Investing

Could there be another financial crisis? Spreads in bond markets have widened, and no one knows where the European sovereign debt crisis will end up – or whether several banks on that continent could get taken down for the count.

Stark reminder

The head of the international agency responsible for drawing up new banking regulations following the 2008 crisis, Basel Committee for Banking Supervision secretary-general Stefan Walter, recently issued a stark reminder that despite all the renovations to banks that are under way, another crisis is bound to occur eventually.

“We’ve had systemic level failures over and over again, and we will in the future,” Walter says. “It’s a complex system.”

Worrying times

Bank investors have certainly been worrying about something of late. Shares in Australian lenders have been on a steady nosedive since late April. Over the past year, they have failed to make any of the gains locked in by industrial stocks.

The good news is that the Achilles heel of the Australian banking system is now a smaller problem. The financial crisis hit local banks because they rely on debt markets to raise the money they need to lend. When Lehman Brothers collapsed, those markets completely froze, and even now, the cost of money is a lot higher.

But banks get far less of their funding from wholesale money markets today than they did in 2008. Short-term debt, the flightiest and riskiest form of funding, makes up about 20 per cent of the capital that institutions need to operate, compared with above 30 per cent in 2008. The hole has been plugged mostly with deposits – the safest funding after equity.

Expensive reality

Yet about 45 per cent of banking funds still come from the bond market. So banks remain exposed to jitters and ANZ Banking Group chief executive Mike Smith recently warned that life is not getting any easier.

“Europe, frankly, shows no sign of actually sorting out its problems,’’ the ANZ chief says. “That will mean raising funds will just be a bit more expensive. That is the reality.’’

It may seem counter-intuitive, but fears of another crisis are good news for Australian depositors. The rush by banks to get more of their funding from people’s savings pushed deposit rates to record highs against the benchmark bank bill rate. Any news that keeps bond investors fearful serves to maintain this upwards pressure.

Cracks in the economy

The other reality that looms over the banks is that there are cracks in the Australian economy, particularly around house prices – which have fallen – and corporations remain worried about the outlook. That means everyone is leery about getting new loans, which is bad news for the lenders.

Many analysts have downgraded bank stocks, not so much because of fears of a crisis but because of lower growth.

“If you look at the last 20 years, personal lending has been the riskier asset class three or five years after any crisis, because people get used to lower interest rates and they get complacent,” Southern Cross Equities analyst TS Lim says. “The GFC was three years ago and we don’t have any more stimulus going into the market, so things could be tough for people relying on cheap money.”

Good pedigree

As for fears of a repeat of the crisis, Lim notes that the major banks now enjoy a pedigree that means they are in good stead.

“At the end of the day, the markets are still open. Investors still prefer Australian bank debt. Funding will not be the issue. Funding cost could be higher, but the markets are still open.”