If Macquarie Group can commit to spend more than half a billion dollars expanding its funds management business in the US, then it’s about time all the guarantees from the Federal Government were taken away.

If the National Australia Bank can expand by buying Aviva’s insurance and funds management business, then bail out Challenger by grabbing its $4 billion of home mortgages; and if the ANZ can expand into Asia, then banks as a whole are all fit and healthy enough to stand on their own without the de-facto support of taxpayers.

While there are a couple on the “making us nervous lists” at the regulators, the system as a whole is strong and has remained so.

So why should the Australian taxpayer be the underwriter of Macquarie’s regeneration via takeover and expansion (and through restructuring its dodgy satellite funds business model) now underway?

Why should taxpayers be supporting the further concentration of the Big Four’s control over the economy by allowing them to do deals they might struggle with if the guarantees weren’t in place?

Late yesterday, Macquarie Group confirmed a story that its operatives had leaked to the market that it was buying US asset management firm Delaware Investments for $US428 ($A518.29) million.
Macquarie says it has signed an agreement to buy the firm that has over $US125 billion ($A151.37 billion) in assets under management.

The key part of the announcement though wasn’t the dollar cost, it was the capital cost to Macquarie, a very sensitive issue, even now with the recovery in confidence.

“The transaction will be funded by Macquarie Bank Limited (MBL). MBL’s Tier 1 capital ratio is anticipated to decrease by approximately 1.2% as a result of the transaction,” the bank said.

Prior to the credit crunch that sort of capital cost would have been shrugged off; 9 months ago it would have proved too much for Macquarie and the deal would not have happened, even with the guarantee.

Macquarie said its clients will be offered investment solutions involving Delaware’s investment strategies, in structures designed specifically for them.

“Macquarie will also provide additional funding to support Delaware’s growth through continued investment in operations, distribution and commitment to expanding its multi-boutique approach.”

But not a word of thanks to the Australian Government, the RBA for those low interest rates, or the Australian taxpayer for lending the likes of Macquarie the country’s Triple A credit rating. The fees the banks pay are not all that onerous).

The reality is that Macquarie was saved by the RBA, APRA (the main banking regulator) and the Federal Government from a mess of its own making. Without that support (and ASIC’s ban on short selling) it could have easily been consumed by the credit crunch.

The Macquarie empire was a house of cards, its satellite funds were under pressure, investors had lost trust and even though the bank said it had lots of capital and liquidity, after the failure of Lehman Brothers, nobody believed bankers’ assurances on strength.

Now the so-called Macquarie model of having satellite investment funds listed with a series of sectors covered, geared to the hilt, paying Macquarie fat fees to do virtually nothing, is broken and being unpicked, but even that is generating fat rewards and potential bonuses for the bank and its bankers.

That is being implicitly supported by the guarantees from Canberra which have put a floor under the Australian banking system. But not for long. Soon deals with a large capital cost like this one, will need to be financed through equity issues as Macquarie and its rivals will be required to hold more money in reserve.

In a speech in Sydney yesterday the Reserve Banker in charge of the financial system, Assistant Governor, Malcolm Edey made it clear the banking landscape will change here and offshore in coming months.

We are moving into a world where banks are going to be required to hold more capital and to take less risk. Regulators will be asking for higher liquidity resources. And they will be paying greater attention to the way risks interact across the financial system, in addition to the conventional focus on the safety of individual institutions.

In all of this there is a balance to be struck. More demanding regulation of banks’ capital, liquidity and risk-taking will make the core of the system safer, but it will also add to banks’ cost of doing business, and to the incentive to shift business into the less regulated parts of the system. It will be important to get this balance right.

And the head bank regulator, John Laker of APRA made this cryptic comment on the need for vigorous testing of risks in bank balance sheets and business models:

The heightened emphasis on rigorous stress testing now being built into regulatory frameworks is intended to stiffen the spines of boards, risk managers and prudential regulators alike and act as an antidote to any early outbreak of post-crisis complacency.

“Stiffen the spines” is a wonderful phrase. Time for a bit of that in respect of the guarantees and support for the banks, I feel.

That support was meant for the grim times, and survival. That’s far from the case now.

Peter Fray

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