A New GFC Around The Corner?


Finance reporter David Taylor, On Wednesday 20 July 2011, 15:21 EST

Australia’s banking regulator has called on the nation’s banks to put plans in place in case of another financial crisis.

APRA asked the big four to draw up what it’s calling ‘living wills’ or contingency plans that would help prevent a financial panic.

Analysts say the regulator is indicating that the banks were too reliant on the Reserve Bank during the last credit crisis.

Industry experts say it is common place for the Australian Prudential Regulation Authority (APRA) to be in talks with Australia’s major banks, but it appears a recent meeting had a different twist.

According to financial services group Promontory’s Australian banking analyst Colleen Cassidy, the regulator is now asking for the banks to be ready to stand on their own two feet in the event of another major crisis.

She says they have been asked to draw up ‘living wills’.

“It’s about getting large and complex financial services organisations in order, so that if there’s either a market crisis or a crisis that’s specific to the organisation that they can work through it in an orderly way and not create instability to the financial system,” Ms Cassidy explained.

The argument is that banks have in the past taken on excessive risks with the knowledge that the government would come to the rescue – what economists term moral hazard.

“A situation where a government or an agency is seen to be willing, able and wanting to support a problem institution,” she added.

“Again, all around the world, there’s always concern about the moral hazard that government support creates.” Analysts say the big four banks’ books were structurally flawed before the global financial crisis.

“If you have a look at some of the structural problems the Australian banks had going into the global financial crisis they were very real, in that basically they basically borrow money very short-term, they lend it long [term] and they’re very reliant on offshore funding,” explained CLSA banking analyst Brian Johnson. See here at Yahoo Finance

Thanks to The Smart Money

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