Australia’s Banking System May Be The “Bloody Big Butterfly” Which Triggers Next “Financial Storm”

Australia’s Banking System May Be The “Bloody Big Butterfly” Which Triggers Next “Financial Storm”, by Nick Hubble.

Australia’s banking system is about to blow, potentially triggering serious disruption in financial markets. Including here in Britain. …

In Australia, the lenders, not the borrowers, are the ones lying on liar loans. The lenders and their mortgage brokers fudge the figures, such as income, to get a loan past lending standards. … According to Australian media reports, some mortgage brokers’ associates offered the service of fake employer phone confirmations in case the bank actually tried to verify the loan applicant’s employment. …

Why do the bankers lend to people who can’t afford their debt? … Yes, banks stand to gain based on fees, creating a churn and burn model for borrowers who borrow and default. But what about the risk? …

While house prices are rising, it makes sense to borrow money to buy a house you can’t afford. The worst-case scenario, for you and the lender, is to sell your house. The borrower gets to keep the capital gain and the bank’s risk of not being repaid is tiny. …

If house prices stop going up, … bankers can’t rely on rising house prices to bail them out of bad lending decisions … The default risk … becomes the deciding factor on whether a loan makes sense or not.

Over the last few months, house prices in Australia have begun dropping. The spike in collateral risk, and the return of default risk, is leading bankers to realise they’re sitting on a time bomb.

Having written billions in loans to people without any idea how many can actually afford that debt, the bankers are panicking. At the margin of this issue are interest only loans. …

Thanks to the Royal Commission, bankers have tightened lending standards. … Lending is contracting. Without demand from the marginal borrower, who can’t afford to buy, house price demand is evaporating. The banks are on the hook for their dodgy loans, and for ordinary losses on their loan book.

Worldwide effect:

Australia’s banks are absolutely massive, big enough to cause global disruptions. … It’s a lesser-known fact that Australia’s big four banks are among the top 11 weightings in the MSCI Asia Pacific index along with the likes of Japanese industrial giants Toyota, Sony and Softbank. …

The power of a banking crisis to sink the Australian stockmarket, and pension system, is extraordinary. The big four banks make up a quarter of the ASX200 stockmarket index today, having reached over 30% in 2015, and surpassing the records set by other major economies before their banking sectors collapsed. …

The banking system first reached saturation (not enough borrowers with income to pay interest, not enough collateral to loan against) in 2008 and the GFC ensued. Lower interest rates have given them another decade, but saturation is setting in again:

The ASR firm co-founder Ian Harnett explained why things eventually turn down: “In a world of low rates, this entails an expansion of their assets. However, there are only so many financial assets that the home economy can generate before saturation kicks in, or the asset quality deteriorates.”