“Australia’s WTF Moment”

Australian bank regulators that had for years practically encouraged the big four Australian banks to do whatever it takes to further inflate the housing bubble suddenly fretted publicly in April about the banks’ exposure not only to housing but also to China. And now something strange has happened that set off all kinds of warning sirens.

On August 2, the Reserve Bank of Australia (RBA) lowered its target “cash rate” by 25 basis points to 1.50%. And what did the banks do? Something so strange it smelled of panic.

Everything is nearly hunky-dory around the globe and in Australia, the RBA said to rationalize the rate cut, but it mentioned some squiggles in Australia’s housing market. And since about two-thirds of the assets of the big four banks are loans to the property sector, particularly mortgages, the RBA is getting nervous. It mentioned the oncoming tsunami of supply of housing units, tightening lending standards, and the pull-back of maxed-out potential homebuyers. It seems the RBA fears that something is going to prick the Australian housing bubble and take down the banks.

The big four banks – Commonwealth Bank of Australia (CBA), Australia & New Zealand Banking Group (ANZ), Westpac Banking Corp (WBC), and National Australia Bank (NAB) – are a special breed. Their total assets amount to 220% of Australia’s GDP!

Charles Littrell, executive general manager of supervision and support at APRA, the bank regulator, pointed out in April so eloquently that they’re not only “too big to fail” in terms of Australia’s economy; they’re “almost too big to get sick.”

And here is what happened next, after the RBA’s rate cut: the same day, the banks announced that they would, as expected, cut their mortgage rates and some other loan rates, but would also raise their term deposit rates for savers – and by a whole whopping lot.

Why would banks raise their deposit rates as the central bank cuts its rates? In other words, why would banks raise their cost of funds (deposit rates) while lowering their revenues (lending rates), thus crushing their spreads – and thus their profit margins? Among the big four banks, the movements were nearly panicky:

CBA will raise its one-year term deposit rate by 0.55 percentage points to 3% and its two-year and three-year deposit rates by 0.50 percentage points to 3.1% and 3.2% respectively, effective August 19.

NAB will raise its eight-month term deposit rate by 0.85 percentage points to 2.9%!

ANZ will raise its one-year advanced notice term deposit rate by 0.60 percentage points to 3% and its two-year advanced notice term deposit rate by 0.75 percentage points to 3.2%.

Westpac will raise its one-year term deposit rates by 0.55 percentage points to 3%, its two-year deposit rate by 0.45 percentage points to 3.1%, and three-year deposit rate by 0.55 percentage points to 3.2%.

These are a mega increases of deposit rates!

This conundrum of banks jacking up their deposit rates while the central bank cut its rates is what Lindsay David of LF Economics, a WOLF STREET contributor, and long a thorn in the side of these bubble banks and their regulators, called so poignantly, “Australia’s WTF moment.”

Regulators – after years of ignoring or encouraging the ballooning housing bubble and banks’ equally ballooning balance sheets so singularly exposed to mortgages – have become nervous. APRA has imposed higher capital requirements on the banks and some other rules to tamp down on the worst excesses. And it has become more vocal.

APRA’s Littrell called the housing market “toppy” in April, according to the Sydney Morning Herald. He warned about the banks’ exposure to iffy growth in China, the largest destination of Australian commodities exports, on which the Australian economy has become dependent, and whose prices have plunged – a theme the RBA picked up in its rate-cut decision.

The concentration of lending by the big four banks to the property sector was a “perpetual concern,” Littrell said. “It is a significant issue of concern to us that close to two-thirds of [the big four banks’] balance sheets are exposed to property…mainly housing loans.”

“It is fair to say in the past year we have worried about it a bit more because of the point we are at in the cycle,” he said.

APRA also warned at the time about the banks’ dependence on wholesale funding in the global financial markets, particularly short-term funding, which can dissipate into ambient air when other banks get spooked, leaving a bank suddenly high and dry.

That’s the fodder, as we’ve come to learn in 2008, for a financial crisis:

What did Washington Mutual in the US do to attract stable funding as it was cut off from the wholesale market in 2008 shortly before it collapsed? It offered 5% 5-year CDs, even as the Fed was slashing rates to zero.

That these banks jacked up their deposit rates, even as the RBA cut its rates, is a sign that they might be encountering trouble with wholesale funding. Their exposure to the Australian housing bubble and to a slowdown in China has been well known for a while, and we’ve written about it for over a year. Banks around the globe are now possibly getting nervous, or even a little spooked, and might be reluctant to lend to Australian banks, which would make wholesale funding harder to find, and more expensive.

And so the Australian banks want to entice depositors to lend them money. These term deposits would provide stable funding that cannot be withdrawn easily. But they come at a much greater cost. And that banks would be desperate enough to do that is a sign of possibly serious funding issues. If push comes to shove, efforts to bail them out will be made. But it remains uncertain how to bail out four banks whose assets are 220% of the country’s GDP.

And the short sellers have moved in. But is shorting these banks the best way to short Australian real estate, or is it a “widow maker trade?” Read… Hedge Funds Are Betting Record Amounts on Meltdown of Australian Banks and Housing Bubble

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