Rba Warns Of Credit Rations

The Age

Thursday March 6, 2008

Marc Moncrief

BANKS are cutting back lending, even at higher interest rates, and the Reserve Bank has warned the slowdown could get worse.

RBA assistant governor Guy Debelle told debt market boffins in Sydney that unstable credit markets could force banks to wind back the amount of credit they were willing to offer, rather than simply raising the price at which they offer it. As if to punctuate the point, Macquarie Group announced it would do just that.

Macquarie issued a statement announcing its subsidiary, Macquarie Securitisation, would "wind back its Australian residential mortgage origination services for both retail and wholesale customers". It blamed a "significant increase in the cost of funding mortgages".

Peter Maher, the head of Macquarie's banking and financial services group, said in the statement that lending would continue "although it will be at much reduced volumes".

Dr Debelle warned that banks had so far been able to continue providing loans by borrowing on global credit markets even though these had been hit by the failure of billions of dollars worth of loans related to the US "subprime" mortgage crisis. He said if the pace of issuing bonds on credit markets slowed it could force banks to ration credit.

"Because the banks have been able to maintain their pre-crisis pace . . . they have not curtailed their provision of credit, beyond charging a higher price," Dr Debelle said. "However, were the banks to experience difficulties in continuing to access funding, one might see a quantitative constraint placed on credit provision in addition to that provided by the price."

National Australia Bank chief economist Alan Oster said credit rationing was a threat, but it was unlikely that big banks would start rationing mortgages.

"That is a way off yet," Mr Oster said. "You tend to find in these sorts of worlds that the credit rationing goes to the corporate world first."

In his speech, Dr Debelle said companies had turned in droves to banks for money as bond investors became more nervous.

But in a speech on Tuesday to the Australian Bureau of Agricultural and Resource Economics, ANZ chief economist Saul Eslake warned that the rush to borrow from banks exacerbated the trend to credit rationing.

In order to meet US banking standards, Australian banks keep 10? immediately available for every $1 of credit (measured as risk-weighted assets).

At the end of last year, Australian banks held risk-weighted assets worth almost $1.5 trillion against $150 billion in capital.

The ratio of capital to risk-weighted assets sat at 10.2%, leaving little room to provide loans that increase risk-weighted assets without raising capital.

"The banking system could come close to running out of capital and . . . be forced to ration credit or to impose much tighter terms for extending credit than . . . in any time for the past 15 years," Mr Eslake said.

© 2008 The Age

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