Bank and government balance sheets changing

With a mastery of understatement, Reserve Bank governor Glenn Stevens yesterday observed at a business lunch that "the balance sheets of governments might well be expected to expand a good deal" - only hours after the US government capitulated and agreed to stump up US$85 billion in funding to failed insurer American International Group. The US Treasury announced a revised and expanded borrowing program to cater to this in recent hours.

While all sorts of theories circulate over where the crisis will strike next (the prospects of the insolvency of the US Federal Deposit Insurance Corporation was one topic being debated overnight), one theme of Stevens' speech was the probable shift in the nature of bank balance sheets over the next decade.

His main point is that "there is a good chance that households will for some time seek to contain and consolidate their debt, grow their consumption spending at a pace closer to income, and perhaps look to save more of their current income than in the recent past.

"It is possible that we are witnessing the early part of a new phase where the household spending and borrowing dynamic is different from the past decade and a half."

Growth in demand for credit for housing is now under 10 per cent and there's even been a slight fall in demand for other forms of consumer credit this year.

Stevens' remark about governments expanding their balance sheets was as much about borrowing to fund backlogs in infrastructure investment, and to replace the now hard-to-source private funding of motorways and utilities as it was about the immediate fact of repeated Fed bailouts.