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.