Australia’s Resilience During the GFC
Renée A. Fry
The nature of the shock Australia’sResilience During the GFC
Export markets
Regulation and banking Renée A. Fry
Bank guarantee CAMA, The Australian National University RBA
Stimulus package October 30, 2009
Longer term issues
Conclusion Outline
Australia’s Resilience During the GFC Renée A. Fry Nature of the shock facing Australia
The nature of the shock Factors moderating the shock Export Resilience of export markets markets The banking system and regulatory structure Regulation and banking Bank deposit guarantee
Bank Response of the Reserve Bank of Australia guarantee Stimulus package RBA
Stimulus Longer term issues package
Longer term Conclusion issues
Conclusion Real GDP growth
Australia’s Resilience During the GFC
Renée A. Fry
The nature of the shock
Export markets
Regulation and banking
Bank guarantee
RBA
Stimulus package
Longer term issues
Conclusion Unemployment rate
Australia’s Resilience During the GFC
Renée A. Fry
The nature of the shock
Export markets
Regulation and banking
Bank guarantee
RBA
Stimulus package
Longer term issues
Conclusion Unemployment rate
Australia’s Resilience During the GFC
Renée A. Fry
The nature of the shock 5.7 percent at the moment (down from 5.8% in the Export previous quarter) markets Regulation IMF forecast published in June of 2009 of 7.9% and banking
Bank guarantee Treasury forecast published in June of 2009 of 8.25% by RBA mid 2010 Stimulus package
Longer term issues
Conclusion The shock
Australia’s Resilience During the GFC
Renée A. Fry The shock facing Australia was very di¤erent to that The nature of facing the rest of the world the shock
Export markets The shock was not sourced in our own …nancial sector
Regulation and banking The shock was an external shock from the US and Bank elsewhere guarantee RBA a¤ecting our con…dence Stimulus package a¤ecting our …nancial sector Longer term issues
Conclusion Con…dence
Australia’s Resilience During the GFC
Renée A. Fry
The nature of the shock
Export markets
Regulation and banking
Bank guarantee
RBA
Stimulus package
Longer term issues
Conclusion Equity markets
Australia’s Resilience During the GFC
Renée A. Fry
The nature of the shock
Export markets
Regulation and banking
Bank guarantee
RBA
Stimulus package
Longer term issues
Conclusion Resilience of export markets
Australia’s Resilience During the As the crisis hit, Australia was in the midst of an extended GFC commodities boom Renée A. Fry
The nature of the shock
Export markets
Regulation and banking
Bank guarantee
RBA
Stimulus package
Longer term issues
Conclusion Resilience of export markets
Australia’s Resilience During the GFC
Renée A. Fry
The nature of the shock
Export markets
Regulation and banking
Bank guarantee
RBA
Stimulus package
Longer term issues
Conclusion Resilience of export markets
Australia’s Resilience During the GFC
Renée A. Fry
The nature of the shock
Export markets
Regulation and banking
Bank guarantee
RBA
Stimulus package
Longer term issues
Conclusion Resilience of export markets
Australia’s Resilience During the GFC
Renée A. Fry
The nature of the shock
Export markets
Regulation and banking
Bank guarantee
RBA
Stimulus package
Longer term issues
Conclusion The regulatory structure
Australia’s Resilience During the GFC
Renée A. Fry
The nature of Council of Regulators the shock
Export The Reserve Bank of Australia markets
Regulation The Australian Prudential Regulatory Authority and banking Bank The Treasury guarantee RBA The Australian Securities and Investment Commission Stimulus package
Longer term issues
Conclusion The regulatory structure
Australia’s Resilience During the GFC
Renée A. Fry Council of Regulators The nature of the shock An informal council with no power as a group Export markets
Regulation Very clearly de…ned role of each of the parties and banking
Bank No room for regulatory arbitrage guarantee RBA APRA particularly conservative Stimulus package
Longer term issues
Conclusion The four pillars policy
Australia’s Resilience During the GFC Renée A. Fry 4 largest banks in Australia are prohibited from taking
The nature of each other over the shock
Export 1990 policy initial version 6 pillars under Paul Keating markets 1997 Wallis inquiry recommended dismantling the policy Regulation The treasurer changed the policy to a 4 pillar policy and banking
Bank guarantee Aim to avoid reduction in competition by merger or take RBA over of each other Stimulus package banks argue international competitiveness is limited
Longer term doesn’tmean the big four can’ttake over small banks issues
Conclusion The four pillars policy
Australia’s Resilience During the GFC
Renée A. Fry
The nature of the shock Structure of four pillars made space for banks to be Export pro…table from lending to the domestic household sector markets Regulation Small number of entities to bene…t from a lack of and banking competition Bank guarantee Large enough entities to still compete with each other RBA
Stimulus package
Longer term issues
Conclusion The Banks
Australia’s Resilience During the GFC Renée A. Fry All 4 major banks AA rated by Standard & Poors The nature of the shock Banks 13.5% after tax return on equity from January -
Export June 2009 markets although this is down by 14% from the previous years Regulation and banking reduction in pro…ts due to increased provisioning Bank guarantee Higher interest rates than most economies meant less need RBA to search for yield Stimulus package Only 5% of the income from banks from trading Longer term issues
Conclusion The Banks
Australia’s Resilience During the GFC Little exposure to CDOs and MBS Renée A. Fry Lending standards are generally high and prudential
The nature of supervision conservative the shock
Export Credit assessments of third pary originators stringent markets
Regulation APRA introduced higher risk weights on loans with low and banking documentation Bank guarantee Borrowers cannot walk away from their debt providing RBA incentives to repay early Stimulus package No tax deductibility of mortgage interest payments Longer term issues provides incentive to repay early Conclusion (see Bloxham and Kent 2009) The Banks
Australia’s Resilience During the GFC Lending is generally funded by o¤shore borrowing by the Renée A. Fry banks The nature of the shock Access to this funding at the height of the global crisis Export markets created problems for Australia
Regulation and banking September-October, 2008 Bank deterioration in global money markets guarantee di¢ cult for authorized deposit taking institutions (ADIs) to RBA manage their liquidity Stimulus package RBA expanded domestic market facilities to alleviate
Longer term included increasing swap facilities in US dollar short term issues funding markets Conclusion The bank deposit guarantee
Australia’s Resilience During the GFC
Renée A. Fry
The nature of the shock October 12, 2008 the government announced Export markets a guarantee all deposits and wholesale funding ADIs Regulation and banking aim to facilitate access to funding Bank guarantee was unlimited guarantee
RBA
Stimulus package
Longer term issues
Conclusion The bank deposit guarantee
Australia’s Resilience During the GFC
Renée A. Fry Created substantial distortions in …nancial markets The nature of the shock institutions not subject to the guarantee were hit hard hit Export markets created instability in other sectors of the …nancial markets Regulation and banking some non-guaranteed institutions even stopped allowing Bank withdrawals guarantee
RBA those a¤ected still do not have access to their money
Stimulus package Australia almost had it’sown …nancial market crisis
Longer term issues
Conclusion The bank deposit guarantee
Australia’s Resilience During the GFC
Renée A. Fry
The nature of the shock
Export markets
Regulation and banking
Bank guarantee
RBA
Stimulus package
Longer term issues
Conclusion The bank deposit guarantee
Australia’s Resilience During the GFC
Renée A. Fry Amendments to the guarantee to avert a …nancial crisis in The nature of the shock Australia Export markets On 24 October 2008, Regulation and banking a threshold of $1 million Bank guarantee over this amount, a fee is charged to receive the bene…ts
RBA of the deposit guarantee
Stimulus package foreign bank branches in Australia also covered
Longer term issues
Conclusion Interest rates (nominal)
Australia’s Resilience During the GFC
Renée A. Fry
The nature of the shock
Export markets
Regulation and banking
Bank guarantee
RBA
Stimulus package
Longer term issues
Conclusion Interest rates
Australia’s Resilience During the GFC
Renée A. Fry Prior to the crisis cash rate 7.25% The nature of the shock Reached the emergency rate of a low of 3% in 4 dramatic Export markets and 2 conventional moves Regulation and banking High enough interest rates prior to crisis to not approach Bank guarantee the zero bound when cutting rates
RBA The …rst developed economy to raise interest rates Stimulus package following the crisis by 0.25 basis points in October 2009 Longer term issues
Conclusion The stimulus package
Australia’s Resilience During the GFC Australia has a long history of surpluses so was in a good Renée A. Fry position prior to the crisis The nature of the shock Stimulus package 3.9% of GDP (42.4 billion dollars) Export markets Compared to an OECD average of 2% of GDP Regulation and banking of OECD countries only the US (5.6%) and Korea (4.9%)
Bank are greater guarantee RBA Treasury estimated that the economy would contract 1.3% Stimulus without the package package
Longer term there is discussion that this …gure will be revised issues actual growth 0.6% Conclusion The stimulus package
Australia’s Resilience During the GFC Measures Renée A. Fry Short term The nature of the shock immediate transfer payments of $900 to tax payers earning Export less than $100,000 markets Regulation Long term and banking Bank Infrastructure and investment guarantee Investment incentives RBA Education Stimulus package Weight more on increasing government expenditure than Longer term issues reducing taxes Conclusion Longer term issues
Australia’s Resilience During the GFC Renée A. Fry Much criticism that the stimulus package is too big and should be below the average of the global stimulus given The nature of the shock initial conditions Export markets Problem is that the size of the package is much larger Regulation and banking than the average of the rest of the world (3.9% of GDP Bank v’saverage of 2% of GDP)) guarantee
RBA crowding out of export markets
Stimulus appreciation of the Australian dollar package export markets and jobs in export makets likely to be Longer term a¤ected in the longer term issues
Conclusion Longer term issues
Australia’s Resilience During the GFC
Renée A. Fry
The nature of the shock
Export markets
Regulation and banking
Bank guarantee
RBA
Stimulus package
Longer term issues
Conclusion Longer term issues
Australia’s Resilience During the GFC
Renée A. Fry
The nature of Much criticism that the Government directed stimulus the shock expenditure not necessarily focussed in the right areas for Export markets long term growth Regulation Business Council of Australia calling for ‘better and banking expenditure’on infrastructure and fear that capacity Bank guarantee constraints are to be met again
RBA
Stimulus Housing market extremely strong still package
Longer term issues
Conclusion Conclusion
Australia’s Resilience During the GFC Renée A. Fry The shock facing Australian was very di¤erent to the one facing the rest of the world The nature of the shock
Export Main factors in Australia averting a crisis were markets export resilience Regulation and banking strong regulatory structure Bank strong initial conditions guarantee RBA Possibly too early to comment on the true success of Stimulus package Australia through this period Longer term some longer term issues emerging issues
Conclusion References
Australia’s Resilience During the GFC Renée A. Fry Bloxhsm, P. and Kent, C. (2009), “Household The nature of Indebtedness”, The Australian Economic Review, 42(3), the shock 327-39 Export markets OECD (2009), “Strategies for aligning stimulus measures Regulation and banking with long term growth”, manuscript, OECD Bank guarantee The Treasury (2009), Fiscal Stimulus Packages announced RBA 2008 and 2009 - 5/02/2009, submission Tabled at the Stimulus Parliamentary Inquiry into the Nation Building and Jobs package
Longer term Plan. issues
Conclusion