Are we creating a liquidity trap

[Financialpanther]

Well are we?

We are dropping the cash rate by unprecedented amounts and are about to bring it down again to soften the recession impact. However with rates dropping by so much and APRA requiring ADI's to hold almost double the liquidity ratio as set out in prudential standards - are we at risk at creating a liquidity trap.

The trap is brought about with a significant drop in the cash rate brought on to allow money to flow in the economy, however the rates are so low that lending money is now not a profitable exercise for ADIs and they become unwilling to lend. The situation means that the government needs to stimulate the economy by trying to get banks to lend - but they are no longer willing. Keating said on lateline that the banks have walked away (whilst it may not be for this reason alone - it is a prevalent factor) and we need to get them lending. The question is - with rates dropping every month by nearly 100bps - is it creating a problem which will exacerbate the recession. If so - why can't the government step in now to prevent the liquidity trap by reducing the minimum liquidity back to normal levels rather than these obscene and unsustainable levels. We get it - we have on of the best banking sectors in the globe right now but it will be dying the death of a thousand cuts if we don't either relax some liquidity strain put on them or not being so aggressive with the rate cuts (whilst the RBA is independant - surely some lobbying may be necessary).

My rant over - but seriously - I can see shortly that Mr Swan and Ms Bishop will start accusing ADIs of being irresponsible and greedy when it is up to the government to step in and relax the situation.

 

[Dry Rot]

Haven't you heard? Mr Rudd wants more regulation and besides Mr Swan wouldn't understand your post.

 

[Lach72]

They'll keep lending...on credit cards at 20%

 

[Fire]

They'll keep lending...on credit cards at 20%

Can the government cap these?

Can the government suddenly declare that the interest rate on cards can not be higher than 7%?

 

[Financialpanther]

Can the government cap these?

Can the government suddenly declare that the interest rate on cards can not be higher than 7%?

More govt intervention in the banking sector will make things worse s hope not

 

[medusala]

The trap is brought about with a significant drop in the cash rate brought on to allow money to flow in the economy, however the rates are so low that lending money is now not a profitable exercise for ADIs and they become unwilling to lend.

Issues like this are unintended consequences of govt interference.

Take the UK govt, they forced banks to pay a 12% return on their investment and then wonder why the banks dont want to lend it out near the Bank of England rate of 1.5%. Of course the banks want to preserve cash and pay this off asap.

What else would you expect?

 

[Womble]

The banks are doing ok as witnessed by the story below, but I agree it's dumb to just keep cutting rates - how many people actually reduce their mortgage payments??? How much of the interest rate cut actually makes it's way into the economy???

Commonwealth Bank of Australia in profit surprise


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George Lekakis
February 03, 2009 12:00am

COMMONWEALTH Bank scrip may rebound this morning after the group last night issued a surprise profit upgrade to the market.
In a statement filed to the ASX after the bank's monthly board meeting in Sydney, CBA chief executive Ralph Norris revealed that the group's interim cash earnings would come in at around $2 billion.
While this guidance is 16 per cent down on the previous first half result, it is more than 20 per cent above analysts' consensus forecasts.
Under ASX rules, all listed companies are required to notify the market as soon as they become aware that near time profit performances may exceed consensus estimates by more than 10 per cent.
CBA directors are believed to have arrived at that conclusion after the sharemarket closed yesterday.
Broking analysts said the disclosure was a positive for CBA amid a tide of grim news in the banking sector.
"The CBA has signalled it will deliver a result well above expectations and that's a positive for shareholders, but we note that there was no commentary on the dividend," said Stewart Oldfield of Baillieu Stockbroking.
"We still believe the banks will experience a very difficult trading environment in the second half."
While the cash result is yet to be finalised, Mr Norris said the CBA's performance had been driven by volume growth in key businesses.
"As customers look for stable financial institutions in these uncertain times, growth in deposit and credit demand has been strong," he said.
"The group remains focused on credit management and cost control."
Bottom line profit for the six months to the end of December - which includes non-cash items such as gains on the carrying value of assets - is expected to exceed $2.5 billion.
That is more than 9 per cent up on the December half in 2007, mainly because of a "post-tax gain of approximately $550 million on the acquisition of Bankwest".

However, the bank indicated that this benefit would be partly offset by a substantial fall in income from its funds management operations.

Mr Norris cautioned that the increasingly challenging environment made the outlook for the company "extremely difficult to predict".

CBA will release its full interim results on February 11.

The bank's scrip closed down 45c to $26.45.

 

[Financialpanther]

The banks are doing ok as witnessed by the story below, but I agree it's dumb to just keep cutting rates - how many people actually reduce their mortgage payments??? How much of the interest rate cut actually makes it's way into the economy???

Commonwealth Bank of Australia in profit surprise


Article from:

• Font size: Decrease Increase
• Email article: Email
• Print article: Print
• Submit comment: Submit comment

George Lekakis
February 03, 2009 12:00am

COMMONWEALTH Bank scrip may rebound this morning after the group last night issued a surprise profit upgrade to the market.
In a statement filed to the ASX after the bank's monthly board meeting in Sydney, CBA chief executive Ralph Norris revealed that the group's interim cash earnings would come in at around $2 billion.
While this guidance is 16 per cent down on the previous first half result, it is more than 20 per cent above analysts' consensus forecasts.
Under ASX rules, all listed companies are required to notify the market as soon as they become aware that near time profit performances may exceed consensus estimates by more than 10 per cent.
CBA directors are believed to have arrived at that conclusion after the sharemarket closed yesterday.
Broking analysts said the disclosure was a positive for CBA amid a tide of grim news in the banking sector.
"The CBA has signalled it will deliver a result well above expectations and that's a positive for shareholders, but we note that there was no commentary on the dividend," said Stewart Oldfield of Baillieu Stockbroking.
"We still believe the banks will experience a very difficult trading environment in the second half."
While the cash result is yet to be finalised, Mr Norris said the CBA's performance had been driven by volume growth in key businesses.
"As customers look for stable financial institutions in these uncertain times, growth in deposit and credit demand has been strong," he said.
"The group remains focused on credit management and cost control."
Bottom line profit for the six months to the end of December - which includes non-cash items such as gains on the carrying value of assets - is expected to exceed $2.5 billion.
That is more than 9 per cent up on the December half in 2007, mainly because of a "post-tax gain of approximately $550 million on the acquisition of Bankwest".

However, the bank indicated that this benefit would be partly offset by a substantial fall in income from its funds management operations.

Mr Norris cautioned that the increasingly challenging environment made the outlook for the company "extremely difficult to predict".

CBA will release its full interim results on February 11.

The bank's scrip closed down 45c to $26.45.

I think the CBA's result is good but not truly indicative of where it is going into the future - the result is for December where the full effects of the rate cuts have not fully been put in. A rate cut will have a lag from when the RBA announce and when the bank will pass that cut on. December results would have the rate cuts from Sep, Oct and Nov factored in and only a couple of days worth of a Dec cut. That said - CBA probably have a large fixed loan portfolio as well which is shielding some of the profit downturn - but no doubt this is sure to change. I would be more worried about the second half of the 09 FY to be honest as the rate cuts (both known and forecast) will have its downward effect in the months Feb through to June. CBA is big enough to shield a fair bit (especially when is starts cutting staff for cost cutting activities) but others I fear may not be as lucky.

 

[morgoth]

Those results are a furphy. Until the banks take the hit on the bad loans that they are currently managing rather than off-loading the numbers count for jack.

The other side FP is that interest rates gets so low that depositers take there money out and start putting it into alternative investments like the stock market, reducing the deposit base and thereby reducing the lending power of the banks.

Personally I hope the low rates do not get into the wider economy as we would be setting ourselves up for a sub-prime type event when rates return to norm (exactly what happened in the US post 9/11).

 

[Qsaint]

besides Mr Swan wouldn't understand your post.

Aint that the truth

 

[Financialpanther]

Those results are a furphy. Until the banks take the hit on the bad loans that they are currently managing rather than off-loading the numbers count for jack.

The other side FP is that interest rates gets so low that depositers take there money out and start putting it into alternative investments like the stock market, reducing the deposit base and thereby reducing the lending power of the banks.

Personally I hope the low rates do not get into the wider economy as we would be setting ourselves up for a sub-prime type event when rates return to norm (exactly what happened in the US post 9/11).

Isn't it interesting - but as much as we say they didn't - terrorism won. I know the point about the deposit base as keeping a retail book is becoming hard given we have people trying to advise that the sharemarket has hit bottom (if you ask me - if you try to pick bottoms you end up with smelly fingers). Retail deposits in Australia has almost reached market saturation and it can't sustain the growth especially when people will need cash. The greater effect of what is happening is the price of funding will continue to go up even though the rates are going down. In the market currently ADI's are taking on borrowings at 200+ over 90day BBSW which is further depressing the NIM of the ADI. It ends up seeing banks less likely to loan funds out as they may borrow funds at 5.00% and lend it out at 5.60% floating (which may happen after today). Lets also consider the fact that the fed is asking governments to spend money on infrastructure so then there is even less money on the market. Securitisation is dead, there is no money - how will the government expect banks to drop their variable rates? Unless of course they are asking for banks to become public servants (I shudder at the thought).

 

[Financialpanther]

Haven't you heard? Mr Rudd wants more regulation and besides Mr Swan wouldn't understand your post.

Woo-hoo I outsmarted Mr Swan....oh wait thats not hard...

 

[TheMase]

in Sydney, CBA chief executive Ralph Norris revealed that the group's interim cash earnings would come in at around $2 billion.

That does not tell anybody anything.

 

[Col Davies]

Well are we?

Finally someone from the Finance Industry that sees all is as their fault.

And yes you are/did

 

[Col Davies]

More govt intervention in the banking sector will make things worse s hope not

Is that because it was working so well in the Subprime market?

 

[Financialpanther]

Finally someone from the Finance Industry that sees all is as their fault.

And yes you are/did

No I mean us the general public - the voters, the politicians and general muppetry like you Muzz. We are ultimatey responsible for what our government does whether they be liberal or labor.

Of course - this whole mess was brought about by a small sector in the globe - shame on you Australia and shame on those who decide that they want more money to buy things they can't afford......shame on you.