Australian Banks in International Standards During the Global Turmoil - Example

The stability of Australian Banks in International Standards during the Global turmoil. The manner through which the Australian and New Zealand banks escaped from the global crisis involved studies conducted to assess how the banks could handle economic deterioration. These studies pushed the supervisors in these banks to conduct stress tests, which evaluated the proficiency of the banks in an imposed economic downturn. When the global turmoil hit the countries, these banks fared remarkably well. The banks managed to escape the global crisis by imposing capital adequacy rules. Regular stress tests to decrease the risks also took place. The global turmoil had less influence on the large banks in these throughout the time. The turmoil may have reduced profits made, but the banks maintained their AA credit ratings. The bigger groups of banks could come up with private equity capital. These banks had massive debts, and there was concern that these debts would be hard to roll over. The crucial break came when the governments established a funding program that could save the situation. The establishment of wholesale and deposit funding guarantees from the governments in both New Zealand and Australia gave a boost to the financial sector. This move taken in 2008 ensured that banks in both countries had access to finances even through the worst global turmoil in recent years. The funding, which came from both local and external sources, gave the bank's growth in deposits. Additionally the banks could handle increased mortgage defaults. This came about despite the fact that they had numerous loans emerging from the domestic sectors. This situation had the privilege of being test run before the global economic crisis. Banks’ Supervisors had encouragement to conduct tests that could predict how grim the situation could be in the event of a worse economic disaster. The test runs gave the banks in these countries experience on how to handle the situation and enough preparation for the same. The Australian government also has a particularly keen sensitivity to crisis situations. The minister for Financial Services, Bill Cohen recently handed out a paper to the Australian Prudential Regulation Authority that seeks to toughen its powers for crisis management. This concern from the government and funding by the same saved the banks from suffering the fate of the global turmoil. The cooperation between governments and the banks contributed to the outstanding International Standards displayed. Australian banks, however, did not escape entirely from the global crisis since the shares of the banks decreased sharply. The IMF uses a certain to determine the maintenance of international standards by banks which involves looking at balance sheets and market indicators. These show the potential danger that banks risk facing from corporate loan collections. These indicators from the balance sheet showed that the commercial sectors were rigid. The influence when defined as both the debt-to-asset ratio and debt-to-equity ratio, remained stable. This stability failed to be noticed in other developed countries. The profits made ha vastly improved since the late 90s and so did the assets. When the global crisis increased the balance sheets owned by nonfinancial organisations started weakening. Some of these organisations were from Australia and New Zealand. Some indicators, which happen to be market based such as credit default swap spreads, give the indication that creditworthiness risks were of increase from the year 2008 to 2009. These risks could be felt across all developed countries but could be handled. The Contingent Claim Analysis combines information on the balance sheet with prices that have prevalence in the markets. This aims at obtaining visionary measures that foresee risks of defaults. The CCA forecasted that New Zealand and Australian banks’ losses could be as high as 2% of all loans. That would be a better performance than the performance of any other country. This and other criteria used proved that Australian and New Zealand banks make up the strongest international banks. This does not mean that the banks should enjoy the comfort of their strength. According to the IMF the Reserve Bank of New Zealand and Australian Prudential Regulation Authority need to conduct more test runs. These test runs seek to counter checked the difficulty arising from the global crisis. On September 15 2008, a $600 billion implosion changed everything. This happened to the Lehman brothers International Investment banking house. APRA, which had conducted stress testing and planning for over 10 years, could overcome the task. John Laker, the chairman of Australian Prudential Regulation Authority recalls that he did not know how to locate the funding. He had no control of the business. The organisation amassed liquidity as high as 20% higher than the normal 12%. According to John Laker, his role resembled that of a fireman. The job adopted involved prevention. Normally his job involved making sure that the financial institutions identified and managed their risk with caution. This time things became tougher. Everybody had to be attached and be ready. The APRA management commanded the reactivation of the Liquidity team that takes Australian Deposits. The unit’s establishment took place about a year before when the global turmoil started advancing. The team consisted of 12 supervisors on the frontline. The supervisors made contact with their banks before the events that unfolded in September. This regular contact ensured that the supervisors had familiarity with pressure looming over the bank’s funding. The ADI liquidity team coordinated with APRA. This took place by gathering all the intelligence from the banks treasures. This move aimed at identifying the funding pressures encountered by individual banks. The information moved up the chain and became fed to APRA. The APRA also got extra data though the liquidity templates established then. Throughout 2008, the regulator had a clear picture of the funding demands encountered by all banks. Additionally the liquidity the regulator identified the liquidity positions of the banks. The RBA also had intelligence of its own kind. This had details of the markets closed, businesses in operation and the pricing. It also maintained daily contact with the APRA, government and the bank treasures. The freezing of the global financial markets became unpredictable. A virtual freeze affecting funding markets globally occurred and spared no one. The RBA upgraded its liquidity support before the upset in the financial markets. The RBA annual reported that the balances revolving around the exchange settlements consisted of over $750 million. Settlement funds became increased by the central bank in response to the worsening of the market conditions in September. Aggregate balances peaked in October peaked at $11 billion. At that time, the RBA increased the variety of the collateral accepted. This move aimed including securities that backed residential mortgages. The RBA extended the repurchase agreements to 12 months thus giving the banks a chance to hold on to the money for a year. The cash rate underwent a major cut of a 100 basis point on the 7th of October the highest of its kind in 14 years. According to the APRA senior manager, Vincent Lee, the regulator’s original focus aimed at the ADIs exposed to the displacement of the liquidity market. This originated from the size, funding structures and business models. The APRA worked closely with ADIs that relied on the securitisation in order to fund growth and improve earnings. The weekend of October 2008 became the darkest hour for the Australian banking system. On the 11th of that month the prime minister, Kevin Rudd called for a crisis meeting between him and senior ministers. This meeting took place in Canberra to discuss the awful situation marked by the global crisis. During the course of the day, a rumour went around that there could be an enclosure of one of the country’s midtier banks the coming Monday. The day before, the Australian Securities Exchange recorded an 8% slide, the worst stock market fall in a day since 1987. The rumour caused untold damage in the whole of the Australian banking system. A lot of feedback streamed from the RBA and the private sector citing that if the bank did not act quickly enough, the banks would have to put a guarantee. This would come after the closure, and there would be a serious collapse in the confidence of the financial system. This resulted in massive withdrawal from all the banks. This threat to the Australian banking system almost led to the total collapse. Since the bank to be closed down had not been specified, people withdrew their money. It did not matter which bank whether it could be Suncorp, St George, Bendigo or Adelaide people just took out their money. If the guarantee had not been given the collapse would have happened. The banking system in Australia still continues to be strong. The Australian Prudential Regulation Authority acquired more powers to intervene when need be. According to the treasury, the regulating body should take charge before a situation involving a crisis spins out of control. This power should stop foreign banks with branches in Australia from transferring their assets from the country. Calls for another financial system review show the preparedness that the Australian financial system seeks. There are also calls for avoiding finance sector failures which may encourage risk taking behaviours. APRA’s powers may be expanded to the superannuation sector that deals with trillions of dollars. The government through the ministry of financial services recently increased the powers of the APRA. The involvement of the APRA in all financial crisis preparation situations goes on to prove that the Australian financial system wants to be well secure. These preparations show despite the fact that the global turmoil did not affect Australian banks, the sector did not take the situation lightly. The banking system continues to flourish since it did not experience an interruption like other countries. This lack of interruption means that the system did not need a recovery period. In order to avoid future crisis, the taking of stress tests continues to be rampant. The Australian banking system seems to be ahead of the rest of the world. The international standards continue to be maintained giving them a role model image. This thriving trend gives Australian banks recognition from organisations like the IMF. In conclusion, the banking system continues to prosper due to substantial support from the government and massive caution from the system at large. References Anon. (2012) APRA needs a bigger tool kit [Online]. Australia: The Australian Financial Review. Retrieved from http://afr.com/p/opinion/apra_needs_bigger_tool_kit_8FaqZXLqebebrWsbXA61QO [Accessed 18th September 2012]. Anon. (2012) Govt to seek greater powers for APRA [Online]. Australia: Business Spectator. Retrieved from: http://www.businessspectator.com.au/bs.nsf/Article/Government-seeking- greater-powers-for-APRA-Y34NE?OpenDocument&src=tnb [Accessed 17th September 2012]. Katherine Jimenez (2010) How APRA handled the crisis by: [Online]. Australia: The Australian. Retrieved from http://www.theaustralian.com.au/business/how-apra-handled-the-crisis/story- e6frg8zx-1225858552084 [Accessed 17th September 2012]. Patrizia Tumbarello (2010) Australian, New Zealand Banks Remain Sound During Global Crisis [Online]. Australia: IMF Survey Magazine: Countries & Regions. Retrieved from http://www.imf.org/external/pubs/ft/survey/so/2010/car012210a.htm [Accessed 17th September 2012]. Read More