Tuesday, 12 April 2011

Unstable Pillars

Prof. Steve Keen has written some interesting stuff lately on the instability of our banks due to their exposure to an over priced housing market (bubble). His work appeared in Business Spectator and his own Steve Keen's Debtwatch.

I'm not going to regurgitate it all like last Saturday's 3am Doner Kebab, read it all yourself, but here some snippets.

A persistent refrain from the “no bubble” camp has been that Australia and its banks won’t suffer anything like a US downturn from a house price crash, because Australian lending has been much more responsible than American lending was.
Actually, out debt to GDP ratio exceeds that of the US and has grown three times more rapidly than did American mortgage debt since 1990. Real estate loans are also a higher proportion of Australian bank loans than for US banks, and their rise in significance in Australia was far faster and sharper than for the US


More significantly, real estate loans are a higher proportion of bank assets in Australia than in the US, and this applied throughout the subprime era in the US. The crucial role of the First Home Buyers' Boost in reversing the fall in the banks’ dependence on real estate loans is also strikingly apparent.


In Australia, impaired assets hit an all-time low of 4.1 per cent of bank Tier 1 assets and 0.2 per cent of total assets in January 2008, but August that year impairment was on the rise again. Impaired assets have since reached a plateau of 25 per cent of Tier 1 capital and 1.25 per cent of total capital – while house prices were still rising. Despite full-recourse lending, this is comparable to the level of impaired assets in US banks before house prices collapsed when the subprime boom turned into the subprime crisis


As I said you can read it all yourself.

What happened to bank stocks when the property market fell into the poo ditch (the collapse of US bank share prices is stuff of legend so I'll skip them)?

(You can click on each chart to expand it, to identify which bank)


ALL those bank stocks peaked in early 2007 at the 'highs' of their respective country's property bubbles well before the global stock market peak of late 2007 and the Lehmann Bros crash of Sep 2008.

Which Australian bank do I really love to watch?

The one that is the biggest general insurer in Australia (natural disaster exposure), insures "Aussie subprime" mortgages and has a massive exposure to the rotting carcass that will soon be QLD real estate - Suncorp.

Do I have long dated Put Options? I must admit I have.

If I pay insurance on my house burning down I may as well pay a premium for it halving in value.

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