Oz: Banks Need Living Wills

July 21st, 2011
in econ_news

housing_bubble Econintersect:  The banking regulator for Australia is calling for banks to have written plans for how they would manage another financial crisis.  Such a crisis is a real concern down under because the rapid rise in housing prices there in the last decade has not been reversed the way it has in the U.S.  Economist Steve Keen has shown in GEI Analysis just how susceptible Australia could be to a possible bursting housing bubble.  Keen finds that the rise in house prices well over 100% in 14 years is unprecedented in Australian history.

Follow up:

From abc.net.au:

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.


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 [Australian banking analyst Colleen Cassidy] 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.

Sources:  abc.net.au and GEI Analysis

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