NAB CEO, Cameron Clyne, is in somewhat of a tough spot. On one hand, he is charged with increasing the bank’s profits, inevitably by lending more money. However, to lend more money, banks need to have money to lend — and money is getting more expensive.
Yesterday, Clyne took the unusual step of ‘warning’ policy makers of banks’ funding gap. Clyne noted that “Australian banks are very, very reliant on offshore funding. The four banks this year will probably source in the order of $140 [billion] to $150 billion.”
Clyne then made several suggestions to fix the banks’ predicament, namely increasing the attractiveness of bank deposits, developing a deep corporate bond market, introducing covered bonds and giving tax incentives for annuities. Of course, all those suggestions involve using taxpayer money in some way to reduce the cost of bank funding. This is a great result for bank shareholders and executives like Clyne, but not an especially good deal for taxpayers who would be somewhat aggrieved to realise they are underwriting billion dollar bank profits and multi-million dollar executive salaries.
A preferred option could be for banks to perhaps curtail their lending.
However, the exact opposite is actually occurring — the big four are continuing to chase market share, even while Australians households do their best to deleverage.
Last week, Australia’s biggest mortgage lender, the Commonwealth Bank, announced that it would allow new customers to borrow up to 95% of the purchase price of a property. Meanwhile, Clyne’s NAB is actively promoting a ‘break up’ series of advertisements, aimed at getting customers to switch to NAB. In response, CBA offered NAB customers a $1,200 bribe to switch to them. This doesn’t sound like a sector too worried about funding.
The attitude of bank CEOs contradicts the advice given by Peter Fisher, a former under-secretary at the US Treasury who joined BlackRock in 2004. Fisher told the Australian Financial Review’s Barry Dunstan last week that banking isn’t too difficult and that bankers simply need to follow a few simple rules:
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Don’t lend money to someone who can’t pay you back; don’t lend too much to the same kind of person; and don’t borrow too much short.
Fisher also noted, “regulators got a little lost in risk-based capital.”
It appears that the Australian banks have failed all three rules with their substantial lending to the residential housing sector. (The driving force behind residential lending is Basel rules, which place a lower ‘risk’ premium on residential lending, allowing banks to lend more money to mortgage holders on a limited amount of capital).
So while the banks continue to lend to housing buyers in the midst of a housing bubble, they are required to borrow from overseas investors on (relatively) short terms while unemployment rates are at record lows.
Meanwhile, the banks operate on leverage of around 20 times their equity base, making the Big Four banks like a super-charged hedge fund.