Our banks are on solid foundations

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This subject may appear a little dull but believe me it is crucial that our banks are solid. The good health of our financial institutions is critical to Australia’s economic fortunes.

Prior to the GFC our banks and other lenders were sourcing a greater share of their funding from “short term debt” than ever before.

The RBA chart below shows us where the banks were getting their money from. As you can see, a lot of the pre GFC funding was generally shown on the chart as “short-term debt”.

 

Short-term debt can be risky. Imagine taking a loan out with a full term of only 90 days. Every 90 days the lender has the right to call in the debt, even if you are making your repayments. That is where our banks (as a group) were getting 35% of their funding prior to the GFC.

The good news is that our banks are now only using short term debt to the tune of approximately 21%. This is a terrific result.

The reason why short-term debt grew to such high levels was that it was temptingly cheap and plentiful.

Remember RAMS (before Westpac purchased the brand)? They had a very large proportion of their funding coming from short term debt facilities. When the GFC hit, their funders were either asking for their money back or increasing the cost of the debt significantly, trouble is that RAMS had lent the money out on 30 year loan terms to Australian home owners. The house of cards collapsed causing huge numbers of shareholders to lose their money.

Domestic Deposits from bank clients are generally considered to be safer, as long as there is confidence in the bank. Australian banks, as a group, now source almost 60% their funding from this more reliable pool of funds. This is a very good sign.

Given the vast amount of mass media news that focuses on our economic doom and gloom, I thought you might appreciate some good news, however dull it might be.

 

Jason Thomson | Mortgage Adviser and Finance Broker | Smartline Cairns

 

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