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Interest only loans are Australia’s subprime
Topic Started: 16 Oct 2014, 10:35 AM (11,224 Views)
szokolay
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Good post crosspoint, it proves the point that the Australian property market is abnormal by any historical standard. Interest only loans were unheard of for investment property 20 years ago, in fact you had to put down a substantially higher deposit back then because they are riskier loans. Property investors today seem to have forgotten that, or are so young in the game they are not aware of it? It begs the question, why would banks throw caution to the wind, especially after all the turmoil we have seen in the world's other premier housing markets?

The reason is obvious, they need to make loans at any cost now or else their business model collapses. That and the simple fact that depositors and the pubic stand by to bail them out when the wheels fall off. A great proportion of these dubious loans are packaged into what they now call covered bonds, these are no more than re-badged Residential Mortgage Backed Securities, RMBS. Who is buying all these risky covered bonds? Have a look in your superannuation folder for starters.

Quote:
 

In November 2011, after intense lobbying by the banks, the Australian Government announced they had amended regulations to allow the Australian banks to issue covered bonds, while still ensuring the relative security or priority of deposit holders.

A covered bond is a bond secured by a specific pool of mortgages and this essentially gives holders a ticket near the front of the queue behind depositors, if the bank was to be placed into administration.

http://www.financialkeys.com.au/article/covered-bonds-whats-all-the-fuss-about


They still issue debt called "asset backed securities", but hardly anyone has the stomach for them them now.

Quote:
 

One of the areas of the market that suffered the greatest impact from the crisis was asset‑backed securities, due to the loss of investor confidence in this asset class globally. This resulted in the stock of outstanding Australian asset-backed securities nearly halving, in nominal terms, and declining three-fold relative to GDP since mid 2007.
http://www.rba.gov.au/speeches/2014/sp-ag-150414.html


But covered bonds are not counted as such, even though they have the exact same underlying asset base. It is a blatant bit of financial manipulation but no one involved will mention these facts because they are all making their living off peddling the debt.

Australian Bonds Outstanding: (All bonds)

Year 2013 2007

Banks $445 B $248 B
RMBS $104 B $204 B
Asset-backed securities $122 B $225 B

What share of new mortgages are the banks offloading to the public these days?
Quote:
 

Australia’s big banks raised $125 billion from wholesale markets last financial year, the highest level of borrowing in several years, as lenders move to lock in cheap funding to fight for a bigger slice of the booming mortgage market.
http://www.afr.com/p/business/financial_services/banks_hit_bond_market_for_vPzbtAV3mGrcD5kDIEdkBK


As you can see, the banks have every incentive to make risky loans into the Australian housing bubble because they are offloading the risk as fast as it comes in the front door. All prudence has again been thrown out the window and nothing was learned from the GFC.




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peter fraser
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szokolay
17 Oct 2014, 01:20 AM
As you can see, the banks have every incentive to make risky loans into the Australian housing bubble because they are offloading the risk as fast as it comes in the front door. All prudence has again been thrown out the window and nothing was learned from the GFC.



Not correct, in Australia banks retain the risk. It was the same prior and during the GFC as well.
Edited by peter fraser, 17 Oct 2014, 12:29 PM.
Any expressed market opinion is my own and is not to be taken as financial advice
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Catweasel
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peter fraser
17 Oct 2014, 12:13 PM
Not correct, in Australia banks retain the risk. It was prior and during the GFC as well.
Catweasel actually be a wrong too.

Risk the be with mouse in source the country,

of a wholesale the fund,

particularly in a risk.

Some the risky for a Australia the bank,

which can be covered manhole effectively on hedge.

And a yes,

same as before a GF the C.

Nothing the change.
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Veritas
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peter fraser
17 Oct 2014, 12:13 PM
Not correct, in Australia banks retain the risk. It was the same prior and during the GFC as well.
Do you think the fact that the Federal Government would be forced to come to their aid if they did overextend themselves is lost on the banks?

I don't.

Australian banks are quintessential too big to fails.
Property acquisition as a topic was almost a national obsession. You couldn't even call it speculation as the buyers all presumed the price of property could only go up. That’s why we use the word obsession. Ordinary people were buying properties for their young children who had not even left school assuming they would not be able to afford property of their own when they left college- Klaus Regling on Ireland. Sound familiar?

The evidence of nearly 40 cycles in house prices for 17 OECD economies since 1970 shows that real house prices typically give up about 70 per cent of their rise in the subsequent fall, and that these falls occur slowly.
Morgan Kelly:On the Likely Extent of Falls in Irish House Prices, 2007
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peter fraser
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Veritas
17 Oct 2014, 12:40 PM
Australian banks are quintessential too big to fails.
I hear that all of the time, but I've yet to hear an argument that shows small banks are more stable or better suited to our banking environment.

Can you give me one?

Why was it that during the GFC the larger banks bought up some of the smaller banks that were in difficulty, why wasn't it the other way around?

I can see the advantage in separating the trading bank operations from the retail bank operations, but that won't make the bank smaller. I would have thought that the risk profile was more critical than the size. I'm beginning to think that the people who make these calls are just repeating something that they have heard said but have no idea about.

I'm not having a shot at you, I just want to see a logical argument that shows me why a small bank is more solid than a large bank.
Edited by peter fraser, 17 Oct 2014, 01:02 PM.
Any expressed market opinion is my own and is not to be taken as financial advice
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Veritas
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peter fraser
17 Oct 2014, 01:01 PM
I hear that all of the time, but I've yet to hear an argument that shows small banks are more stable or better suited to our banking environment.

Can you give me one?

Why was it that during the GFC the larger banks bought up some of the smaller banks that were in difficulty, why wasn't it the other way around?

I can see the advantage in separating the trading bank operations from the retail bank operations, but that won't make the bank smaller. I would have thought that the risk profile was more critical than the size. I'm beginning to think that the people who make these calls are just repeating something that they have heard said but have no idea about.

I'm not having a shot at you, I just want to see a logical argument that shows me why a small bank is more solid than a large bank.
That's only part of the argument.

The other, and more important argument, is their size relative to the Australian economy.

30% of the ASX is the big four banks.
Property acquisition as a topic was almost a national obsession. You couldn't even call it speculation as the buyers all presumed the price of property could only go up. That’s why we use the word obsession. Ordinary people were buying properties for their young children who had not even left school assuming they would not be able to afford property of their own when they left college- Klaus Regling on Ireland. Sound familiar?

The evidence of nearly 40 cycles in house prices for 17 OECD economies since 1970 shows that real house prices typically give up about 70 per cent of their rise in the subsequent fall, and that these falls occur slowly.
Morgan Kelly:On the Likely Extent of Falls in Irish House Prices, 2007
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Catweasel
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In spirit of a sandpit,

Catweasel chip in with the cut and paste,

from beloved media,

about a beloved too big a fail:


Too big to fail is likely to prove a costly epithet for the world’s biggest banks as regulators demand they increase holdings of debt securities to cover losses should they collapse.

The shortfall facing lenders from JPMorgan Chase & Co. to HSBC Holdings Plc could be as much as $870 billion, according to estimates from AllianceBernstein Ltd., or as little as $237 billion forecast by Barclays Plc.

The range is so wide because proposals from the Basel-based Financial Stability Board outline various possibilities for the amount lenders need to have available as a portion of risk-weighted assets. With those holdings in excess of $21 trillion at the lenders most directly affected, small changes to assumptions translate into big numbers.

Too Big to Fail

“The direction is clear and it is clear that we are talking about huge amounts,” said Emil Petrov, who heads the capital solutions group at Nomura International Plc in London. “What is less clear is how we get there. Regulatory timelines will stretch far into the future but how quickly will the market demand full compliance?”

The FSB wants to limit the damage the collapse of a major bank would inflict on the world economy by forcing them to hold debt that can be written down to help recapitalize an insolvent lender. For senior bonds to suffer losses under present rules the institution has to enter bankruptcy, a move that would inflict huge damage on the financial system worldwide if it happened to a global bank.


That’s what happened when Lehman Brothers Holdings Inc. collapsed in 2008, prompting governments around the world to step in with taxpayers money to rescue lenders placed at risk in the turmoil that followed.

The FSB, which consists of regulators and central bankers from around the world, will present its draft rules to a G-20 summit in Brisbane, Australia, next month. Its proposals call for 27 of the world’s largest banks to hold loss-absorbing debt and equity equivalent to 16 percent to 20 percent of their risk-weighted assets to take losses in a failure, ensuring investors rather than taxpayers pick up the bill should a lender collapse.

Under the plans, these lenders will also have to meet buffer rules set by the Basel Committee on Banking Supervision, another group of global regulators. These can amount to a further 5 percent of risk-weighted assets, taking banks’ requirements to as much as 25 percent of holdings.

‘Significant Shortfalls’

“There’s a huge potential stream of issuance to be done,” said Steve Hussey, who heads financial institutions research at AllianceBernstein in London. The company manages the equivalent of $473 billion. “If the requirements were implemented today then there would be significant shortfalls and pressure for issuance of all kinds of eligible capital.”

Using the 16 percent figure, the shortfall globally is about $375 billion, according to Hussey. At 20 percent, the requirement would be $870 billion, which he called “extreme.” He expects European lenders to have larger needs than the U.S.

JPMorgan and Wells Fargo & Co., may need to raise $127 billion to reach 18 percent of risk weighted assets, according to a note to clients from Barclays analysts, including Brian Monteleone in New York. HSBC, Europe’s biggest lender, and Spain’s Banco Santander SA and Banco Bilbao Vizcaya Argentaria SA may be the only banks in the region affected, needing about $110 billion between them, according to the report.

BNP Paribas SA and HSBC may have shortfalls of $50 billion to $100 billion each, while Banco Santander will need as much as $90 billion, according to Hussey. Barclays will have to cover a gap of $25 billion to $50 billion, he said.

Thue Sondergaard, an analyst at Scope Ratings in London, estimates the shortfall in Europe alone at about 482 billion euros ($610 billion) if a 25 percent requirement is imposed, he said. His sample includes 41 banks and not just the biggest global lenders that some other estimates are based on.

European banks, including some second-tier lenders, will probably have to issue about 500 billion euros of senior debt through holding companies, if they have them, said Simon McGeary, who heads the new products group at Citigroup Inc. in London. Senior bonds issued through a holding company would be subordinated to the liabilities of an operating unit, he said.

“Banks should be able to replace existing debt with bail-in-able debt,” said Ed Firth, an analyst at Macquarie Group Ltd. in London. “Spreads have come in so much that the pricing differential is likely to be very small. Debt markets are in an extraordinarily generous mood.”

http://www.bloomberg.com/news/2014-10-13/too-big-fail-banks-seen-facing-capital-gap-of-up-to-870-billion.html
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Sydneyite
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Veritas
17 Oct 2014, 01:08 PM
peter fraser
17 Oct 2014, 01:01 PM
I hear that all of the time, but I've yet to hear an argument that shows small banks are more stable or better suited to our banking environment.

Can you give me one?

Why was it that during the GFC the larger banks bought up some of the smaller banks that were in difficulty, why wasn't it the other way around?

I can see the advantage in separating the trading bank operations from the retail bank operations, but that won't make the bank smaller. I would have thought that the risk profile was more critical than the size. I'm beginning to think that the people who make these calls are just repeating something that they have heard said but have no idea about.

I'm not having a shot at you, I just want to see a logical argument that shows me why a small bank is more solid than a large bank.
That's only part of the argument.

The other, and more important argument, is their size relative to the Australian economy.

30% of the ASX is the big four banks.
You have talked about the "size" of the banks relative to the economy, but then stated their market capitlisation as a % of the total market cap of all listed stocks on the ASX. They are two completely different things.

If you want to discuss the "size" of the banks relative to the economy (ie, annual GDP I presume), you need to talk about the % of GDP that represents the activity of the big four banks within our economy. And you can't just use gross profits/turnover, as all the banks make money overseas as well as locally. Ie they actually export services.
For Aussie property bears, "denial", is not just a long river in North Africa.....
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Veritas
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Sydneyite
17 Oct 2014, 01:24 PM
You have talked about the "size" of the banks relative to the economy, but then stated their market capitlisation as a % of the total market cap of all listed stocks on the ASX. They are two completely different things.

If you want to discuss the "size" of the banks relative to the economy (ie, annual GDP I presume), you need to talk about the % of GDP that represents the activity of the big four banks within our economy. And you can't just use gross profits/turnover, as all the banks make money overseas as well as locally. Ie they actually export services.
Contribution to GDP?

Well that's a very interesting question.

How could we measure it? Genuine question.

Recent economic data shows us that housing and real estate are perhaps the only sections of the economy doing well. The banks are central to that given that they lend the money to the builders and the buyers alike. Then there is the multiplier effect of all that economic activity.
Property acquisition as a topic was almost a national obsession. You couldn't even call it speculation as the buyers all presumed the price of property could only go up. That’s why we use the word obsession. Ordinary people were buying properties for their young children who had not even left school assuming they would not be able to afford property of their own when they left college- Klaus Regling on Ireland. Sound familiar?

The evidence of nearly 40 cycles in house prices for 17 OECD economies since 1970 shows that real house prices typically give up about 70 per cent of their rise in the subsequent fall, and that these falls occur slowly.
Morgan Kelly:On the Likely Extent of Falls in Irish House Prices, 2007
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Joxer
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Just so you know...

Australian banks are worth more than US banks with 14x the customers...

Australian banks, serving 24 million people... are worth more than Japanese banks serving 130 million in the 3rd largest economy in the world.

Go figure...

For example... The commonwealth banks, ANZ, NAB and Westpac, INDIVIDUALLY, take your pick, any of them are worth more than Goldman Sachs...

I mean, the commonwealth bank is worth more than Lloyds... so's westpac...

Hell, probably whats MOST disturbing... Wells Fargo & co. the LARGEST BANK IN THE WORLD, Working in an economy with population of 320, 000, 000 somehow is only worth double the commonwealth bank which works in an economy with 23, 000, 000....

How.... Whats wrong with those numbers...

Somehow having 14 houses in the US is worth less than having 1 house in Australia.

Just something to think about to anyone who thinks Australia is 'balanced'

Dont we have something like 60-70% Of all our economy tied up in housing now? lol

Most places only have around 20-30%

Thats going to end GREAT

http://www.relbanks.com/worlds-top-banks/market-cap

Anyone who doesn't think Australia is lined up for a collapse of titanic proportions and thinks getting more people to dive into the housing with more grants more bonuses more tax exemptions is a good thing... well quite frankly... they are mentally retarded.
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