bubble… Upon Bubble… Upon Bubble<\/a><\/p>\n

There is No Safe Haven – But You Should Still Own Gold<\/a><\/p>\n

\n<\/img><\/a> <\/img><\/a> <\/img><\/a>\n<\/div>\n


\nThe Bloody Oaths and Balance Sheet Imbalances of Australian Banks <\/a><\/p>\n","protected":false},"excerpt":{"rendered":"

By MoneyMorning.com.au You\u2019ll soon think back longingly to the times when Australian banks were stupidly profitable: \u2018Remember the good old days when The Age reported, \u2018the combined yearly profits of the big four banks now total more than $1000 for every person in Australia.\u2019 Back then, people thought profits were bad. Ha, little did they … <\/p>\n

Continue reading “The Bloody Oaths and Balance Sheet Imbalances of Australian Banks”<\/span><\/a><\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[],"tags":[],"class_list":["post-31755","post","type-post","status-publish","format-standard","hentry"],"_links":{"self":[{"href":"https:\/\/www.investmacro.com\/forex-news\/wp-json\/wp\/v2\/posts\/31755","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.investmacro.com\/forex-news\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.investmacro.com\/forex-news\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.investmacro.com\/forex-news\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.investmacro.com\/forex-news\/wp-json\/wp\/v2\/comments?post=31755"}],"version-history":[{"count":0,"href":"https:\/\/www.investmacro.com\/forex-news\/wp-json\/wp\/v2\/posts\/31755\/revisions"}],"wp:attachment":[{"href":"https:\/\/www.investmacro.com\/forex-news\/wp-json\/wp\/v2\/media?parent=31755"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.investmacro.com\/forex-news\/wp-json\/wp\/v2\/categories?post=31755"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.investmacro.com\/forex-news\/wp-json\/wp\/v2\/tags?post=31755"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}