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Australian Bankers’ Association disagrees with
Professor Garnaut’s comments on banks
Sydney, 13 October, 2009: The Australian Bankers’ Association (ABA) said today that it disagrees with economist Professor Ross Garnaut’s comments1 on banks.
The evidence is that the Australian banks were not insolvent and the wholesale funding guarantee was introduced as a means of ensuring banks could maintain lending growth, not restore the solvency of banks.
The ABA has not yet examined the evidence put forward by Professor Garnaut in his book investigating the global financial crisis, but the claim that the Australian banking system was insolvent at the time of the crisis is contradicted by a lot of evidence:
- The global financial crisis commenced in August 2007, yet there was no government wholesale guarantee introduced until one year after, in September 2008. Up until this time, at least, banks were continuing to fund their lending, albeit the price of funding was considerably elevated.
- The wholesale guarantee was introduced as a response to similar guarantees introduced by other countries, starting with Ireland. This development fundamentally changed international debt markets by creating a new AAA-rated security for investors. These developments overseas threatened to constrain the ability of banks in Australia to rollover funding.
- However, even if the banks were constrained in rolling over overseas-sourced funding, this is not evidence of insolvency. Banks have many methods to manage this cash flow situation. For example:
- They can liquidate certain assets, such as those with high liquidity characteristics;
- They can seek additional sources of funding (e.g. retail deposits and/or capital raisings);
- They can secure liquidity from the central bank by pledging high quality assets as collateral;
- They can simply constrain lending to business and household customers;
- They can reduce their dividends to shareholders; and
- They can introduce longer-term changes such as reductions in operating costs.
- Throughout the global financial crisis, most banks had their credit ratings maintained, including the four major banks which have maintained their AA credit rating.
- Profit levels of the banks held up well and dividends continued to be paid. Return on equity (ROE) of the banks fell from an average of 19% to about 15%, but 15% is still a very respectable return on shareholders’ funds.
- Banks were able to maintain credit growth, including lending to small business.
- There has never been any commentary or report from the Reserve Bank of Australia, the Australian Prudential Regulation Authority, the Treasury, senior economic Ministers, banking analysts, the International Monetary Fund, the World Economic Forum or other reputable commentators that Australian banks were insolvent.
There is no doubt that the introduction of the Government’s wholesale funding guarantee assisted banks in maintaining overseas funding at a reasonable price. We will never fully know the stress that the system may have come under without the guarantee.
However, there is no evidence we are aware of that suggests the system was actually insolvent. In fact, the Australian banking system showed extraordinary resilience both in the period up until the wholesale guarantee was introduced and after it.
For further information:
Heather Wellard
Director, Public Relations
Phone: 02 8298 0411
Mobile: 0409 830 439
ENDS
[1] Except from transcript of “The 7.30 report” – Kerry O’Brien interview with Professor Garnaut, broadcast 12/10/09. http://www.abc.net.au/7.30/content/2009/s2712070.htm
O’Brien: You have said in the book that, in fact, the big Australian banks were essentially insolvent at the time of the crash – in what way?
Professor Ross Garnaut: They were starting to have great difficulty in rolling over their huge external debt, and without the Government guarantee on wholesale borrowing, they may not have been able to fund their liabilities, and you can go - you can be insolvent for two types of reasons, one: you get yourself into trouble with the way you've managed your debt and you can't roll over your debt as it becomes due, or you run into trouble with the value of your assets. The rest of the world’s problems, Europe and American's problems were problems with their bad assets, our problems were the problems of excessive reliance on a source of debt that turned out not to be reliable. |
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