Analysis: Will the 1992 Great Depression repeat itself? Can Australia's Big Four Banks withstand the Great Depression?
Facing the impact of the new crown epidemic on the economy, major Australian banks have put out huge reserves to make up for the rising bad debts and default payments. But the deeper question is, given the uncertain history of Australian banks in dealing with economic recessions in the past, how will they deal with the coming crisis?
How reliable are banks?
Australia’s financial system is really the envy of developed countries. It can always survive global financial crises unscathed, without any need for assistance like other banks. This is a wonderful story for Australian exceptionalists, but it is far from the truth.
In the financial crisis ten years ago, the federal government provided 1200 billion loans to banks. In essence, it is the taxpayer who borrows from abroad so that the bank can fulfill its loan promise and continue to operate. This is not all. Short selling is banned, thereby protecting the decline of financial stock prices. Taxpayers guarantee bank deposits of up to 50, which are done behind the scenes.
Westpac amicably wiped out St George. When its British parent company was in deep trouble, Commonwealth took over the shaky BankWest. Suncorp is locked in a jail for not obtaining government loans, National Australia Bank is also preparing to take action against Suncorp.
Remember the state bank?
The State Bank of Victoria was acquired by CBA in 1990 after a series of scandals in which executives were accused of criminal offences. At about the same time, the State Bank of South Australia went bankrupt. Both were involved in high-risk lending during the boom of the 20s.
However, ANZ and Westpac are the culprits that paralyzed the entire system. After the stock market crash in 1987, Westpac continued to absorb commercial loans. The housing market shrank when interest rates soared to 18%, causing Westpac's 50 billion bad debts to almost deplete 67 billion assets. ANZ faces the same dangerous situation. Prime Minister Paul was under tremendous pressure to prevent the Big Four from becoming two.
Rising bad debts
Banks are the most risky businesses. Huge debts were made up by thin capital. As the interface between borrowers and lenders, banks are critical to the healthy operation of the economy. Therefore, the government will act as the lender of last resort as long as the government sees red flags. This is why after the Western capitalist economy barely recovered from the crash a decade ago, governments all over the world demanded to strengthen financial strength to ensure that they survived another crisis.
This time, the crisis did not come from the financial sector, but was imposed by the virus that brought all production activities to a halt. The longer the time, the greater the impact on the weak links of the financial system.
Over the past ten years, Australian banks have indeed strengthened their strengths in order to make themselves "unquestionably strong", but they have been stumbled along the way because every dollar invested in reserves means damage to their profits and executive dividends. Although banks are accumulating reserves, they also claim how strong the economy is and how safe their loans are. They don't need so much cash to cover bad debts and doubtful debts.
The following chart from the Macquarie Institute can illustrate the problem. From 2010 to last year, every bank reduced the cash it prepared for repaying bad debts. Because the release of cash represents an increase in profits.
source: Macquarie Research
Unfortunately, the opposite is happening.
In addition to the house, the bank puts treasure in the office
After the market crash in 1987 and the economic recession in the 20s, the four major banks chose the security card. No longer have close contacts with secular entrepreneurs, but instead focus on real estate, especially housing loans. Although dull, but profitable. The results are? Australia has some of the most expensive residential houses in the world and tearful household debts that account for 90% of income. As most bankers keenly point out, as long as the unemployment rate is low, this is not a problem, because most people will do everything they can to keep their homes.
Unfortunately, the unemployment rate is about to reach double digits. Goldman Sachs estimates that without the intervention of government unemployment subsidies, the unemployment rate could reach 19.2%. If the owner does not repay the loan, it will put tremendous pressure on the residential market. There are more questions. In addition to residential properties, banks have also invested heavily in commercial properties, subsidizing high-rise buildings, office buildings and retail. Mr. Jin of Westpac recently hinted that commercial real estate might shrink.
The chart also from the Macquarie Research Institute emphasizes that NAB and ANZ are more invested in commercial real estate than the hotel and tourism industries, which were the first to be hit by social distancing and city closures.
Investment in billions of dollars by ANZ and NAB.(Source: Macquarie Research)
Source: Macquarie Research
You can see that NAB has invested 740 billion yuan in commercial real estate. However, as companies lay off employees and the unemployment rate continues to rise until next year, commercial real estate will fall sharply. As more and more people work from home, this will become a long-term trend.
Morgan Stanley's chart demonstrates that the unemployment rate and office vacancy rate are strongly correlated.
Look at the surge in unemployment during the Great Depression in 1992 and its impact on the vacancy rate in Sydney offices. Real estate owners faced a few acres of vacant land and had to reduce the return on investment. Many people went bankrupt, the government was under great pressure, and banks and investors suffered huge losses.
Will history repeat itself?
Note: This article is compiled from an article by Ian Verrender, an ABC media business commentator. For reference and reading, it does not represent the standpoint of this site.
in tip-top condition perfect, excellent
having scraped through
beef up (strength)
chip away at
write down the value