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They certainly worked and are now being withdrawn.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.
