’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 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 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 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 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