Big Four Needs Government Subsidy Against Future Insolvency

By @AringoYenko on

Australia's Big Four - ANZ, Commonwealth, NAB and Westpac - will need "a higher minimum capital requirements for SIBs [Systemically Important Banks], in addition to heightened supervision and a credible resolution framework" as recommended by IMF's Global Financial Stability Review.

This hinted that the Big Four require increased government's subsidy to combat future risk of insolvency.

According to the report, investment in emerging markets had progressed over the past 15 years, being highly globalised at present.

"We examine the sensitivity of flows from various types of global investors to assess whether the new mix of investors has made portfolio flows more or less sensitive to global financial shocks. We also investigate the role of investor herding and domestic macro fundamentals during crises. Moreover, we analyze how the strength of local financial systems affects the sensitivity of local asset prices to global financial shocks," the report states.

IMF found that the likelihood of mixed investors - local and international - makes emerging markets vulnerable to global financial risk. There can be more weak bonds and the boom of foreign investors in local markets poses more risk than advantage. And if the influx of foreign investors continues, emerging markets are opening themselves up to global financial shocks.

"Growing investment from institutional investors that are generally more stable during normal times is welcome, but these investors can pull back more strongly and persistently when facing an extreme shock. While domestic macroeconomic conditions matter, investor herding among global funds continues, and there are few signs of increasing differentiation along macroeconomic fundamentals during crises over the past 15 years. Nonetheless, the progress made by emerging markets toward strengthening their financial systems reduces their financial asset prices' sensitivity to global financial shocks."

While foreign investors definitely augment the local market, local financial institution should be wary of the risk involved.

In hindsight, IMF said that if Australian banks' chance of survival during a global financial crisis is 99 per cent, these banks need "-0.9 to 2.8 percent of risk-weighted assets (RWA) at the end of 2011. If the goal were to achieve a 99.95 percent probability of no default, additional Tier 1 capital ranging from 1.4 to 5.2 percent of RWA would be necessary."

A report from Business Insider deduced that the Big Four might be receiving government's subsidy of at least worth of $5 billion. IMF had quantified the value by saying that the four banks received a subsidy as "$70 billion in the United States, and up to $300 billion in the euro area." Business Insider notes that the Australian economy is about 11 times smaller than the economy of the United States with a lot focused on banking investments.

According to IMF, "excluding the possibility of government support for big banks may be neither credible nor always socially desirable." Hence, "policymakers can enhance capital requirements, and possibly recoup taxpayers' costs from those banks through a financial stability tax."

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