What Keeps Australian Central Bankers Up at Night?
WSJ.COM ECONOMICS
Reserve Bank of Australia assistant governor Guy Debelle gave a speech Tuesday on the global financial situation and glossed over "recent jitters" in the sovereign debt world (i.e. Greece). His big worry is the mountain of U.S. bank loans tied to commercial property, such as apartments, hotels, offices and warehouses.
Mr. Debelle, head of the RBA's financial markets group, said the recession's effect has yet to hit a big chunk of the U.S. banking system.
"We are still yet to see the full impact of the weakness in the North Atlantic economies on the loans on the books of financial institutions. The bulk of the losses to date by these institutions have been write-downs in the value of securities held on their books. While these write-downs have been absorbed, albeit with some difficulty and with substantial capital raisings, given the size of the output contraction, one would expect that we are not all that far advanced in the adverse credit cycle that normally accompanies recessions. For the North Atlantic economies, this was a big recession which, combined with large falls in both commercial and housing property prices, should result in large loan losses."
He lauded the stress tests the Fed and Treasury performed on the 19 largest financial institutions in May 2009, but Mr. Debelle expressed concern about the small and medium sized banks that didn't get stress tested:
"This lower tier, which is a sizeable share of the US financial sector, has loan portfolios which are very regionally concentrated with a sizeable weighting to commercial property. The experience of previous cycles indicates that the commercial property cycle takes a long time to unfold, and we may have some way yet to travel. These problems in the banking system will almost certainly hinder credit provision in the US, particularly to the [small and medium sized enterprises] sector, which doesn't have the direct access to capital markets that larger corporates have."
He said the public may be surprised by how this plays out:
>>>Even though one might be relatively confident that the major financial institutions have the ability to absorb the loan losses still to come, there may also be a concern that there could be an adverse effect on public confidence, should these institutions report further quarterly losses. The general public might well be surprised that losses are continuing to occur, given the sizeable public sector support that has already been provided.<<<
Australia is in much better shape, and it has increasingly tied its economic fate to Asia, where the banking systems are strong. He said:
>>>There is a marked contrast between the balance and nature of the risks in Asia and the North Atlantic. While the near-term risks may be on the downside in the US and Europe, they would appear to be on the upside in Asia. The interplay between the contrasting fortunes of these two parts of the world is likely to be the critical factor in determining the evolution of the global economy, and Australia is now more tied into one than the other. feeds.wsjonline.com |
