The NAB interim result sends us a message that the Australian banking sector is alive and very well, despite having the government guarantee.
In fact the guarantee is looking more and more as though its time will be short, even though there’s news that the US has told Citigroup and Bank of America to raise more capital after the recent stress testing.
The news, leaks and other reports will shake financial markets for the next few days, but it won’t hide the fact that conditions have improved.
Yesterday the NAB was trying to raise a couple of billion dollars in a domestic bond issue without the government guarantee, just as the Commonwealth did last week.
Yesterday’s solid result will have aided that raising.
Big profits might be objectionable when dividends and jobs are cut and interest reductions not fully passed through, but they do bring closer the day when things will be back to normal.
The ANZ’s interim today won’t be as good, but there will at least be solid earnings in Australia.
The results are helping our banks weather the global storm and add to the feeling that the worst is over now.
A global recession will hurt, but it won’t be a global slump of an intensity equalling The Depression. In Australia the slowdown will help costs and also remove much of the excess that had built up in the corporate sector, especially financial engineers and resources which had become overheated and overconfident.
Now we are seeing the upside of the recession in the big end of town: the professional money market where confidence is returning.
The recession might be upon us, but the credit crunch is becoming more of a horrid, distant echo for Australian banks and financial institutions.
The two are linked, of course: the recession dampens the demand for funds, while the seven week rebound in markets and returning confidence have added to the feeling that banks are not going to fail and will be around, one way or another, to meet their debts.
Money market liquidity and conditions in Australia have now calmed down to the point where cash balances held in the Reserve Bank’s Exchange Settlement Accounts each night have fallen to their lowest level since the collapse of Lehman Brothers last September.
As well spreads on short term funding have eased to the point where they are close to two years, if not already there.
Figures published on the RBA website show that the banks held $2.327 billion in their ESAs last Friday to cover the weekend and $2.421 billion overnight Monday.
That’s the amount of money the banks keep to handle overnight liquidity calls from settlement of banking and other transactions.
And in another indicator this morning, the spread between the 90 day bank bill rate of 3.08% and the expected cash rate fell to 0.27%, the lowest for two years (give or take a day or two). It’s certainly the lowest for 18 months when the crunch first started.
The banks are now more focused on meeting their overnight settlements, rather than worrying if their peers will be around in the morning to continue dealing, or would fail overnight, as several did in the US in 2008 when Bear Stearns, Lehmans, Merrill Lynch, Washington Mutual and Wachovia all failed or were forcibly taken over by other banks at the direction of, or supervised by, regulators.
Here the ESAs have been an important indicator of banking pressures since the credit crunch started in August 2007.
The ESA balances ballooned as the banks (with the RBA’s blessing) listed the amounts of money they held in the accounts each night as they grew more fearful about their peers and whether they would fail.
The failure of Northern Rock in the UK, then big losses in Germany, the US, Japan and again in the UK, and more worries about the stability of the financial system saw the amounts held in these accounts maintained at high levels.
They rose when Bear Stearns was bailed out in March 2008, then eased dramatically as the markets thought the worst was over.
Even when pressures re-emerged in the US, UK and Europe in August, the ESA balances were low, but the rapid collapse of Lehman Brothers saw the amounts held jump sharply to $5 and $6 billion, and then $8 billion and finally over $11 billion a night as it seemed the global financial system would freeze and then implode.
The collapse of the first attempt by the US to set up a fund to aid stricken banks didn’t help and it added to the intense pressure on liquidity.
Froze it did and the high balances and fraught confidence levels were maintained through December into January, February and then early March as it seemed Citigroup and Bank of America might topple over or be nationalised by a reluctant US government.
But as confidence started returning from mid March onwards, as conditions started stabilising and the freefall in the economy and markets eased, share markets and commodities starting rising, leading to more confidence. This showed up in an easing in market liquidity and short term interest rates.
But the ESAs are now back to their lowest since September 15.
But they are likely to kick up this weekend and then next Monday ahead of the release of the stress tests on the balance sheets of the 19 biggest banks in the US. If they are OK then there will be another easing in tension in markets.
Overnight reports emerged in US media claiming that based on the results of recently concluded "stress tests" US regulators told Citigroup Inc and Bank of America Corp they may need to raise more capital, the Wall Street Journal reported.
The paper claimed the capital shortfall amounts to billions of dollars at BofA, the paper said.
Both banks, whose
