Fast rise of round robin lenders...
THE Reserve Bank of Australia has a dark worry about our banks: they get 90 per cent of their cash from each other. If one bank gets into trouble, the Australian financial system could be snap-frozen overnight.
This concern was laid out by the RBA's assistant governor for the financial system, Philip Lowe, and the chief manager of domestic markets, Jonathan Kearns, to a private RBA gathering at Kirribilli House in Sydney last week.
Banking systems of other countries do not have the same level of mutual dependency, they claim, and it was not the case in Australia until about eight years ago.
In the US, banks hold twice as many government bonds as they do short-term securities issued by other banks. When a US bank needs to raise cash in a hurry, it is guaranteed a market for its government bonds. In Australia about 15 per cent of banks' total assets are securities issued by other banks - what the RBA calls inside assets - while only 0.5 per cent are government bonds.
"This reliance on inside assets poses some challenges for dealing with system-wide liquidity problems, particularly if those problems are associated with system-wide credit quality concerns," their presentation said.
The main reason the banks look to each other to borrow funds is that with the commonwealth running budget surpluses and, as former treasurer Peter Costello so often proclaimed, paying off Labor's $96 billion debt, there are no longer enough government bonds to go around. But it means the banking system has a vulnerability not shared overseas.
Not only are banks' liquid assets - those they could sell immediately - mainly held in the round robin of bills written by each other, there are fewer of them than there used to be.
Until the 1960s, Australia's banks put about 30 per cent of their money into government bonds, while a further 8 per cent was held on deposit at the RBA. This was a huge buffer against loans going bad.
Australia's banks are, as the RBA governor Glenn Stevens tirelessly says, in great shape. Stockbrokers agree, even as they field the sell orders from overseas clients.
"The banks are trading at 12 or 13-year lows in terms of their price-to-earnings ratios," UBS equities strategist David Cassidy says.
"Given what is happening in the US, they can always trade more cheaply. But since our economy still looks on track for a soft landing, it looks like they've been way oversold."
But it does not look that way from abroad. At a recent conference held by one of the world's largest banks, the Australian banking system was identified as one of the best investment opportunities, for going short………
Fast rise of round robin lenders | The Australian
