a little note about foreign borrowing by the banks
Foreign Borrowing by Banks Within Australia?s total foreign liabilities, the proportion accounted for by the foreign borrowing of Australian banks has increased. Virtually all this rise took place through the decade of the 1990s. Banks accounted for a little over 20 per cent of Australia?s foreign liabilities in 1990 but, by 2001, this had risen to around 40 per cent. It has not changed much in the past decade (Graph 9).
Graph 9
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Part of this trend was the result of banks adjusting their balance sheets following financial deregulation and the growth of financial markets. These developments gave banks the opportunity to move from deposit funding to various forms of funding through markets, as a way of diversifying funding sources or reducing funding costs (Graph 10).
Graph 10
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The growth of the superannuation industry, following government decisions to promote compulsory superannuation, probably contributed to this trend. Firstly, it meant households became less inclined to hold their savings as bank deposits, and second, the pool of funds created by superannuation increased demand for securities such as bank securities.
Within this trend away from deposits to funding through securities markets, there were also forces that resulted in banks increasing their use of offshore funding. As an example, a substantial proportion ? about 20 per cent ? of superannuation savings flow offshore, mainly into foreign equities. This reduces the pool of savings available domestically to banks and, other things equal, increases the amount of offshore funding banks need to undertake.
It is also an inescapable fact that, with Australia running a current account deficit, some funding for the economy needs to come from offshore. Households, by and large, cannot borrow offshore and the government sector has not had much need for offshore funding. That leaves the corporate and the financial sectors. Of these, the financial sector has a comparative advantage in offshore borrowing, because of the relatively high credit rating of Australian banks, both compared with Australian corporations and, in recent years, with banks in other countries.
Banks in Australia have therefore established a significant role in intermediating the flow of funds from overseas to Australia. Banks in countries where there are surplus savings, such as those in Europe, play a similar role, though in reverse; they channel funds from domestic savers to offshore.
There is a natural tendency to believe that it is riskier for banks to borrow offshore than to lend offshore. Events over the past few years, however, have shown that one activity is not intrinsically more risky than the other. It is a matter of how the risks are managed. In the lead up to the financial crisis, for example, European banks were running very significant risks through their offshore lending, not only in terms of the credit quality of the US assets they were buying, but also in terms of the short-term nature of some of the funding transactions that supported those assets. The US dollar shortages that keep recurring in global money markets are manifestation of those funding risks. These risks were largely unrecognised and, it seems, not very well managed.
The Australian banks have long recognised the risks that come from their business model, and, in my experience, are very focused on understanding those risks and managing them. This contributed to their relatively good performance through the global financial crisis.
