What could cause our banks to go belly up
The Australian 8:12am November 17, 2016
Robert Gottliebsen
The banking regulator, the Australian Prudential Regulation Authority (APRA), is conducting one of the most important stress tests ever required of Australian banks.
Normal stress tests in Australia and around the world ask banks to test their systems, assets etc on a series of events — say a doubling of unemployment or a 40 per cent fall in house prices.
But this time the banks are being asked to tell APRA what is required for them to fail — that is asking what events would see one of the big banks plus the smaller ones fall over.
I believe the answers are rolling into APRA now and, unfortunately, I don’t have the details of exactly what percentage fall in dwelling prices or what kind of rise in the unemployment rate would causes banks to fall over.
But I do know that two surprising events that have bobbed up in the test results and of one event that at least some banks forgot to include in their stress test.
So, today I will write about events that banks are really scared of and tomorrow I will write about why APRA should consider sending some of the stress tests back to the banks for further work.
The first event that banks are really scared of is some catastrophic failure of the internet or computer systems potentially brought about by an external attack.
The banks have all sorts of protection procedures and backups but what if a nation or a group of hackers found a way to destroy the system? The days when banks had paper backups have long since gone.
Last century we worried about a nation sending troops and bombers to raid Australia. We still prepare for that (as we should) but the stress test shows that a really good way to “soften up” Australia would be to destroy our banking system.
Some of the banks appear to have mentioned a really serious set of terror attacks on the nation as part of their stress test.
The second stress test failure that appeared in the documents of most banks was a substantial collapse in the Australian economy.
Some of the banks appear to be most concerned about a collapse in the commercial property market rather than the housing market. And that makes sense because in the 1990s ANZ Bank and Westpac were on their knees as a result of commercial property losses.
Indeed, the late Kerry Packer attempted to take control of Westpac at that time. One of the sad parts about Australian banking is that few executives of the big four banks were around when these events took place.
In terms of a break down in the Australian economy in the current era, the most likely cause would be China pulling the plug.
If they did that in 2016, China would stop sending tourists which would send that industry into a deep spiral. They would take a similar stance with education. They would not take our iron ore or coal and walk away from all apartment contracts. I should emphasise that this is not a forecast but a stress test to reveal weakness.
Australia would be in a deep recession if not a depression. James Packer would be in no position to bid for a bank because his Crown operation would have no Chinese gamblers.
As I thought about the surprising results of the bank stress tests, a chilling thought went down the spine. The latest reports from the US say that Donald Trump is planning to build up America’s Asian defence strength to contain China. At this stage, I emphasise, we don’t really know want Trump is going to do in defence except that he will try and do a deal with Russia.
But if the latest speculation is right, then we could be involved in the build-up, much to the annoyance of China. They might have a go at our banking computer system but they would almost certainly look to teach us a lesson by taking action against our economy.
The worst thing that can happen to Australia is for our major trading partner (China) and our military protector (the US) to fall out.
The banking stress rest shows that we will need to be very alert in that space. Tomorrow, what the banks have forgotten in their stress tests.