How Australia’s Big 4 Banks Can Sink the Entire Economy

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They’re so huge compared to Australia, they’re “Too Big To Save”

By Lindsay David, Australia, author of Print: The Central Bankers Bubble, founder of LF Economics:

Australia’s Big 4 put the American Big 4 to shame

JP Morgan, Bank of America, Citigroup, and Wells Fargo are the four largest banks in the United States. The total assets on their balance sheets combined equaled the equivalent of 48.3% of total American GDP in 2014.

That sounds like a crazy number until you compare that to the total assets of the Big four Australian banks: ANZ, Commonwealth (CBA), National Australia Bank (NAB), and Westpac (WBC) hold relative to Australian GDP

AUSVUS Assets

 

This was not always the case.

Using the CBA as an example, its balance sheet has grown at a stifling pace relative to the size of the Australian economy.

 

CBA GDP

 

So how does a bank like the CBA go from holding assets the equivalent of 14% of Australian GDP in 1999 to 51% of GDP by 2014? The answer to that question is simple:

By taking on more risk.

It did so via a get-rich-quick scheme by getting a nation to depend on using leverage to flip houses as it’s wealth creation model).

It’s funny how the balance sheets of four primarily domestic-focused retail banks have become so much larger over the period when house prices have significantly outpaced all other economic fundamentals.

So the next question:

How do you save four banks holding assets on their balance sheets the equivalent of almost 220% of Australian GDP if the Australian economy goes belly up? By Lindsay David, Australia Boom to Bust Blog, author of Print: The Central Bankers Bubble

Australia’s households are the third most indebted in the world, relative to GDP, after having passed the Netherlands in 2014. Aussies are now closing in on the leader of the pack, Denmark, and second place, Switzerland. And it’s all based on one factor, the Great Australian Household Debt Trap. Read… Australia’s “Largest Housing Bubble on Record” in 4 Charts

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  9 comments for “How Australia’s Big 4 Banks Can Sink the Entire Economy

  1. JayTe
    Jun 13, 2015 at 3:06 pm

    It’s Iceland 2.0. Except unlike the sensible policies taken on by the people in the northern hemisphere, don’t be surprised to see Australia follow it’s Anglo Saxon brethen down the rabbit hole of QE and bailouts. It should be amusing to say the least.

    • pop
      Jun 14, 2015 at 11:49 pm

      many make the mistake of forgetting that Australia (and now also New Zealand) ha struck the mother-load of growth strategies – ie: be of small population and much land – keep the later restrained and the former unlimited

      i’d not be worried about the banks – they aren’t

      it’s not the banks that will fail first – it’s if the world ever runs out of relatively rich migrants in love with the great Australian dream – one that has supplanted the great American Dream with scope for a 10 fold increase in population

      that’s big numbers and i don’t see it ending soon

  2. Brett
    Jun 13, 2015 at 3:34 pm

    Thank God we have a mining boom to take the place of the real estate bubble when it explodes otherwise I would be very worried.

    The Government can’t bail out the Big four, could not even bail one of them out and just forget that $250,000 account guarantee, all the Australian Government could do is Nationalize the failing Banks, expect mind blowing losses.

    • Les Francis
      Jun 13, 2015 at 8:10 pm

      Ever wondered where the original government owned state banks plus the original federal government owned Commonwealth Bank originated?

      Private bank collapses back in the early 1900’s.

      Collective Australian state and federal governments sold off their “Bank Assets” back in the ’90’s under the prevailing thought of : “Government should get out of private businesses mantra

      • Brett
        Jun 15, 2015 at 6:28 am

        Sorry for the late reply, been very busy, good reply Les.

        ‘History doesn’t repeat itself, but it does rhyme.’ Mark Twain

  3. Debtserf
    Jun 13, 2015 at 3:51 pm

    Ah, housing bubbles. Always and everywhere. The cornerstone of securitisation and infinite rehypothecation.

    The global housing bubble must never be allowed to pop. Whatever it takes. Here in the UK it is propped up with subsidies – govt guaranteed subprime – but even these appear to have run out of greater muppets foolish enough to apply.

    Given the extraordinary measures that have been taken to protect house prices for the last 8 years, I just can’t see TPTB allowing them to deflate now, as everything else would unravel – unless…

    Wolf; do you see the current bond market turmoil as a potential catalyst for a disorderly asset price deflation?

  4. Lee
    Jun 13, 2015 at 5:29 pm

    Australian banks are not quite the same as US banks……………

    As indicated in the above article we have four big banks. They basically control the market here. Yeah, there are other little fish, but basically no meanginful competition.

    Sort of like the grocery business here with two big players and a couple of minnow wanna bees.

    As such they can and do get away with lots of stuff that banks in the USA and other countries can not and don’t.

    For example, want to use your credit card overseas? Most likely you’ll get hit with a 3% fee on the purchase amount.

    Mortgages? Here is a little blurb from CBS’a annual report to think about:

    “Net interest income increased 8% to $15,091 million,
    reflecting 8% growth in average interest earning assets
    and a one basis point increase in net interest margin;

    Other banking income increased 4% to $4,323 million…”

    Since the GFC interest rates in Australia have gone up and down. One thing that has not changed is the increased margin the banks have been able to charge on their mortgages mainly variable rate mortgages.

    They did this by increasing rates MORE when the RBA (our central bank) increased rates, pushed through rate increases when the RBA left rates unchanged, and failed to pass on 100% of the cuts when the RBA cut rates.

    How much do you ask? Well by about 1.5%. On a $A500,000 loan that would work out to A$7500 a year. Now multiply that margin increase across the loan portfolio and you have one of the major reasons banks here have been able to increase their earnings.

    The pundits here all scream about ‘record low interest rates’ and quote the RBA discount rate.

    Yes, rates are low, but they should be even lower had the commercial banks actually passed on the full amount of cuts over time. What they ignore is the fact that consumers still have not felt the entire impact of those record low interest rates.

    CBA’s ROE was 18.7% in 2014.

    Finally, all you have to do to see the impact of the effect of the banks increasing margins to look at their share prices. Most are still near record highs even after the recent falls.

    Mining boom? What mining boom? The boom has been in banks shares and not mining stocks. Compare the price performance of BHP to CBA………………….

  5. Julian the Apostate
    Jun 13, 2015 at 8:46 pm

    “Out in the Indian Ocean somewhere
    There’s a former army post
    Abandoned now just like the war.
    There is no doubt about it,
    It was the Myth of Fingerprints.
    That’s what that old army post was for.”
    -Paul Simon

  6. hbrn
    Jun 14, 2015 at 10:26 am

    “Danske Bank”, Denmarks largest bank is 200% of the Danish GDP – same threat as in Australia – but trough one bank only!

Comments are closed.