After the announcement of the Moody’s review overnight, it’s something of a spectacle watching the banks swing from the line that they need to raise interest rates because of rising wholesale borrowing costs to telling us not to worry about rising wholesale borrowing costs. From the Wall Street Journal:
In response to Moody’s, Commonwealth Bank’s group treasurer Lyn Cobley said, “we will await the outcome of the review, which we understand may take a few months, however, at this point we do not expect this to have any material impact on our funding plans or expected pricing of our new issuance in the medium term.”
And it’s not just the banks. This quote from Bloomberg has to go down as one of the greats:
“Moody’s seems about 12 months too late with this concern,” T.S. Lim, an analyst at Southern Cross in Sydney, said by telephone. “The banks have just reported and they’ve shown wholesale funding isn’t an issue for them anymore.”
This blogger reads this as something like: The problem we never had, which is not now a problem, was only a problem twelve months ago.
The FT’s Alphaville also noted the furious defensiveness in Westpac’s response:
… Westpac continues to attract strong investor support for its wholesale funding. The Group has taken a number of steps in recent years to diversify its funding sources and improve its funding tenor, allowing it to continue to support its customers.
Moody’s notes that, “The Banks have reduced their sensitivity to market shocks by increasing the average tenor of their wholesale funding and by increasing liquid asset coverage of their short-term maturities”. Moody’s also notes that, “in many other respects Australia’s major banks continue to exhibit strong credit characteristics,” and that their “capital is also much improved, providing a buffer against asset quality shocks and facilitating the transition to Basel III” …
And yes, as this blogger noted some time ago, the wholesale debt maturity profiles in the big four have improved after some good work by APRA, though as Glenn Stevens has pointed out, it sure as hell wasn’t voluntary, even though the banks will take credit for it now.
As for improved capital reserves, a quick visit to the Deep T. sanitarium for the deluded will cure you of that.
But facetiousness aside, although Moody’s is clearly late coming to this party, it is highlighting a huge problem for both the banks and their regulators: The banks are trading in an uninformed market wearing only fickle and discredited ratings agencies as protection.
Some months ago, indeed when this blog first began, it coined the term “Invisopower!” to describe the accounting opacity surrounding the banks’ wholesale borrowings and the regulatory supports that address them.
Invispower! is used by the RBA to render opaque the repo transactions it uses to provide liquidity to the banks against who-knows-what security.
Invisopower! is used by APRA and the banks to renders opaque what the individual wholesale debt profiles actually are of the big four.
In sum, how can anyone, including Moody’s, possibly assess the degree to which individual Australian banks’ have addressed their vulnerability to shocks in wholesale debt markets since the raging bailouts of the GFC?
Educated guesswork doesn’t suffice, given, as Moody’s puts it, “the speed with which shifts in investor confidence can impact bank funding”.
Nowhere is this uninformed market more obvious than in the Australian business media, which seems to think if it just shoves its head into the sand a little harder, then the rather large and scary looking beast (known elsewhere as ‘the world’) looking over its shoulder will evaporate like a bad dream.
There are no commentaries so far on Moody’s today. All of the paper’s online editions are carrying the story but none gives it a headline.
Who said trust was dead in modern business?
