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Too-big-to-fail banks warp the playing field

By Nicholas Gruen - posted Friday, 8 February 2013


The Bank of England calculates the annual too-big-to-fail taxpayer subsidy for the world's 29 biggest banks at $70 billion before the crisis. Today it's around a third to half a trillion (yes, trillion) - coincidentally around the same amount as our four monster banks' collective market cap.

Are we fixing this by busting them up (scale economies are exhausted well before you get to the majors' size) or reducing their complexity? No.

In trying to minimise the chances of future crises the global regulator of banking regulators, the Basel Committee, recommends banks hold buffers of "level one" liquid assets (mainly government bonds) and riskier "level two" assets on which they'll be expected to draw before turning to their lenders of last resort - you and me.

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But not here. Australia's government debt is too low to provide our banks with enough level one assets and our regulators are concerned that they face similarly slim pickings of level two liquid assets - which include MBS. So the RBA will give them a loan - via its new "Committed Liquidity Facility".

Why are there so few MBS in our market? Because enjoying such exorbitant privileges, mortgages that might otherwise be securitised repose blissfully - implicitly guaranteed - on bank balance sheets. What collateral will banks pledge to the RBA to draw on its CLF? Why the same mortgages that could be securing MBS.

So as the RBA ramps up its support for banks with policies that increase moral hazard as they depress demand for MBS, the AOFM's last annual report announced its "increasing focus on the need to encourage a transition towards a … securitisation market that is not reliant on government financial support''.

So much for a level playing field.

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This article was first published in The Age.



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About the Author

Dr Nicholas Gruen is CEO of Lateral Economics and Chairman of Peach Refund Mortgage Broker. He is working on a book entitled Reimagining Economic Reform.

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