A nation caught off-guard.
I have always warned of the day that Australian banks would face when it came to the dangerous assumption that no matter what happens, the tap of international wholesale debt would always be running at full power. However following this months RBA decision to cut rates, the beans have officially been spilt, and Australians are a little confused at the moment.
First and foremost, this was the first time I can remember witnessing an interest rate cut where the prime response was for banks to raise term deposit rates to the incredible magnitude of 50-85bs (roughly 150bps above the reserve rate). It must also be noted that there is enough scrutiny to warrant an explanation from the RBA on whether it informed these banks prior to the rate decision of a pending rate cut. Because it normally takes a major institution (let alone four of them) weeks to make the necessary preparations to raise term deposit rates at such a scale when the reserve rate is about to be cut.
Why did the banks raise the interest rates on term deposits when the RBA cut rates?
Unfortunately there are several possible reasons as to why. None of those possible reasons can give Australians any comfort. Possible reasons include
- The international wholesale lending community have no interest to lend money to Australian ADI’s at such a low rate, so banks have to source money elsewhere
- There is a funding problem in general
- There already is a funding problem with one of the major banks, hence raising the interest rate by 55-85bps for term deposits will attract more depositors to their banks (keeping money in the banking system) whilst banks tap cheap funding through the RBA bailout CLF (if they haven’t already).
- Banks are starting to sustain or preparing for heavy losses from the WA, NT and QLD housing markets, hence are not able to pay back creditors without additional resources which would limit their liquid cash on hand and the ability to lend to homebuyers in other states in Australia the way they are.
- For one reason or another about to be given heavy fines for mortgage fraud from a regulator other than ASIC or APRA, or that a Royal Commission is on its way which will crush the banks.
- The banks don’t have the fiscal resources to lend to all the soon-to-be new apartment owners. Hence are batting down the hatched because if they cant lend like they are today in Sydney and Melbourne… the whole economy tanks.
- Credit rating downgrades (rating agencies are a bit late to this party)
I warned about this… Sad to possibly see my biggest concerns possibly coming to fruition. Whatever the RBA does from now is irrelevant. Our focus now turns to how much money can banks raise to fund their ponzi financing schemes– by who– at what rate– and how much it will cost the Big Four to lend between one another. Last but not least, focus will also be on how much are these banks going to write down from the housing market.
Interesting times ahead.