From Clancy Yeates:
Australia’s banks face the threat of higher funding costs, after Standard & Poor’s downgraded the big four’s credit rating outlook to “negative”, a direct result of its action on the government’s top-notch rating.
….the banks’ credit ratings are automatically raised by two notches because S&P assumes they would receive government support in times of financial stress. Action on the government’s rating therefore tends to flow directly into the banks’ ratings.
“The negative outlooks on these banks reflect our view that the ratings benefit from government support and that we would expect to downgrade these entities if we lower the long-term local currency sovereign credit rating on Australia,” Standard & Poor’s said.
While the warning does not reflect changes in the banks’ financial performance, analysts say that if it leads to a downgrade in the actual credit rating of banks, it could push up bank funding costs all the same.
….”While Australian banks enjoy relatively high credit ratings and are deemed to be in the top quartile of global capital requirements, the frequent use of offshore wholesale funding markets is likely to result in higher funding costs.”
The big four raise about 30 per cent of their funding by issuing bonds in wholesale funding markets, so the cost of this debt can have a significant influence on the sector…..
To avoid moral hazard, with banks taking unnecessary risk at the taxpayer’s expense — a case of heads I win, tails you lose — Treasury and the RBA should commit themselves to the Swedish example. Banks that require rescue should forfeit control of their assets by issue of a controlling equity stake to the government. That would significantly curtail management and shareholders’ willingness to take unnecessary risks. And create a strong incentive to increase capital buffers. Not just to comply with APRA rules, but to make their businesses as bullet-proof as possible. Conservatively-run banks would be a major asset to the economy.
What APRA needs to focus on is instilling the right culture in banks. Rather than management focused on incentives to grow the business, there should be more emphasis on protecting the business and ensuring its long-term survival.