Laker: Euro-crisis has effectively closed some long-term debt markets

David Walker
APRA chairman John Laker has confirmed Australian banks could face a major challenge to fill a mid-2012 funding hole if the Euro-crisis keeps on disrupting markets.

In comments on Friday, made available yesterday, he bluntly declared banks did not want to issue long-term unsecured debt in international markets right now because they would be seen as desperate.

Laker's comments give the clearest public indication yet of authorities' concern about the major banks' abilities to continue funding Australia's borrowing needs.

They come in a month when derivatives markets have been pointing to severe market disruption and Australian bank chiefs have been stressing their lack of any need for funding in the rest of 2011.

In evidence to the Senate Economics Committee on Friday, the Australian Prudential Regulation Authority chief said that global markets for unsecured longer term debt were regarded as "effectively closed".

"Spreads are sufficiently wide that no bank wishes to issue unsecured debt for fear of being perceived as desperate for funds," he said.

If the disruption in unsecured long-term debt markets continued well into 2012, he said, "it will start to coincide with wholesale debt maturities."

Laker said banks would then face the task of raising funds "in markets likely to be crowded by sovereigns and offshore banks."

To help ease any funding pressure, the major banks were preparing to use two techniques. They could tap the covered bond market, due to open soon, and in which APRA has confirmed issuance will be allowed even before a new prudential standard on the bonds is finalised. And they could pursue "funding securitisations".

Banking Day reported earlier this month that Australian bank activity in wholesale debt markets has fallen sharply over recent months. Bank leaders have been stressing how little they will need from the market over the rest of 2011.

But, as Laker has confirmed, banks will need much more in 2012. Banking Day's rough calculations, based on APRA data, suggest A$120 billion of long-term debt might need to be refinanced in the coming 12 months, most of it in 2012.

In a further pointer to disrupted markets, the price of Australian corporate CDS (collateralised debt securities - put crudely, a form of insurance on bank debt) for longer term debt has soared above 200 basis points in recent weeks.

As authorities have done for several months now, Laker stressed that the Australian banking system was "well placed to deal with the current market turbulence".

He pointed to strong bank profits, a gradual decline in bad debts, high Tier One capital ratios, and a lack of exposure to the most troubled European financial systems (Portugal, Italy, Ireland, Greece and Spain).

And, he said, banks were well aware of how global market problems could affect them.

Short-term markets "remain open and accessible to Australian banks", he noted. The local majors even seemed to have attained "safe-haven status".

Since the global financial crisis, Australian banks have reduced their reliance on short-term funding. They now have a "substantially more robust funding profile".

The banks also have "unused self-securitisations" they can use in repurchase transactions with the Reserve Bank of Australia, he said.

The result was that banks "could survive a period of months without access to global term debt markets, provided short-term and domestic markets continue to operate relatively normally."