From the AFR:
Australia’s major banks could be hit with a ratings downgrade and find it more expensive to borrow money in overseas markets if their bond-holders are forced to incur losses in the event of bank failures, according to Fabienne Michaux, head of Standard & Poor’s Ratings Services Australia and New Zealand.
“One of the peculiarities of the Australian system is our high reliance on foreign debt and most of that is channelled through the banking system”, she said.
“Ultimately we are a relatively small market, which is geographically remote and so there is some merit in the argument that we need to present ourselves as offering relative value from a global perspective to continue to attract that capital.”
Ms Michaux added that when Standard & Poor’s rated the four major banks, “we factor in two notches of upgrade because of their high systemic importance.”
If a bail-in regime were introduced ‘this may need to be reviewed because to the extent to which we believe the government support for senior unsecured creditors is lessened, it could potentially impact the ratings of the four major banks.”
What’s more, a ratings downgrade “potentially could impact their cost of funds.”
This is really just a repeat of the material produced for the Murray Inquiry submission. The broader debate is, of course, completely missed by the reporter. There is no way to prevent bank profits from falling and credit getting more expensive if resilience is to be restored to the financial system. A bail-in regime could be offset by higher capital ratios that would lower funding costs but the end result is still less credit and lower profits.
The fact is, we’ve been living a false economy of easy credit and inflated bank returns. We can run it flat out off a cliff or turn it now.
My issue with the proposed bail-in rules is that in a system so dependent on bond financing, just how do you intend to force losses upon the very same bond-holders that you’ll be asking for more money from in the heat of a crisis?
