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Macquarie Group is due to update the market today on its first half performance.
It will be news eagerly awaited by investors, now convinced that the
investment bank and fund manager won't collapse as a result of the
credit crunch and recession.
It was probably a co-incidence that saw the federal government announce
on Sunday the ending of the borrowing guarantees for banks and other
lenders.
But the update from Macquarie, plus the CBA's interim figures and
updates from the NAB and Westpac in the next 10 days, will also confirm
the rightness of the government's move.
It may have been unintended, but the international credit crunch and
recession, and the federal government's financial guarantees to banks
has effectively underwritten the restructuring of the sector.
The guarantees (issued to state governments for borrowings that allowed
both groups to have a good credit crunch and recession), for the banks
will finish at the end of next month, but will remain in place for
several more years to allow for existing bonds and deposits to expire.
The federal government move will almost certainly be matched by a
similar decision across the Tasman where the major banks are
subsidiaries of the big four and control around 90% of the banking
market.
The Australian guarantees were dramatic when revealed on October 12,
2008, a month after Lehman Brothers collapsed, triggering a chain
reaction of credit crunches around the world, on top of the already
extensive reduction in global liquidity which started in August 2007.
Using the country's AAA rating to protect our banks at the height of
the credit crunch in October 2008 the system of guarantees provided
funding and deposit certainty.
They certainly worked and are now being withdrawn. Similar arrangements supporting borrowing by the states are also being wound down.
The guarantees were especially crucial when Australia was cut off from the rest of the world in the last quarter of 2008.
The Reserve Bank funded the Australian financial and banking
system with over $45 billion in deals (re-purchase agreements and
allowing banks to hold higher than normal balances in their accounts at
the central bank and a special deposit).
In the next few months, the guarantees supported the banks as they
ventured back into global markets to raise new money and into local
markets as well.
These measures, plus the guarantees, kept the banks alive, especially
Macquarie, which was under attack from hedge funds and other
speculators; helped Suncorp's Metway subsidiary in Brisbane, plus the
Bank of Queensland and the Bank of Bendigo.
The Commonwealth, which reports its interim figures tomorrow, was
allowed to acquire Bank West, while the NAB snapped up insurer and fund
manager, Aviva and looks set to grab control of AXA's local operations.
Westpac lifted its share of the Australian banking market by making a
$16 billion all paper offer for St George, which removed another
independent competitor to the big four.
Smaller lenders were also helped by the guarantees.
The deposits guarantees helped stop any runs that might have developed in the wake of collapses in the UK, US and Europe.
The most damaging type of run wasn't where people queued outside a bank
of lender; it was where the money was taken out electronically through
internet banking and in the wholesale markets.
That's how US banks such as Bear Stearns, Lehman, Washington Mutual,
Wachovia and IndyMac were crippled and then fatally wounded.
Treasurer Swan said that Australian banks and other lenders have so far
paid around $1.1 billion for the use of the Guarantee and will pay
around $5.5 billion over its full life, so it's been a nice earner for
the country.
But the biggest beneficiaries have been the banks and their bankers.
The big four have tightened their grip on the economy and on the sector.
They account for more than 90% of lending for housing and all four have
been allowed to expand their grip on funds management (and ignoring the
inherent conflict of interest).
Many bankers have kept their jobs, only some of their dud clients, such as ABC Learning, Allco and MFS etc went bust.
The arguments here over bank pay and bonuses have not been as damaging
as in the US and thanks to the guarantees, all institutions kept their
credit ratings as those of their peers offshore tumbled.
Our banks (especially the big four - all AA rated), looked increasingly better.
Australia's hard-earned AAA rating was the best support of all. This Information is provided to you by the Australasian Investment Review (AIR).Subscriptions are free.AIR reports about financial markets and investment products in the widest sense possible. The AIR website and all its contents is prepared for general information only, and as such, the specific needs, investment objectives or financial situation of any particular user have not been taken into consideration. Individuals should therefore talk with their financial planner or advisor before making any investment decision.
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