Banks can only blame themselves
HAVING missed every major financial crisis or corporate collapse in the past 20 years, the three big global ratings agencies seem hell-bent on a mission to prove themselves relevant.
The only problem is that, whereas in the past they failed to spot anything at all, they now appear to be jumping at shadows.
Take the decisions by two of them on Australian banks in recent days.
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On Friday, Fitch downgraded three of the big four banks - it excluded ANZ Banking Group as it already was on the lower rating - because it suddenly discovered Australian banks have borrowed heavily offshore and, apparently, there has been some kind of financial trouble in Europe recently.
That bizarre announcement was followed yesterday by an even more laughable proposition from Standard & Poor's.
It breathlessly announced Australia's banks could well be at risk if China's economy collapses.
I hate to be the bearer of bad tidings. But if China's economy has a ''hard landing'', as the agency postulated, there's certain to be more than just our banks that will suffer. Try our resources companies for starters. Try the global economy for seconds.
Despite all the hype about recovery, the US economy has sputtered to life only after copious doses of fuel from the US Federal Reserve, courtesy of zero interest rates and two massive doses of money printing.
Europe is now in recession, with the European Central Bank also cranking up the printing presses in a desperate effort to keep things ticking over. And in Japan, well, it's been the same old story since it collapsed in the early '90s.
China and emerging Asia are the driving forces for global commerce, the only geographic region showing any sign of life, powering the Australian economy to the greatest export performance in history. It's a somewhat myopic view to suggest that if China collapses, Australian banking could suffer some hard times.
Is it possible the ratings agencies missed the latest round of bank mega earnings?
Could they have overlooked our banks' monopolistic behaviour, their unique ability to be price-makers rather than price-takers when it comes to interest rates? And what about their terrific margins or world-beating returns on equity?
Investors largely took the Fitch banking downgrades in their stride yesterday with little movement in early trading. But the finance sector came under pressure during the session as the general market retreated.
Each of the big four has taken massive steps in reducing the impact of offshore funding. They've dramatically shifted reliance from offshore markets to onshore and they now rely far less on short-term debt than when the financial crisis hit in 2008.
On top of that, Europe finally has begun the long process of reducing the risk of a calamitous break-up. So you'd have to question the logic of downgrading Australian banks at this point. Surely, they faced greater risks three years ago.
It is true that back then, the federal government rode to the rescue, covering the foreign debts of all our financial institutions and insuring their deposits. But it is equally true that, in the event of a similar meltdown, the federal government would again support the banks. So the risk to the banking system now is lower, not higher.
The Reserve Bank governor, Glenn Stevens, also was at a loss to understand the downgrades. Other Australian companies with much greater risk profiles, he told a Senate hearing last week, could borrow offshore at cheaper rates than our banks.
You could argue the RBA governor has a vested interest in maintaining stability and so naturally would bat for the banks. But if you want to compare track records on financial analysis and economic management, Stevens wins by a country mile. And while he may want to eliminate overly negative sentiments, he's certainly not prone to boosterism.
But really, the banks have only themselves to blame. They invited these downgrades with their ridiculous posturing on interest rates.
In the past few months, they've been moaning at length about the enormous costs of borrowing offshore and how the ructions on European wholesale funding markets have walloped their profit margins.
At every opportunity, senior executives at the big four have loudly broadcast how captive they were to offshore funding costs. And their spinmeister, the Australian Bankers Association, has rarely been so busy, detailing the perilous nature of global finance and the abyss into which Australia may soon descend unless they raise interest rates.
They have virtually held up a big red flag to the ratings agencies, all the time screaming: ''Look at us! We are in serious trouble here.''
Guess what fellas. You were heard.
Collectively, they have made a serious error in judgment, not just strategically, but from an operational viewpoint.
The problem facing the banks is not funding costs. It is that demand for new loans has shrunk alarmingly. With lending growth at all-time lows, smashing profit records becomes virtually impossible.
You don't need to be an economics whizz to figure out that if you raise the price of a good or service, demand will shrink.
So by pushing rates higher, by pumping up their margins to maintain the record earnings streak, the big banks have ensured decreased demand for new loans, potentially pushing them into a vicious circle.
Oh yes, let's not forget that those lowered credit ratings will force the banks to pay more to raise cash on international wholesale markets.
Sometimes you need to be careful what you wish for.
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Banks can only blame themselves