All roads lead to Rome.
And all arguments lead to banking.
That seems to be the way it works anyway. Almost every story we write has a direct or indirect link to the banking sector. Although in reality the banks are really just the ‘beards’ covering up the real culprits – government.
But even so, today we’ll have another crack at our corrupt friends in banking.
Yesterday afternoon, after we’d knocked out the October issue of Australian Wealth Gameplan, we thought we’d re-read a couple of the Money Morning stories from earlier this week.
It was Tuesday’s edition that stood out. And not just because of the superb writing style either!
It was the transcript from ABC Radio of banking analyst Brian Johnson questioning an unnamed ANZ Bank economist that caught our attention again.
If you haven’t read it yet it, take a look now by clicking here.
There’s something eerily bizarre about it. It’s just more evidence – if it was needed – that the banks have one thing on their agenda, and that’s to lend as much cash as they possibly can.
Don’t worry about the risks, because that will be back-stopped by the taxpayer anyway.
The banks’ greed for more interest income is unstoppable. In fact, either in tomorrow’s Money Weekend or Monday’s Money Morning, expert chair builder and assistant editor, Shae Smith will look at how the banks will shortly scam even more loans onto their books.
But anyway, as we were reading through a couple of the comments on Tuesday’s article left by Money Morning readers, one of them stuck out. It was written by ‘Kohl’:
“I would like an explanation of the $13 trillion in ‘OFF BALANCE SHEET BUSINESS” as detailed in the RBA’s B4 table. $191289 million of this is identified as credit derivatives not related to foreign exchange or interest rate swaps. Maybe property? No one ever talks about this startling $13 trillion “off-balance sheet ” business.”
Actually, we’ve got a feeling that we’ve brought this up before, but we’ll give it a good going over again anyway.
Kohl is right, according to the Reserve Bank of Australia (RBA), banks in Australia have $13,006,783,131,920.80 of off-balance sheet finances. That’s a lazy six billion over $13 trillion.
But don’t just take my word for it, click here and look for yourself.
Most of it relates to interest rate contracts and foreign exchange contracts. Plus there’s a tiny $191 billion that’s just classified as “Other.” Clearly $191 billion is too small a number to worry about itemizing.
As I’ve mentioned before, I make no claim to being an expert on the workings of a bank balance sheet. To me the whole business model just stinks and I’d rather not have a bar of it.
However, we’ll make of it what we can. But if you know more about banks and their balance sheets and what they do with the off-balance sheet stuff then feel free to leave a comment on the Money Morning website.
According to the RBA data, the banks have $8.5 trillion worth of interest rate contracts. A number that’s too big for our Canon LS-100TS calculator to cope with.
But whatever it means, it’s quite clear that the banks have a massively huge enormous exposure to interest rates. I’m sure you knew that already, but seeing numbers as big as these should put it into some perspective.
So what are these interest rate contracts for? Our guess is it’s part of their hedging strategy to try and protect them against interest rate movements. This helps them lock in ‘guaranteed’ profits regardless of what happens to the underlying interest rate.
What else does it mean? Well, it undoubtedly has a big connection with the housing and mortgage market. Remember that Commonwealth Bank has about 50% of its lending book exposed to residential mortgages.
And even better than that, as technical analyst Murray Dawes pointed out recently, Bank of Queensland’s business has a 73% exposure to residential mortgages. That’s a figure which the bank claims makes the bank “safe.”
It stands to reason that the off balance sheet interest rate contracts are tied into mortgages. We can see that if we rely on a couple of stats from the RBA.
First is a chart I’ve knocked up showing the growth in off balance sheet interest rate contracts going back to 1989 – that’s the earliest data the RBA has:
As you can see, in the last twenty years these contracts have grown from less than $1 trillion, to just under $9 trillion now.
The next chart shows bank lending to the residential owner-occupier mortgage market:
Is there a connection?
Who knows.
Maybe.
Or is it just a coincidence. Oh, and by the way, the Bank Lending chart doesn’t include ‘securitisations’, that’s where the bank has packaged up loans and flogged them off as AAA or AA securities.
But whether there’s a connection or not, it doesn’t matter the real important point is that we’re talking big numbers here. We talking about numbers that could break an economy in two even if a small percentage of the ‘assets’ went smelly.
Talking of which, also remember that a banking balance sheet or off-balance sheet is like no other.
Sure, banks have assets and liabilities like anyone else. But that’s pretty much as far as the similarity goes. The rest is just smoke and mirrors. Let me give you a quick comparison.
If you’re looking at the balance sheet of a supermarket chain, its assets are inventories, property, and equipment. Plus it’s got other stuff such as receivables and intangibles.
But the lion’s share of its assets are things that you would generally call an asset. It’s something the company owns.
Take a look at the balance sheet of a bank and you’ll see it’s entirely different.
In the liabilities column the bank lists everything that it owes people, eg. Savings deposits. And in the assets column it lists… well, it lists what it claims to be “assets.”
These “assets” of course, are nothing more than other people’s obligations and promises to owe the bank money. The banks stay afloat on a ‘promise.’
In other words, if you’re a first home buyer who has taken out a $280,000 mortgage, then the bank lists that as an asset.
But it’s not much of an asset is it? An asset that’s based purely on the ability of a bunch of people to keep paying their bills. If those people suddenly stop paying, what happens to those “assets”?
That’s easy to answer, they get revalued to fire-sale prices.
The complacency which the mainstream press has towards the banking industry staggers us. They have the false impression that bankers are meticulously assessing the risk of the borrower and declining loans if they don’t fit in.
Of course that’s all nonsense. Banks don’t decline borrowers – not until they’ve exhausted all possible avenues first. They can’t decline borrowers, they need to bring on as many borrowers as they possibly can.
Anything to make sure the value of their existing assets, or loans to borrowers remains high.
And to do that they need to grab as many deposits as they can too. If you read mainstream commentators such as our friend Michael Pascoe, you’ll think it’s a good thing the banks are bidding for your business.
Don’t believe a word of it. It’s desperation. The banks need the deposits so they can continue lending out as much money as possible. They’re grabbing at your pockets, pleading for you to allow them to look after your hard-earned money.
But look out, because as soon as the value of loans written starts falling, it will put pressure on the value of their existing loans. And once that happens, the Banking Death Spiral formation will begin.
Other Stuff on the Markets
The S&P/ASX200 closed yesterday at 4,859.90, up by 28 points, while overnight on Wall Street the Dow Jones Industrial Average dropped by 47 points to 10,062.94. In Europe the FTSE100 finished at 5,222.95, down by 0.63% and the CAC40 was down 0.03%.
The price of gold in Australian dollars is trading at $1,141.48, while in US Dollars it is trading at $1,050.85. And the price of silver in Aussie dollars is $18.89 and in US Dollars it is $17.38.
The Aussie dollar gained a little versus the US dollar, trading at USD$0.9208, and improved against the Japanese Yen JPY83.37.
Crude oil closed overnight at USD$77.58
For the biggest movers on the market yesterday click here…
{ 27 comments… read them below or add one }
← Previous Comments
Just a couple of observations with the APRA monthly banking statistics report referred to by some in this thread. The footnotes of the revised August report identify:
“# Revised due to the exclusion of $1,471m of lending assets by the bank in the previous August 2009 edition of Monthly Banking Statistics (issued 30 September 2009).”
The # appears against Suncorp Metway – simple mistake Im forever misplacing my $1,471m of assets too, left them in the toilet the other day…. oops.
I wonder what the other footnotes:
“* Not consistent with previous issues due to reclassification by the bank.”
and
“^ Change in accounting policy by the bank.”
really mean. Anyway
According to Earl, the accounting trickery is already underway to adjust asset values. I suppose I’d try a fudge too if I was looking at losses in the billions. Anything to avoid facing up to reality.
“”According to Earl, the accounting trickery is already underway to adjust asset values. I suppose I’d try a fudge too if I was looking at losses in the billions. Anything to avoid facing up to reality. “”
thats part of the FIAT reality
Failed-In-All-Tests
Spot on, Gerard. It was not that long ago that the big picture financial landscape was discussed in terms of billions. However, as of late, billions appear more and more like peanuts. The discussion now proceeds in terms of trillions, and tens and hundreds of trillions.
We are indeed swimming in an ocean of debt and liquidity, like a low lying beach during a king tide. If, and when, that tide recedes, to borrow that famous phrase, there will be lots of us exposed as having been swimming naked.
yeah it will either show up the real mc coys & the “wannabes”
& the wannabees (70% of the market) will get their fingers burnt .
ooooooooooooooohhhhhhhhhhhhhhhhh
thats gonna hurt
Some great comments above. I especially like the comment from Gerard “Seems like the whole world economy is a massive ponzi scheme.”
Couldnt agree more and thats why I have such concerns, Ralph. You said “I figure the government is hoping that the bailouts can push that ugly situation down the road a bit while they hope the economy picks up its own head of steam again.”.
Now I know you are only relaying what the Gov’s approach to managing the GFC is, but this is root assumption that is so dangerous. The economy will not pick up its own head of steam again.
The economy’s steam was debt, and that debt has peaked out and people are downsizing. The deflationary environment that you have so accurately described is unavoidable and any attempts to delay it will just waste more resources and delay the eventual recovery (recovery that arises after a depression has occured).
I know I sound like Bill Bonner and the whole DR crew, but thats because I agree with their assesment.
Debt is the issue here and we havent even begun to work out how our economies will grow when people arent adding on debt at record levels.
I agree, PuntPal. It’s delicately poised. Can the government borrow and stimulate their way out of trouble? Ultimately, you would think not. But they are going to give it a go.
You have to ask – what is the economy these days? I’d say so much of the modern economy is built on brought-forward consumption based on easy credit, it’s impossible to go back. Simply stopping to take a breath and reduce debts (as is happening) contributes to the downturn if the government doesn’t keep spending, particularly as rates are going up. If we have to resort to actually saving money in order to consume, then the whole thing will have to go backwards. With less credit, who will buy cars, lounge suites, televisions, even houses? Harvey Norman would go broke.
When all the stimulus runs out, that’s when I think it’ll get interesting. Until then, it’s happy days, increasing confidence and increasing house prices. I keep thinking about how Rudd could continue stimulating. No one in Australia believes there is a recession – we’ve licked that baby. How is the Stimulator going to tell us all that what we really need is more government borrowing? I suppose one way is to do it relatively quietly, like he has with the $8b used to buy RMBS that no one wants.
I’ve also just started reading Ross Garnaut’s book ‘Great Crash of 2008′ – it’s a cracker. Very easy reading and fits in with the general thinking on this blog. Finished reading the chapter on derivatives, credit default swaps and so on. He explains it pretty well, but I still come away feeling confused and amazed that it spiralled so far out of control. Recommend it to anyone looking for a good read.
← Previous Comments