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Sydney, Sep 18, 2008 (ABN Newswire) - The Reserve Bank says "there was never any doubt about the solvency of an Australian bank" during the credit crunch, which started in August 2007.
RBA Governor, Glenn Stevens made the remark in the bank's annual report, which was issued yesterday.Â
It obviously includes Macquarie Bank, which operates as and is regulated like a mainstream bank in this country.
There was an alarmist report about Macquarie's debts in The Australian yesterday.
Macquarie labelled as "false" the report in The Australian yesterday morning which claimed the financial group would have trouble renegotiating debts.
"AUSTRALIA'S biggest investment bank, Macquarie Group, took a pummelling on the debt and equity markets yesterday on fears that it would struggle to raise more than $5 billion in debt in the next six months.
"The stock closed 7 per cent lower at $36.80 as its subordinated debt blew out to 500 basis points and its senior debt ballooned to 320 basis points, indicating the riskiness the market is now attaching to the stock and its capacity to refinance debt, sell assets and maintain earnings.
"To put it in perspective, some of the big US investment banks, such as Citigroup's, senior debt was attracting 300 basis points, while JPMorgan's senior debt was 200 basis points.
"The reality is that by March next year Macquarie needs to refinance $45 billion of debt. While most of it will be relatively easy, more than $5 billion could prove difficult to get away at a decent price and decent length of time. In addition, Macquarie has $3 billion invested in listed funds, and as of yesterday if it was marking to market the value of the listed funds, it would be writing down an additional $400 million.
"And as at March 31 it had about $2.8 billion of assets available for sale. Given some of the largest assets are in real estate, the chances of selling them in this climate are slim.
In a statement to the ASX, Macquarie said:
"A report in today's Australian newspaper which claimed that Macquarie Group needs to refinance $A45 billion of debt and that $A5 billion requiring refinancing by March 2009 "could prove difficult to get away" is false and inconsistent with information provided to the market by the Group. "Since 31 March 2008, the Group has raised term funding of $A6.4 billion from a variety of sources. In addition, from 31 March 2008 to 31 July 2008, Macquarie Bank Limited increased deposits by $A3.8 billion to $A17 billion. The Group also has an undrawn $A3.8 billion senior credit facility.
"Macquarie remains well-funded and well-capitalised with liquid assets of more than $A20 billion as at 30 June 2008, which is twice the level of a year ago.
"The author did not provide the Group with an opportunity to respond to these claims."
Macquarie shares still fell, despite its statement. They finished down 7.8%, or $2.87 at $A33.93.
The Governor's comments in the foreword and the tone of the RBA annual report confirms that it doesn't see any Australian bank as having problems.
That's why the RBA Governor could write this in the annual report:
"There was never any doubt about the solvency of any Australian bank. Indeed, the very sound position of the local banks was a major source of strength for the Australian financial system during this period."
(He could have also been talking about New Zealand seeing the ANZ, Commonwealth, NAB and Westpac dominate that market with 80% of the business).
Its comment not made lightly and unable to have been said about quite a few other countries, such as the US, Canada, the UK and Spain, Germany (where three banks have had to be recued), Ireland or Denmark; or France where big banks have suffered large loses from bad investments, or poor management in the case of Societie Generale.
Mr Stevens said that the credit crunch "presented some of the most demanding circumstances for the domestic market operations of central banks, including the Reserve Bank of Australia, seen for many years. Practices that had been largely settled since the mid 1980s had to be adapted quickly in the face of very unusual and fast-moving developments.
"The Reserve Bank moved early to expand the scope of its daily operations, accepting a wider variety of collateral in repurchase operations, dealing at considerably longer terms than usual and, for brief periods, significantly pushing up the quantity of settlement funds in the system. The intention of this was to maintain liquidity in the domestic financial system, as local and international markets underwent the difficult and potentially disruptive process of re-pricing risk."
"Overall, the rise in term funding spreads to the official yield curve has generally been smaller in Australia than in continental Europe, the United Kingdom or the United States."
Although the timing of its release was coincidental, it emphasises the gulf between what's been happening overseas, especially on Wall Street, and the local banking system.
The failure of Lehman Brothers, the bailout of Merrill Lynch, the earlier rescues of Fannie Mae and Freddie Mac and the Bear Stearns rescue in March, plus the Northern Rock debacle in Britain, all underline the difference between Australia and many larger economies and financial systems.
Many of those bigger systems are shaky, hit by doubt, illiquidity, falling asset prices, and imploding financial groups: the slow death of the huge American International Group, a major global insurer, is the latest, and perhaps most dangerous example.
And yet, down on the bottom of the globe in a little economy, on a big continent, we have been keeping our heads down: Australia is too small to matter much, we will be buffeted by the problems sweeping Wall Street, but our banks won't be damaged.
That doesn't seem to be appreciated at times by investors as they have followed US and other foreigners out of financial stocks, helped by aggressive shorting by hedge funds reduced to trying to destroy value to create value of themselves, their managers and investors.
The irony is that Lehman, Bear Stearns and Merrill Lynch and other investment banks actively funded the same hedge funds that helped drive their shares down to the point where independence was no longer an option: bailout, forced takeover and collapse were all that remained.
Australian banks, including Macquarie, as it is a 'bank' in terms of the legislation and the Reserve Bank's statement, were attacked, but haven't been broken.
Some losses have been taken, but much of that is for poor commercial lending decisions, not from dud deals in credit derivatives (with the exception of the NAB, it must be said).
Our big four are among the top 14 rated banks in the world, sitting on Double A.
They didn't achieve those ranking for nothing, even if the ratings are issued by the same flawed organisations that helped bring us the credit crunch in all its guises.
And, in a speech to a business lunch in Sydney yesterday after the annual report had been released, Mr Stevens said that "Australia has been affected by these forces" currently hitting world markets, "but much less than the countries at the epicentre. Our financial system is weathering the storm well."
The annual report was issued a day after the minutes of the September 2 board meeting were released where it was decided that the first rate cut in seven years would happen.
The RBA cut then and remains disposed to cut again, whenever. Our economy is still in the black, slowing, but growth is still there.
The US economy isn't and the latest financial worries add to the pressures forcing it into recession.
Housing starts last month fell sharply to a new 17 year low and building permits fell as well.
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AIR publishes a weekly magazine. Subscriptions are free at http://www.aireview.com.au
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