So all AUD loans (including mortgages) create AUD deposits. Therefore all AUD loans are fully funded day 1.
And the AUD deposits never leave the Australian banking system (outside of notes and coins in the wallets of travellers). This is because any foreign transaction undertaken by Australians requires the AUD to be sold in the FX market. And for every FX buyer there is a seller. So the AUD always finds itself back in the Australian banking system (albeit classified as foreign liabilities). ***
So banks (in aggregate) are fully funded well after the loan created the deposit.
So why Issue Bonds? When a bank issues a domestic bond, zero new funds are raised for the banking system. Because in order to settle the bond, buyers need an AUD bank account with the required funds. That is, the money is already in the banking system when the bank issues the bond.
So what is really happening is what I like to call “liability management”. Bond issuance does nothing more than alter the term structure of bank liabilities. Total liabilities (deposits / bonds etc) are the same after bond issuance, but the composition is different. It is no different than someone with a 100% variable mortgage contacting their bank and asking the loan to be restructured 50% fixed 50% variable. You have no new money from the transaction, but you have altered the structure of your liabilities.
Bank do this for several reasons. But then main reasons include; - APRA encourages banks to seek “term” for their liabilities to try and limit short term inter-bank liquidity issues (as opposed to the banking system which is always funded) - Banks sensibly try to match asset and liability duration - Price - particularly if the bank has a view that cash rates on average will be higher than the long term rate secured
So why access overseas markets?
Australia’s capital markets are far less developed compared to other developed markets. The market for +5 year bank issuance is thin, and therefore pricing is inconsistent and the market is not deep. By issuing into the US / Euro / Yen markets, banks can secure longer term duration at a very low cost.
But when the banks issue USD/EURO/YEN denominated bonds, no domestic funding is raised for AUD banks. All Australian based loans are in AUD, so holding USD is pretty meaningless. So the mechanics of a foreign bond issue are as follows.
Aussie bank selects a foreign bank as settlement agent (say Wells Fargo) 1. Bank issue USD Bond (say US$500m) - sold by the joint lead managers, which would probably include Wells Fargo. 2. On settlement the Aust bank has a US$500M liability and US$500M cash held on deposit with Wells Fargo 3. Aust bank then sells US$500m and buys (say) A$700m in FX market (consequently pushing up AUD) - they will simultaneously enter into a forward FX rate agreement with Wells fargo to receive USD on the same say of bond maturity. This effectively hedges the banks liability against adverse FX movements. 4. The A$700m acquired in the FX market already exists in Australian deposits accounts, so the net change in Australian bank funding from this transaction is ZERO.
Conclusion Technically banks are encouraged to access term for their liabilities due to regulatory and commercial considerations. But the idea that Australian banks “source funding” from either the domestic or foreign capital markets is highly misleading.
And in the event there is some type of credit event where offshore markets were no longer willing to re-finaince existing bonds, it will have no impact on the banks ability to extend credit in the local market (as the loan creates the deposit). BUT it will have a major negative impact on the currency as our banks will be forced to sell AUD and buy USD so as to settle the maturing bonds (this ignore the possible CB response of putting in place temporary swap lines).
I hope this helps.
*** yes I know I can contact a foreign bank and ask them to hold my AUD deposit - but if I were to do this, the foreign bank simply places the AUD deposit back with an Australian bank (since this is the most efficient method to hedge currency risk). So even in this rare case, the AUD still ends up in the Australian banking system.
So in essence my simplified version is correct. b_b has given a much more detailed picture but in essence, the local market for our banks bonds is a bit thin, so they go to overseas markets for the balance.
We both agree there is no capital flight issue to be had but the buying and selling of AUD to buy the bonds does cause the AUD to fluctuate in value.
The only difference of opinion I have with b_b is in regards to a credit freeze. Loans create deposits but the money on the first loan has been taken and spent, they need to keep lending to pay the clip. Banks pay out a healthy dividend then go to the market and sell bonds and hybrids to raise cash. If the lending stops, the banks are in trouble. RBA will provide a backstop, a prolonged event is a wildcard result.
There are some people who seem angry and continuously look for conflict. Walk away, the battle they are fighting isn't with you, it's with themselves.
The first lesson of economics is scarcity: There is not enough of anything to satisfy all who want it. The first lesson of politics is to disregard the first lesson of economics. ~ Thomas Sowell.
Who was the fool, who the wise man, who the beggar or the Emperor? Whether rich or poor, all are equal in death.
We both agree there is no capital flight issue to be had but the buying and selling of AUD to buy the bonds does cause the AUD to fluctuate in value.
Previously you said this -
Quote:
We would suffer a credit freeze if our banks were frozen out of foreign markets, there is not enough willingness/supply of local funds to support them, that is why they go seek overseas funding
So why do you think it would cause a credit freeze if there is no capital flight and you accept that our banks create the deposits when they lend? Money that is spent isn't lost to the banking system, it just changes hands.
So why do you think it would cause a credit freeze if there is no capital flight and you accept that our banks create the deposits when they lend? Money that is spent isn't lost to the banking system, it just changes hands.
If there was a credit freeze there would most likely be a sharp drop in borrowings. Our banks survive on people borrowing.
Other posters rattle on about capital flight, I have always maintained capital stays here. It is the AUD value that rises and falls on its lack of, or gaining of, popularity.
The money is lost, it is clipped from person to person on its travels. That's why banks are always rolling over debts and borrowing more. It's not a zero sum game, it can't be
There are some people who seem angry and continuously look for conflict. Walk away, the battle they are fighting isn't with you, it's with themselves.
The first lesson of economics is scarcity: There is not enough of anything to satisfy all who want it. The first lesson of politics is to disregard the first lesson of economics. ~ Thomas Sowell.
Who was the fool, who the wise man, who the beggar or the Emperor? Whether rich or poor, all are equal in death.
If there was a credit freeze there would most likely be a sharp drop in borrowings. Our banks survive on people borrowing.
Other posters rattle on about capital flight, I have always maintained capital stays here. It is the AUD value that rises and falls on its lack of, or gaining of, popularity.
The money is lost, it is clipped from person to person on its travels. That's why banks are always rolling over debts and borrowing more. It's not a zero sum game, it can't be
It's not clipped. If I buy a car from you for $10K then when the transaction has completed I have your car and you have my $10K - no change at all, it's just changed hands.
I've worked in a bank during a recession - they survive just fine. Profit may be down a bit, but that's all. People don't stop borrowing in a recession.
It's not clipped. If I buy a car from you for $10K then when the transaction has completed I have your car and you have my $10K - no change at all, it's just changed hands.
I've worked in a bank during a recession - they survive just fine. Profit may be down a bit, but that's all. People don't stop borrowing in a recession.
Depends on what I then do with the $10K
There are some people who seem angry and continuously look for conflict. Walk away, the battle they are fighting isn't with you, it's with themselves.
The first lesson of economics is scarcity: There is not enough of anything to satisfy all who want it. The first lesson of politics is to disregard the first lesson of economics. ~ Thomas Sowell.
Who was the fool, who the wise man, who the beggar or the Emperor? Whether rich or poor, all are equal in death.
You can only spend it, when it will end up in someone else's bank account.
That's the concept your failing to grasp. it does not always end up in the bank.
There are some people who seem angry and continuously look for conflict. Walk away, the battle they are fighting isn't with you, it's with themselves.
The first lesson of economics is scarcity: There is not enough of anything to satisfy all who want it. The first lesson of politics is to disregard the first lesson of economics. ~ Thomas Sowell.
Who was the fool, who the wise man, who the beggar or the Emperor? Whether rich or poor, all are equal in death.
That's the concept your failing to grasp. it does not always end up in the bank.
Cash or in the bank it's still in Oz. We hold about 5% of our money in cash. You would have to burn it to have it lost to the system.
If you go to the café and buy a coffee for $4 then you transfer $4 from your pocket or card to the café owners pocket or bank account. Nothing changes to the vaue in the system, it just changes owner.
Edit - if the money is used to repay a debt it's lost to the banking system, as it is when it's used to pay tax, but the government also creates money when it spends, and it does spend.
Australian Property Forum is an economics and finance forum dedicated to discussion of Australian and global real estate markets and macroeconomics, including house prices, housing affordability, and the likelihood of a property crash. Is there an Australian housing bubble? Will house prices crash, boom or stagnate? Is the Australian property market a pyramid scheme or Ponzi scheme? Can house prices really rise forever? These are the questions we address on Australian Property Forum, the premier real estate site for property bears, bulls, investors, and speculators. Members may also discuss matters related to finance, modern monetary theory (MMT), debt deflation, cryptocurrencies like Bitcoin Ethereum and Ripple, property investing, landlords, tenants, debt consolidation, reverse home equity loans, the housing shortage, negative gearing, capital gains tax, land tax and macro prudential regulation.
Forum Rules:
The main forum may be used to discuss property, politics, economics and finance, precious metals, crypto currency, debt management, generational divides, climate change, sustainability, alternative energy, environmental topics, human rights or social justice issues, and other topics on a case by case basis. Topics unsuitable for the main forum may be discussed in the lounge. You agree you won't use this forum to post material that is illegal, private, defamatory, pornographic, excessively abusive or profane, threatening, or invasive of another forum member's privacy. Don't post NSFW content. Racist or ethnic slurs and homophobic comments aren't tolerated. Accusing forum members of serious crimes is not permitted. Accusations, attacks, abuse or threats, litigious or otherwise, directed against the forum or forum administrators aren't tolerated and will result in immediate suspension of your account for a number of days depending on the severity of the attack. No spamming or advertising in the main forum. Spamming includes repeating the same message over and over again within a short period of time. Don't post ALL CAPS thread titles. The Advertising and Promotion Subforum may be used to promote your Australian property related business or service. Active members of the forum who contribute regularly to main forum discussions may also include a link to their product or service in their signature block. Members are limited to one actively posting account each. A secondary account may be used solely for the purpose of maintaining a blog as long as that account no longer posts in threads. Any member who believes another member has violated these rules may report the offending post using the report button.
Australian Property Forum complies with ASIC Regulatory Guide 162 regarding Internet Discussion Sites. Australian Property Forum is not a provider of financial advice. Australian Property Forum does not in any way endorse the views and opinions of its members, nor does it vouch for for the accuracy or authenticity of their posts. It is not permitted for any Australian Property Forum member to post in the role of a licensed financial advisor or to post as the representative of a financial advisor. It is not permitted for Australian Property Forum members to ask for or offer specific buy, sell or hold recommendations on particular stocks, as a response to a request of this nature may be considered the provision of financial advice.
Views expressed on this forum are not representative of the forum owners. The forum owners are not liable or responsible for comments posted. Information posted does not constitute financial or legal advice. The forum owners accept no liability for information posted, nor for consequences of actions taken on the basis of that information. By visiting or using this forum, members and guests agree to be bound by the Zetaboards Terms of Use.
This site may contain copyright material (i.e. attributed snippets from online news reports), the use of which has not always been specifically authorized by the copyright owner. Such content is posted to advance understanding of environmental, political, human rights, economic, democratic, scientific, and social justice issues. This constitutes 'fair use' of such copyright material as provided for in section 107 of US Copyright Law. In accordance with Title 17 U.S.C. Section 107, the material on this site is distributed for research and educational purposes only. If you wish to use this material for purposes that go beyond 'fair use', you must obtain permission from the copyright owner. Such material is credited to the true owner or licensee. We will remove from the forum any such material upon the request of the owners of the copyright of said material, as we claim no credit for such material.
Privacy Policy: Australian Property Forum uses third party advertising companies to serve ads when you visit our site. These third party advertising companies may collect and use information about your visits to Australian Property Forum as well as other web sites in order to provide advertisements about goods and services of interest to you. If you would like more information about this practice and to know your choices about not having this information used by these companies, click here: Google Advertising Privacy FAQ
Australian Property Forum is hosted by Zetaboards. Please refer also to the Zetaboards Privacy Policy