Gareth Vaughan looks at what may really be going on at the banks

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37 Comments

Are bank bosses' concerns more broad based than they're letting on?

Are they more concerned than me? I doubt it. My doubts were so intense I moved funds out of the Australian bank I had been dealing with for years and would like to again. But the market price discovery process realised by others better informed than I forced my hand.

Market price discovery does not tell one the underlying fundamental truth... (only points one towards it. )

i've heard that Hedge Funds think there is a "bubble" in Austrailian Housing and are shorting Bank stocks in anticipation of this..
eg.. Short interest in CBA Bank is at its' highest level since 2012.

Banks are hurting.... but I don't think the Apocalypse is going to happen anytime soon....
ie. Property related Banking crisis..

hedge Funds might have got this one wrong..??
ie.. Central Banks are aware of all this and they aint going to just let it happen..... ( Its' what they don't see that leads to crises )

Collapsing global trade activity is a precursor to a housing related financial stability event, since rising domestic incomes are a necessity to support rising debt levels, given the already low level of interest rates. Events unfolding in Asia and elsewhere are not supportive. Read more

The hedge funds are betting in the correct direction. There seems to be a housing fever in Australia, worse than when disco fever was at its peak. When every man and his dog are property speculators it's time to exit the market.

The same goes for any market. I was waiting for the collapse in Chinese stocks after seeing people speculating based on little more than mysticism and at peak 5% of stock market "investors" in China were illiterate.

Hi Stephen, I'm assuming your not spending your nights beating the daylights out of the mattress and so begs the Question....to where exactly that was in your opinion, safer ? and yes I think the concerns are broad enough to catch the likes of Stevens an Wheeler in and unguarded moment.
Because I know your capable, how about a little stress test of your own reflecting the current safety of depositors funds..? Cheers

Hi Christov, safe alternate destinations to place funds are in short supply, hence my interest in constantly raising awareness of the risks undertaken. The fact the RBNZ introduced OBR without a duty of regulatory care to demand depositors are treated equally along side foreign wholesale lenders when risks demand higher returns makes the domestic bank deposit market precarious.

and domestic bank deposits made much more precarious with the covered bonds available to overseas investors taking the best performing residential mortgages out of consideration for NZ depositors - and not subject to OBR at all - leaving NZ depositors only having recourse to the remaining residential mortgages (including ALL non-performing mortgages).

The RBNZ is not providing prudent oversight to protect NZ depositors, All the current bank profits are heading to Australia each year, with inadequate provision in NZ for badly performing loans and no requirement to maintain adequate retained earnings in NZ. It's a one way street.

Certainly not.

And carefully coded bank statements, excluding a mention of the savage cuts to deposit rates, implicitly authorised by the RBNZ's explicit without conditions OCR cut should raise alarming warning signals for private bank funding agents to react against.

A spokesperson issued a statement which said: "Over the last 18 months, offshore wholesale funding costs have increased significantly. Until now, and unlike some other banks, ANZ has passed on all the recent OCR rate cuts in full. But international volatility has proved to be more than temporary so these extra costs now need to be reflected in our lending rates." Read more

Stephen, would you mind sharing what you consider to be a safe destination for on-call funds? I guess it's a matter of working out which is the best of a potentially bad bunch, but there's bugger all information available to the average punter to make an informed decision. I have nearly all of my on-call savings with RaboDirect. Am I an idiot in light of the current issues in the dairy sector?

I am not able to advise you which is the best alternative given your particular circumstances. I come with a lot of professional experience that cannot be put into practice without industrial sized resources, if one is to make a return without the unacceptable slippage costs introduced by retail financial help, which in most cases is unavoidable.

GK I think you are best served by trying to understand that money can not do work for you, so don't treat it like it can. What you are in reality asking is where can you place your money that will allow you to exit the game before the next guy without losing your money. It is like a game of musical chairs. Up until now there the game has had more chairs added. We are at a stage now were no more chairs are being added, and will soon be at a point where chairs start to be taken away.

You are asking what is going to make you smarter and faster than the next guy that enables you to secure a chair. Do you really fancy your chances? If you play the game, then you have to accept that at some stage you miss out on a chair. It is all gambling, just in varying degrees.

So what other options are there? I already have a sizeable allocation to physical gold and I'm not going to put 100% of my savings into gold. I don't have the means to buy other tangible assets like property without getting heavily into debt, which is the last thing I want to do at this point in time.

I believe the standard to consider is cash and cash like things.

Its a game of multi-round musical chairs. So there will be more and more rounds until there are enough ppl left standing who's money will cover the losses. As Scarfie says , how lucky do you feel?

I don't feel lucky at all, which is why I'm asking for some tips on where you can park your savings so they aren't someone else's liability?

No expert but find a farmer ,you supply cattle,he supplies grazing or buy a share in a forestry block,price falls don't fell the trees leave them for when price rises.

Get it out of the big banks as much as possible at this point would be my advice. Maybe buy some Government bonds (low interest, long term, but...guaranteed , Building Societies like NBS are small but prudent?(note the question mark ;-)) buy some shares in Utilities or something that interests you specifically that you feel will be of value after even the worst economic outcome. Water is not going to get cheaper particularly abroad. Can you purchase even a very small land holding that is arable enough for you yourself to use or lease out? We all need to eat.
Other precious noble metals? Some way more valuable and useful than gold.

Just maybe the best thing is to diversify alittle more. You haven't done anything terrible at this point. Nothing is certain for any of us in these current times GK. There is still more to life than money.

I don't know whether anyone here follows Martin Armstrong (armstrongeconomics.com), but he says the next crisis will start in government bonds and the two things you should avoid right now are government debt and bank stocks.

If you are smart enough not to get heavily into debt then no one here can probably help you. I am no investor so can't really advise there. But I won't leave you hanging, and will try to be somewhat constructive. Just keep in mind I am just another clown on the internet, so don't listen to me. The smart thing to do is challenge the veracity of what I say.

What I do try to do is analyse a problem and boil it down to its basic components. In reference to my comment about work: the world has for the last 50 years or more been swapping oil, which has a calorific content that is dense and highly useful for doing work, for money and its derivatives, which have no ability to do work. What investing means, at least from about 2008 on, is that you are wanting your money to do work for you in the future. But money doesn't have that ability.

You have to understand the game. From 2008 on the game changed. Prior to that the game was to leverage yourself into property with debt to the maximum of your ability. But you know enough that property is illiquid.

Look to Exters Pyramid. Second to last man standing is sovereign bonds. Stehpen Hulme seems to have known about this game longer than anyone on these forums. I posted here that Bonds were the place to be when the US 10 year was at 3%. This stems from my revision of the quantity theory of money, and the conclusion that interest rates must TREND down. So bonds are going to give a yield and a capital gain. Money for nothing, except don't believe that anything is free. There is always a price to pay. I haven't yet taken my own advice as my money is in my own innovation.

Just know that the whole world has heaps of baby boomers retiring that are hoping to live risk free on their investments (money that can't do any work), and they all want yield at a time when yields are disappearing. Tough game to play, there are no guarantees.

well said Scarfo...good to see you .......you seen GBH around at all? I been gone a long while now ..Stay Well

Really good to see you back Count, I hope you are permanently over the issue that took you out of circulation and that we see more of you around here. I don't think Gummy Bear found it the same without you around here. He did pop in occasionally, but I haven't seen him for some while.

David has nerfed the forums a little also by taking away notifications when someone replies to your comment. It works for people like Steven that are tied to it all day :-P But not for those skimming when they can.

I think more to the point is you stay well eh!

Ditto.

Put your money in bank accounts in any of the (many) countries that offer a deposit guarantee.

I have an account with NAB, but I wonder, what would actually happen if one of the big four required a bailout? Would the government guarantee be worth the paper it's written on, i.e. could the government afford to bail them out? And what would the implications be for the value of the currency?

"I have an account with NAB, but I wonder, what would actually happen if one of the big four required a bailout? Would the government guarantee be worth the paper it's written on, i.e. could the government afford to bail them out?"
I think they'd pay out up to the guaranteed limits (AU$250k) per customer. At any rate, this is better than not having any guarantee at all, which is currently the case with NZ banks.

"And what would the implications be for the value of the currency?"
Hard to tell. If one of the OZ big four goes insolvent, NZ will not be unscathed either, so the AUD/NZD rate could go either way.

Using NAB as an example, their 2015 full year report says they have $459 billion of customer deposits. Clearly the Australian government couldn't afford to bail them out, so it seems to me the government guarantee is worthless.

I am not so sure GK. NAB is sitting on assets of more than twice that value, so the government will be able to recover a substantial part if not all of the guarantee payout. The Guarantee Deed allows them to also make up any shortfall by imposing a levy on the banking sector...
Nothing is absolute or bullet proof, but a written deposit guarantee is better than a written promise of a haircut (OBR).

Hmmm, I dunno. The bulk of their assets are illiquid and there's a lot of derivatives, etc., that could become worthless in a systemic crisis.

You know what the OBR is right?

You know that the top 6 banks all have similar lending portfolios? so in effect if one goes the rest are not going to be far behind?

You know it is not the Govn bailing them out but the PAYE tax payer and their children and grandchildren?

Frankly I think we are looking at a Great Depression level (but on steroids) melt down, so the currency will play a game of relative.

For me its simple the Govn should not bail out the banks. They and their investors who created most of this mess should carry the loss.

And how is your drivel helping GK (or anybody else) with finding practical ways to protect their savings?

Except that guarantee might end up only applying to a voter of that country. No votes lost to the pollie that takes your money away.

May I remind you of this '60 min' doco:

https://www.youtube.com/watch?v=j_ktN_h7-J4

Error.

It's Friday Yay!
It has come to my attention that Theo Spinnings has taken some in-house steps to expand spin beyond Fonterra's external culture

Fonterra Memo :To all Staff

Dear Staff

It has been brought to the CEO's attention that some individuals throughout the organisation have been using plain language during the course of normal conversation with their colleagues.

Due to complaints received from some employees who may be easily offended, this type of language will no longer be tolerated.

We do, however, realise the critical importance of being able to accurately express your feelings when communicating with colleagues, media and the public.

Therefore, a list of 13 New and Innovative "TRY SAYING" phrases have been provided so that proper exchange of ideas and information can continue in an effective manner.

Try Saying: I think you could do with more training

Instead Of: You don't have a f%$#ing clue, do you?

Try Saying: She's an aggressive go-getter.

Instead Of: She's a f%$#ing power-crazy bitch

Try Saying: Perhaps I can work late

Instead Of: And when the f%$k do you expect me to do this?

Try Saying: I'm certain that isn't feasible

Instead Of: f*%K off arsehole

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Instead Of: Well f&*k me backwards with a telegraph pole

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Instead Of: Tell someone who gives a f%#k.

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Instead Of: Not my f%$#ing problem.

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Instead Of: What the f&%k ?

Try Saying: I'm not sure this can be implemented within the given timescale.

Instead Of: No f%$#ing chance mate.

Try Saying: It will be tight, but I'll try to schedule it in

Instead Of: Why the f%$k didn't you tell me that yesterday?

Try Saying: He's not familiar with the issues

Instead Of: He's got his head up his f%$#ing arse.

Try Saying: Excuse me, sir?

Instead Of: Oi, f#$k face
.
Try Saying: Of course, I was only going to be at home anyway

Instead Of: Yeah, who needs f%$#ing holidays anyway.

A question - say I have a 100k Mortgage with a Big Bank and also a 100k deposit account with an interest offset so I pay no interest on the floating rate loan and suppose that Bank becomes insolvent do I have a right of set off or will the liquidator claim the Bank loan is secured but my deposit is an unsecured creditor.

The latter, unfortunately. Your deposit (unsecured loan to the bank) will get bailed in and you'll still have a mortgage. It's a lose-lose scenario for the customer.

If your bank has covered bonds issued, and your mortgage is assigned to the covered bonds pool of mortgages, then it could be even more tangled if OBR is invoked for your bank. Another complication the RBNZ has introduced but still lose-lose is the outcome.

(whereas the Reserve Bank of Australia has provision to stop further mortgages being added into a troubled bank's covered bond pool when a bank is approaching insolvency. This is not an option for the RBNZ which chooses to follow a hands-off approach. Likewise the RBA would provide a guarantee for your 100K deposit account whereas the RBNZ has chosen the unique approach to hold you the depositor as responsible for the bank's mis-management.)