Money
Issue No. 47 - June/ july
Banks don’t deserve share bashing
by Dr David Corkindale and Dr David Corkindale
A major consequence of the liquidity and credit crises stemming from the USA sub-prime mortgage industry excesses and cheap and plentiful credit has been the demise of many well-known investment houses and banks around the world. Bank share prices have plunged.
But why have Australian banks’ share prices on average been marked down more than 50% when this country does not have a sub-prime loan problem and our banks were profitable and well capitalised, even before recent capital raisings?
In my view, the current share prices for Australian banks create some very good long-term buying opportunities on any reasonable outlook for the Australian economy.
Background of collapse
The share price collapse many US and European financiers suffered during 2008 had a number of causes.
Foremost is investor concern that shareholder equity has been destroyed by bad lending, or investing in or holding securitised assets or debt which had become largely worthless.
This concern was not only for “assets”. In the case of American International Group (AIG), one of the USA’s biggest insurers, neither lending nor poor insurance practices led to losses, reportedly of some $US150 billion. These losses derived from a sharp fall in the value of credit “enhancements” AIG provided to lower-quality borrowers, to help them gain higher credit ratings and lower borrowing costs.
A second concern was that even if the losses could be absorbed, could the deposits or other borrowings used to fund these loans or securities be renewed or re-financed? Often this funding came from wholesale or ‘interbank’ money markets at much shorter maturities or rollover terms than the loans or securities themselves. At the same time the wholesale funding sources stopped renewing the funding. Closure of inter-bank markets for funding reached its peak in September 2008 after the collapse of Lehman Brothers, one of the big five US investment banks.
...
