The hidden tripwire for Australia’s banks: Gottliebsen

Australian banks are flush with funds and are looking around for sound people and businesses to lend to. So if you are a home mortgage borrower who ticks all the asset and income security boxes you can do an excellent deal by shopping around banks. And the same applies to sound businesses which want extra capital. Australian banks have raised a lot of money in deposits and have borrowed longer-term on the wholesale markets with the expectations of much stronger growth.

But behind that flush of funds is a concern that is reflected in bank share prices around the world – the massive losses incurred because the global banking system backed the debt of European countries that can’t pay has reduced the pool of money available. The American state government losses will have a similar, if less spectacular, effect. As a result the cost of long-term global money is going to rise because the supply has been reduced.

Right now there is a ton of money around as a result of US money printing exercises and because businesses and consumers are not borrowing. But that masks the longer-term problems.

Former Commonwealth Bank of Australia chief Ralph Norris isolated the major longer-term problem some months ago when he warned that if the Reserve Bank lowered rates it would not necessarily follow that banks would follow because of the higher cost of money overseas. The Commonwealth Bank has important wholesale roll-overs early in 2012 and will be replacing low cost money with much higher cost.

But former National Australia Bank chief and BHP Billiton chairman Don Argus in The Age has gone one step further, saying that the sovereign debt crisis will leave a legacy of higher borrowing costs for years to come. Argus says that higher interest costs will affect not just banks but the giant resource companies (like BHP) that bypass banks and borrow directly overseas.

Right now all the emphasis is on recapitalising the European banks that have lost their capital. Their solvency is vital for the global banking system because of the interconnection of banks via the derivatives market. 

If a major bank were to fall over it would send shock waves around the global banking system, which is why so many central bankers in Europe are nervous and why solvent banks are reluctant to deal with those on the suspect list.

Because the bad loans problem has been concealed in Europe I fear that the recapitalisation will not go far enough. But Argus makes the point that simply recapitalising the banks will not solve the problem of the higher cost of money.