Global Finance announces a half-yearly update World’s 50 Safest Banks: April 2012
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NEW YORK, March 1, 2012 – Bank stability is an ever-more pressing concern for the world’s corporations and investors. It is within this context that Global Finance announces the half-yearly update to its Ranking of the World’s 50 Safest Banks.
The sovereign debt crisis is still raging in Europe, the Arab Spring outcome is far from clear and global elections have put political stability at risk in some markets. As a result, the credit ratings of European and global banks have been affected, and have moved down the ranking of the World’s Safest Banks. In contrast, a number of banks—particularly in Asia and the Middle East—have benefitted by moving up the ranking.
In addition, even in the face of tough market conditions some banks have actually improved their score by having their ratings upgraded since the last ranking was released. With these factors in mind, Global Finance has launched the World’s 50 Safest Banks: April 2012; and launched a list of the Most Improved Ratings—those banks who have increased their score since October.
The ranking was created through an evaluation of long-term credit ratings—from Moody’s, Standard & Poor’s and Fitch Ratings—and total assets of the 500 largest banks worldwide. Global Finance’s ranking of the World’s 50 Safest Banks is a recognized and trusted standard of creditworthiness for the entire financial world. “Counterparty creditworthiness has seldom been of more concern to companies and investors worldwide,” says Global Finance publisher Joseph D. Giarraputo. “Knowing how their counterparties are faring in the face of global economic uncertainty is key. This ranking helps companies and investors to get a view on the relative strength of their counterparties—and global financial institutions.”
This exclusive survey will be published in the April issue of Global Finance.
For editorial information please contact: Andrea Fiano, Editor, email: afiano@gfmag.com
Stability and less competition vs more competition and less stability, as in many aspects of life .. thinking, living, love, and little things .. one important consideration is always .. balance ..
I have never met Gail Kelly, yet I can see her value as a role model, given she's the most senior woman business executive in Australia. But whenever I see her face my first thought is, ''What did you do with my money?''
I have no debt except for an equity loan that my wife and I took out when a salesman at Westpac persuaded us to take a $100,000 loan against the equity in our house. It would be tax-effective, he said, and the sharemarket offers solid asset growth long term; it would diversify our asset base and put unused credit to work.
We took out the loan and were immediately greeted with a $3000 fee that had not been mentioned during the sales pitch. That was in 2001. Since then the sharemarket has risen more than 40 per cent but our investment, which, in line with the market, should now be worth about $140,000, is instead worth half that - $70,000.
Westpac has destroyed value and repeatedly avoided providing any explanation of how it invested the money. The loan generates payments to us from the bank but these merely offset the cost of capital. Where is the capital gain, the point of the exercise?
Everyone has a bad banking story, and we take for granted all the productive things the banks do for us. It is the bad stories that come to mind when the big four banks issue their profit statements. In the latest financial year the big four made a combined profit of $24 billion.
So strong is their profitability that all of the big four Aussie banks are ranked in the top 25 of the world's largest banks measured by market value. Such is our market concentration, Australia has four banks in this top 25, the same as the US, while Britain has two, Japan one, France one and Germany none. It's because Australia's big four have a combined return on equity - profit - more than twice the global average for banks.
Still, I much prefer the status quo to the alternatives in the US and Europe, where solidity has given way to stress.
It is easy to see why our banks did not want to pass on last week's interest rate cut by the Reserve Bank. A financial storm is blowing as the cost of raising short-term funds on the global market is surging as Europe runs short of cash.
The European Union is caught in a liquidity trap of its own making. The headlines coming out of London at the weekend, after yet another crisis summit by the leaders of the EU, do not make for comfortable reading.
The Telegraph: ''Euro zone banking system on the edge of collapse.'' The paper's lead financial story began: ''Senior analysts and traders warned of impending bank failures as a summit intended to solve the European crisis failed to deliver a solution that eased concerns over bank funding.''
The Daily Mail led with this splash: ''Yes, Cameron got it right: Most voters agree with Prime Minister vetoing treaty changes . . . and half think we should quit the EU.''
On Saturday morning, local time, a schism opened up between Britain and Germany-France over how to respond to the EU sovereign debt crisis. This is on top of the schism between Germany-France and southern Europe over debt and productivity. The crisis could open another schism, within the British government, as the Conservatives and the Social Democrats brawl over Britain's role within the EU.
In the past year, the crisis has brought down the governments of Italy, Spain, Greece, Ireland and Portugal. Nothing the EU leaders said at the weekend alleviated the more immediate threat of the liquidity crisis facing the euro zone's banking system.
As if to underline this, on Friday, even before the summit was over, the debt rating agency Moody's downgraded the debt of three giant French banks, Societe Generale, Credit Agricole and even BNP Paribas, the biggest French bank, which had hitherto been immune to downgrades. France was meant to be impregnable to contagion.
Suddenly, Australia's banks don't look so greedy after all. They look steady. They look like ports in a storm.
For this we can thank good government policy and good banking. Prudential standards set in place by past governments staved off the market in junk mortgage debt that fused the US banking system in 2007-08. Strong fiscal policy left Australia with no sovereign debt overhang and a budget surplus when the financial crisis hit in 2007. Australia had not taken the road of excessive debt and deficit.
Thus the reflexive calls for our banks to pass on the Reserve Bank's interest rate cuts, in full, are now double-edged. Every move to relieve borrowers with lower interest costs is offset by the cost to the legion of savers, including superannuation funds, who rely on interest-bearing deposits for income.
With a growing squeeze in the offshore market for cash, our banks will need to raise more capital onshore. In this context, a healthy bank is far preferable than a stressed bank. They may need their fat for harder times.
Aussi: Our banks: too big to fail, too few to be competitive
7 February 2012 .. 103 Comments
Prior to the global financial crisis, Australia had a diverse and highly competitive financial system. The four major banks went head-to-head with the likes of St. George, BankWest, Bendigo Bank, Aussie, Adelaide Bank, RAMS, Wizard, and Challenger.
Today every single one of these entities has disappeared as a genuinely independent concern, wholly or partly acquired by the majors (with competition concerns waived by the ACCC), or merged with one another.
Prior to the crisis, Australia's banks were not explicitly government-backed. And taxpayers had never guaranteed bank deposits before (or conceived of providing such guarantees for free as they currently do), nor had they ever guaranteed the banks' institutional debts.
The taxpayer-owned central bank, the Reserve Bank of Australia (RBA), had also never lent to the banks on the much longer-dated and more flexible terms that it offered as the financial markets meltdown started to gather momentum, and continues to offer to this day.
The reason taxpayers had not got into the business of bailing-out private banks was because of a well-founded fear of "moral hazard". That's the concern that once you start insuring away a private company's risk of failure, you remove the critical disciplining influence of free markets. And executives will, over time, start behaving less responsibly, and expose taxpayers to even greater risk of loss.
Banks have nevertheless always been different to private companies because they perform a vital social function: they take our short-term savings and transform them into long-term loans. They run this constant "mismatch" between the term of the funding they receive from depositors (eg, mums and dads) and the length of the loans they give to businesses and households.
As a result, banks have always risked insolvency if their funders rapidly withdraw their money. In the 1890s, before the RBA existed, most of Australia's private banks failed. That's why we now have a public "central bank" that lends directly to the private banks. And it's the reason we have a banking regulator, APRA, to ensure that the banks hold enough "capital" to cover liquidity shocks.
We were compelled to write this op-ed because we're convinced that the policymaking surrounding Australia's banking system has been predicated on a flawed and risky paradigm: the frequently-referenced — by APRA and the RBA — trade-off between "competition" and "financial stability", which ends-up favouring a more concentrated industry.
Today Australia's prosperity relies on four colossal banks — or "oligopolists" — worth around $50 billion each. They control 80-90% of all financial transactions executed across the country. Importantly, the introduction of government guarantees for the first time during the GFC bequeathed them with a unique comparative advantage.
In contrast to their smaller rivals, the four majors are now regarded by credit rating agencies and investors alike as "too-big-to-fail". The majors get the benefit of credit ratings that have been explicitly lifted "two notches" higher than they would otherwise be because Standard & Poor's thinks they alone can depend on "extraordinary government support" in a crisis.
This helps them raise money much more cheaply than their smaller peers, which in turn means it is almost impossible to compete effectively against them. Size thus begets more size.
Some recent advertising campaigns have claimed that "the banks are at war for your home loan". Both the new head of the ACCC, Rod Sims, and we disagree. A few weeks ago Sims concluded,
Normally four players in a market should lead to a lot of competitive activity. In the banking sector it seems to need more because even though there are four of them there is a lack of full and effective competition.
While they rank amongst the 30 largest banks in the world, Australian policymakers have worked surprisingly hard to have the four majors excluded from the extra capital charges that global regulators are sensibly insisting the biggest, and most "systematically important", banks hold.
For a number of years we've suggested this is misguided and symptomatic of a worrying oligarchy between Australian banks and their policymakers. Last month the IMF agreed with us, arguing that Australia's major banks should, in fact, be forced to hold extra capital as systematically important institutions. More capital means less leverage and less taxpayer risk. So why exempt the majors, particularly when they have designs on higher-risk growth strategies overseas?
An additional capital buffer for systematically important banks would also be an intelligent disincentive to becoming too-big-to-fail. And it recognises a point we've made for some time: in many ways the catastrophic risks posed by smaller and simpler banks, like Bendigo & Adelaide, Bank of Queensland, and Members Equity, are a fraction of those threatened by the majors.
In all properly-functioning financial markets there is an inexorable trade-off between risk and return. The higher the risks you take, the higher the returns you generate. But in Australia this maxim has been turned on its head: in Australia, the supposedly lowest risks banks with the highest credit ratings — the majors — are somehow able to yield the highest shareholder returns. In contrast, the smallest banks, with the lowest credit ratings, produce much lower returns on equity. This complete reversal of the inverse relation between risk and return is the purest possible illustration that taxpayer subsidies are being used for the benefit of the banking oligarchy to the detriment of meritocratic democracy.
During the GFC, most of the smaller banks did not use the taxpayer guarantees of wholesale debts because the premium paid for the guarantee was, ironically, based on the banks' credit ratings. This made it cheapest for the major banks to use the government’s insurance, which they did in vast volumes. It was peculiar that Treasury decided to price its insurance using the same rating agencies that had missed so many of the moral hazards that triggered the crisis in the first place.
A more subtle example of how the system encourages extreme size are the terms on which the banks borrow from the RBA. When doing so, banks have to pledge an asset as collateral to get RBA funding. Included in the list of "eligible" assets the RBA will accept as collateral is any senior debt issued by an Australian bank. But historically that debt had to have a credit rating — yes, there it is again — of A- or higher, which excluded the debts issued by smaller regional banks and building societies. Since the major banks were amongst the few that qualified for the RBA's funding, this helped further support investor demand for their bonds, and thus lowered their cost. While this month the RBA cut the minimum rating to BBB+, this still excludes several smaller banks and building societies.
A final example of the unanticipated consequences flowing from recent policy decisions is the advent of so-called "covered bonds".
In the past, the first-ranking creditor to any Australian bank has been depositors. It was illegal to issue a debt security that subordinated depositors, which precluded covered bonds. When a bank raises money from an institutional investor, it normally issues an "unsecured" loan. This means that if the bank goes belly-up, the investor must queue up behind mum and dad depositors when getting paid out.
In contrast, a "covered bond" allows banks to issue loans to investors that are secured by specific bank assets. The investors thus have a claim on these assets that ranks ahead of everybody else, including mums and dads. Securing their covered bonds with billions of dollars of home loans has allowed the four AA- rated major banks to win rare AAA ratings for their funding.
The problem for the smaller banks is that they do not have the major banks' credit ratings, which, as noted earlier, are lifted higher because the majors are regarded as too-big-to-fail. And since the smaller banks have far lower credit ratings, they would have to pledge many more assets to secure a AAA-rating for their covered bonds. The bottom-line is that this makes it, in the words of one bank CFO, "non-economic" for them to do so, much like it was non-economic for them to use the government guarantees during the crisis.
In the last four months the major banks have raised about $17.5 billion of new funding via their AAA-rated covered bonds. None of their competitors has followed suit.
Setting aside the fact that allowing the majors to issue covered bonds has provided them with another fund-raising advantage over their rivals, there has been a second, perhaps more damaging, consequence: it has significantly increased their competitors' cost of funding.
CBA and Westpac's sale of around $7 billion worth of covered bonds to Australian investors has created a new ultra-safe, domestic asset-class. By doing so, it has made every other bond, including the unsecured, more lowly-rated bonds offered by smaller banks and building societies, more expensive.
The former head of capital markets at Standard and Poor's, Phil Bayley, concludes, "The bad news coming out of CBA's covered bond issue is that all other debt issues in the market will be more expensive … One of the hardest hit asset-classes will be securitised home loans, which has been a key source of funding for smaller lenders."
That, frankly, is a short-strokes summary of the policy problems we are focussed on. While resolving them will require leadership, we believe that there are tractable solutions. Here are three:
1) Change the policy paradigm: It is often said in financial markets that neither APRA nor the RBA care much about banking competition, and would prefer it if there was only one bank to regulate. Policymakers have been captive to the idea that there is an unavoidable trade-off between improving competition and reducing financial system risks. They are wrong.
As a matter of pure logic, a financial system reliant on four $50 billion banks that are regarded as implicitly government-guaranteed (much like Fannie Mae and Freddie Mac were in the US) is surely less secure, and more prone to moral hazard, than one based on, say, ten, $20 billion banks, each small enough to fail without causing widespread damage. Think of ten pillars as opposed to four.
We learnt from the US experience with Fannie and Freddie that there is a threshold beyond which size becomes a massive "contingent liability" for taxpayers. Like the major banks, Fannie and Freddie could raise money more cheaply than their competition because investors believed they were government-backed. And they were right. Both institutions are now owned by US taxpayers.
The learning from this is that we need to remove the regulatory incentives that actively encourage size of the too-big-to-fail variety. And we should consider, at the very least, explicit breaks on banks becoming too big, and then using this size advantage to horizontally consolidate other industries, such as funds management, financial planning and insurance.
One policy option is a progressive financial taxation regime, such as that being proposed in Europe, which attempts to price the too-big-to-fail subsidy: ie, the bigger you get, the higher the price you pay. Today the system is stacked in the opposite direction: as a bank’s size increases, all its costs decline.
2) Guarantee the assets, not the institutions: Australia's financial system already suffers from moral hazard writ large. Taxpayers are guaranteeing billions of dollars of bank deposits for free, and the majors have artificial fund-raising advantages through their credit ratings and new devices like covered bonds.
There is, however, one solution, which we’ve advocated in the past. All these financial subsidies come back to the fact that there is a catastrophic risk that only governments can insure. That's why the government guarantees bank deposits and bank debts. That's why the government's central bank — the RBA — explicitly refers to itself as the "lender of last resort" to private banks during crises.
Moral hazard emerges when this taxpayer insurance is not properly priced. So let's allow the taxpayer to earn a fair return and iron-out the dysfunctions at the same time. The simplest and most conceptually elegant way to do this would be to offer a permanent government-guarantee of bank-issued, asset-backed securities. This would allow any bank, irrespective of size, to issue asset-backed bonds that had the highest possible credit rating.
So long as the underlying asset quality met the required criteria, this would in turn mean that minnows like ME Bank and Bendigo & Adelaide could raise funding at the same price as CBA or Westpac. It would immediately level the competitive playing field, and remove many of the majors' regulatory advantages. And, as the current Chairman of ASIC, Greg Medcraft, leading economist Dr Nicholas Gruen, and we have argued before, there is a compelling precedent: Canada. The Canadian government offers exactly this type of insurance to its lenders. So why can't we?
3)Back the government's banking regulator, not the rating agencies: the cost of the RBA's lender of last resort facilities, and the price of government guarantees (determined by Treasury), has been based on a bank's credit rating. This confers immediate fund-raising benefits on the majors. Yet Australia's banking regulator, APRA, is responsible for setting the banks' capital requirements, and overseeing their risk management, with powers to intervene directly with a bank if it thinks something is wrong.
Since the government licences the banks, controls their risk management, and can directly remedy any issues it identifies, the government should be willing to rely on itself when determining the price of taxpayer support. We believe that the cost of government insurance should be the active and intrusive regulation of APRA, and generally priced the same, irrespective of an institution's size. If APRA is doing its job properly, ME Bank should pose no more risk to taxpayers than CBA (and vice versa).
Australia can build both a more stable and competitive financial system. All it requires is real leadership. That is the challenge politicians and policymakers now face.
Mark Bouris is Executive Chairman of the ASX-listed Yellow Brick Road, which is not a bank or building society. View his full profile here. Christopher Joye is a leading financial economist, who is a director of YBR Funds Management and Rismark International. View his full profile here.
CANBERRA/SEOUL – Almost four years after the start of the global financial crisis, the world economy remains fragile and unemployment is unacceptably high. There are roughly 200 million unemployed people worldwide, including nearly 75 million young people. Growth is weakening in many countries, risks are mounting, and uncertainty has intensified, owing especially to events in Europe. Only swift and sustained recovery can stem the rise in the human cost of economic stagnation.
Lee Myung-bak
When the G-20 meets in Los Cabos, Mexico, on June 18-19, its challenge will be to shift public perceptions from pessimism and concern about the future to an optimistic mindset of growth and stability. We need resolute action to address the uncertainty confronting the global economy and to chart a path toward self-sustaining recovery and job creation.
We see two components to such a strategy. First, we need a clear message from Europe – the immediate source of global economic concern – that it is taking decisive steps to stabilize and strengthen its banks, and that it is focused on restoring growth while credibly committing itself to fiscal consolidation. A crucial element of restoring confidence in Europe is agreement on a “roadmap” for the eurozone to underpin its monetary union with a fiscal union and a banking union, including pan-European supervision and deposit insurance.
It is essential that Europe move quickly to ensure that its banks are adequately capitalized and backstopped. In this regard, we welcome the recent decision by Spain to seek financial assistance from the European Union to recapitalize its banks as required. Decisive steps to safeguard the banking sector’s health are necessary not only to reduce some of the risks that are preoccupying markets, but also because healthy financial institutions are vital for economic growth.
Europe must have credible fiscal-consolidation plans to restore debt sustainability, but it is also essential that it has a growth strategy that includes policies aimed at boosting investment, freeing up product and labor markets, deregulating business, promoting competition, and building skills. These reforms, including deeper institutional integration, will be politically difficult and their benefits will take time to become fully apparent; but setting a clear pathway will underpin public confidence in Europe’s long-term growth and cooperation.
We do not underestimate the magnitude of the reforms that Europe has achieved in recent years. Since the G-20’s meeting at Cannes last November, for example, Europe has increased its financial firewalls by €200 billion ($252 billion), restructured Greek debt, taken steps towards strengthening its banks and banking regulations, established rules for fiscal discipline, and implemented a range of labor- and product-market reforms.
But the magnitude of the challenges confronting Europe implies an urgent need for far more decisive reforms. We are confident that Europe will act together to meet these challenges, and we will continue to support such efforts, because European stability and growth matter for us all.
Second, we need a clear message from the G-20 that all of its members are delivering policies for strong, sustainable, and balanced growth. To be meaningful, the message must be backed up with action: G-20 members must demonstrate that their policies are clearly directed toward restoring economic growth and creating jobs, and that they will be accountable for meeting their commitments in full. And world leaders must be unambiguous about resisting protectionism and opening trade and investment.
In particular, we believe that an international agreement on trade facilitation is the right step, as it would reduce export and import costs and restore momentum to global trade liberalization. The G-20 must demonstrate in Los Cabos that reform of the International Monetary Fund is continuing. That means that countries must deliver on their commitment to increase IMF resources by more than $430 billion, and that the Fund’s quota and governance structure must reflect the ongoing global shifts in economic influence.
Economic growth and new jobs are crucial to improving people’s livelihoods now and to ensuring the prosperity of future generations. The reforms needed to secure these objectives are not easy, and change will not happen overnight. But the world expects the G-20 to deliver.
Julia Gillard is Prime Minister of Australia, and Lee Myung-bak is President of the Republic of Korea.
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