Australian banks have been cut off from raising funds on foreign markets now for over a week, but that isn’t stopping the Commonwealth Bank and others from burning up much needed capital on acquisitions to further strengthen their market position. It’s something banking regulators and or the Federal Government should kill off until the financial crisis has passed.

The CBA confirmed this morning it is in talks to buy HBOS Australia, while Suncorp said yesterday that it had received expressions of interest for its banking and wealth management businesses.

The moves come as the Federal Government tells us the banks might not be able to pass on in full any cuts made by the Reserve Bank today. The RBA is expected to cut rates by 0.50% and the Government and the banks argue that their cost of funding has risen as the credit crunch has worsened.

But the CBA and other banks are prepared to spend over $2 billion or more on these market grabbing deals at a time when they are crying poor to Canberra.

Australian banking regulators and the Federal Government should step in to stop the Commonwealth from buying HBOS Australia or any other move, such as the possible purchase of Suncorp’s Metway bank, until the markets settle and we know just what shape the banks and the markets are in after the worst turmoil in financial markets since the Depression.

The situation is tough. The banks don’t trust anyone and are leaving $A9 billion a night or more on deposit at the Reserve Bank rather than lend it to one another. The banks receive 0.25% less than the cash rate when they do that (which effectively boosts their funding costs).

They are now being forced to fund themselves domestically. The Australian’s front page story this morning on Westpac and the ANZ borrowing from the Future Fund was behind the times. The situation now is more fraught.

Credit rating agency, Standard and Poor’s confirmed yesterday that our banks have been isolated from foreign funding sources for some time, just as other banks are on their own and unable to fund themselves internationally.

S&P remarked at the end of a CreditWatch statement for Suncorp yesterday:

With the closure of offshore credit markets, funding for Australian banks has become more challenging in the past few weeks. This scenario, in particular, adversely affects those banks with shorter term liability profiles and those more exposed to offshore funding markets.

Nevertheless, any refinancing pressure is expected to be short term, and we are comforted by the strongly supportive Australian banking regulatory system, including the ability of banks to access the Reserve Bank of Australia’s window for securities eligible for repurchase.

That is the first time anyone from the financial markets has mentioned what is a barely kept secret in the banks: that overseas sources of funds have been shut for more than a week, possibly two.

In this context it pays to remind everyone just what the Reserve Bank says on its website about Financial Stability.

The Reserve Bank’s mandate to uphold financial stability does not equate to a guarantee of solvency for financial institutions. The risk of loss or failure is a cornerstone of a competitive and efficient financial system, and the Reserve Bank’s mandate is not meant to be exercised in a way which would compromise that principle.

In exceptional circumstances, however, the Reserve Bank may act to help minimise the costs of systemic financial disturbances. In responding to such an event, the Reserve Bank may use its balance sheet to provide liquidity to the financial system …

The Reserve Bank does not see its balance sheet as being available to support insolvent institutions.

Neither should any other part of Government do so, and our big five banks are clearly too big to be allowed to fall. Therefore they should be compelled not to waste capital on acquisitions at a time when that capital is needed to not only support the bank, its credit rating, its employees and customers, but help underpin the financial system as a whole.

And the news of the banks being isolated reminds us of one of the stress tests the IMF referred to in its clean bill of health for our banks in its Country report issued on September 23.

The IMF reckoned Australia’s big four banks are so well capitalised that they could withstand a surge in home loans going bad and still maintain their capital levels at the minimum required by regulators.

But in the most interesting stress test, the IMF says that its staff “using extreme stress test scenarios applied to the large banks suggests that they could suffer a significant fall in profits from an increase in funding costs associated with loss of access to offshore markets for 90 days, but that their capital would remain adequate.”

Peter Fray

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