The strange logic of RBA

This is light years away whats happening in other banking systems around the world. It is night and day.

This is the RBA of Australia discussing our current financial plight.

Lets accept that the banks are better safeguarded than the USA (although they may be hit very hard if housing also starts to topple).

By why wont the RBA discuss what is happening to the ever-increasing array of non-bank institutions (the so-called non-banks like Macquarie and Babcock and Brown)? They are now heavily exposed to very high funding costs, the failing value of asset-backed securities held by them, rising bad debts and slower credit growth (as are many of the banks). I know it is APRAs role to say something on that front but, either way, I would love to hear more. After all, the non-banks are also heavily indebted to the banks.

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MikeM
MikeM
13 years ago

Perhaps there is nothing worthwhile to be said. Macquarie claims to have “$9.6 billion in regulatory capital, which is 40 per cent in excess of its minimum regulatory requirements. That translates to an excess capital position of about $3 billion.

“About $1 billion in excess capital can be attributed to the holding company and about $2 billion to the bank.” http://www.businessspectator.com.au/bs.nsf/Article/Macquaries-unseen-enemies-JKE2K?OpenDocument&src=sph

It claims that it is not dependent on rolling over short term funding so, even if it is being heavily shorted, it should be able to sit tight.

B&B: if it should fail it is hardly likely to drag down the Australian financial system.

Clearly the make-a-deal clip-the-ticket on fees every time they touch it model isn’t viable in the present market, as BrisConnections 4.1 cent price on its $1 units yesterday illustrates. So there will be tight belts all round and plenty of gardening leave before the market returns to normal.

But APRA and the RBA are concerned mainly that Macquarie’s banking division survives in some shape or form and that the licensed banks have manageable exposures to Macquarie and B&B. The rest is dispensible.

Tom
Tom
13 years ago

MQG has an ADI subsidiary MBL so I’m not sure it should be called a non-bank.

Secondly I don’t think it’s fair to lump Macquarie in with BNB. Extremely different situations.

Thirdly your line about falling value in asset backed securities sounds as if you’re just throwing a bit of jargon around without any basis. Which ABS are MQG and BNB exposed to that are ‘failing’ (sic) so hard?

Also not really sure what your point is with regards to rising bad debts. I don’t think BNB would have any substantial loans business whatsoever and whilst Macquarie does do a small amount of residential and commercial loans, of those that are still on balance sheet I doubt there would be a higher delinquency rate than for those loans at the Big Four.

Overall this seems a very poorly thought out post.

David Rubie
David Rubie
13 years ago

Fred,

The high funding cost exposure MBL has would largely be for future transactions, not the array of vehicles that have been spun off for management fees. The various institutions and individuals who bought tranches of those vehicles are the ones exposed, not MBL directly (other than through an exposure to ongoing management fees they rely on for income). The more traditional banking, prop trading, commodity trading and bullion banking business are most likely making money hand over fist at the moment. Sure, the advisory and other high profile stuff will suffer, but the core business has always been built on a diversified set of largely traditional banking activities. Further, the reporting requirements here are more stringent and arguably the RBA has a much better idea of the kinds of exposures our local banking sector is exposed to – their office is a short walk from MBL’s head office in Sydney.

The guy running the show (Nicholas Moore) used to run the central risk management division within the bank – he knows with stultifyingly boring detail just about every nook and cranny of those businesses. It’s not Lehmans, and Moss/Moore are definitely not Dick Fuld types – if anything, they are overly risk averse and occasionally miss opportunities because of it (at least, if you listen to some of the hairier businesses proposed there).

JC
JC
13 years ago

The guy running the show (Nicholas Moore) used to run the central risk management division within the bank

According to scuttlebutt they’re going to have some real funding issues when their 5 billion revolving credit line comes up over the next 3 months. They’re getting indications of around 12%. if we do the math on the back of a piece of paper that’s going to add 400 basis points to costs of funding on that alone. With people thinking they’ll only make 500 million in profits this year on the previous funding bases, it means this year’s profit comes in at $300 million. this puts the stock even lower and under further pressure. With 11,000 employees, it looks pretty overstaffed…. 5,000 or so.

Fred:

We have an inverted yield curve. this is hardly a safe place to be at the moment. I actually don’t think the RBA people really understand the gravity of the situation. Judging from the governor’s speech earlier this week the guy has no idea. He’s living in cloud 9 thinking we have an inflation problem

Fred Argy
Fred Argy
13 years ago

Tom, I was making no insinuations or sneaky points in my little contribution. I read the Australian every morning. This has some pretty stark facts to relate about MBL. I wanted some clarification from some source this morning – not only about Mac. You and Rubie and MikeM have provided some evidence on Mac (confirmed by Moodys’ this morning that “there is ample cover”). I have, by the way, no interest at all in Macquarie and never had.

But what of the many others non-bank institutions that are currently unable to raise money in the market? Do we have complete transparency in the system? This is “the broken model” of investment banking that David Murray speaks about in the Australian.

niall
13 years ago

Personally, I don’t believe we’ve seen the half of it in Oz. It is interesting though that the RBA don’t talk about the private investment bankers. Perhaps they intend adopting “sink or swim” attitude.