Rba Targets $10bn Cash Stockpile

The Age

Wednesday October 1, 2008

Eric Johnston

THE Reserve Bank has been urging Australian lenders into channelling some of their $10billion in surplus cash back into wholesale funding markets, by placing the funds into RBA term deposits.

The move came as local bank executives warned of likely severe disruption to the world's financial system, with funding costs likely to rocket, if the US Congress maintains its opposition to the $US700 billion ($A840 billion) bank bail-out plan.

Failure of the package "increases the amount of market uncertainty and volatility," Commonwealth Bank group treasurer Lyn Cobley said.

Banks have been piling up their cash reserves as a precautionary measure against the global credit crisis, which has played havoc with banks from New York to London.

This has meant funding markets have dried up, with few banks willing to take on the risk of lending to one another.

Australian banks and the local arms of offshore lenders are now holding a record $10.65billion in exchange settlement accounts with the RBA after depositing an additional $3.1 billion with the central bank this week.

The exchange settlement accounts are on-call deposits at the RBA that receive interest at 6.75% - a 25-basis-point discount to the official cash rate. However, they are of little use to the central bank because they can't be lent out.

Before the latest market upheaval, bank deposits with the RBA averaged about $1.4billion over recent months.

It is believed the RBA has been sweetening the interest rate on longer-term deposits.

The RBA is hoping these funds can then be lent back in the form of term wholesale funds, potentially easing pressure on long-term money market rates.

CBA's Ms Cobley said pressure was likely to remain on wholesale funding costs, with benchmark pricing for short term funding pushing six-month highs.

Long-term wholesale funding markets were "essentially closed", even for banks deemed as low risk, she said.

"Having a package whereby certain lowly rate bonds could be bought out of the system in the US would have restored some confidence in the markets. It now sustains that period of uncertainty," Ms Cobley said.

ANZ chief executive Mike Smith last week warned the health of the world's banking system hinged on US Congress approving the bail-out of Wall Street, fearing a potential meltdown of the US banking system if the package was blocked.

"I don't think anyone in their right mind - politician or not - would prefer the market to peel off several times the value of the $US700 billion," one analyst said in reference to Wall Street's dramatic slide.

Even if the package - called the Troubled Assets Relief Program - is approved, analysts expect credit markets will remain volatile for the next year.

The Australian Bankers Association said the instability of some overseas financial institutions highlighted the value of the strength of the Australian banking sector.

Separately, ANZ has raised $1.08 billion following the close last night of its convertible preference share offer.

ANZ had doubled the size of capital raising to bolster its balance sheet.

The issue of convertible preference shares by ANZ follows more than $2.4 billion in capital raisings by banks such as Macquarie and Westpac in recent months to top up capital reserves.

KEY POINTS

? Local banks hold $10bn surplus cash - RBA wants it back in wholesale fund markets.

? Even with a US package, analysts expect credit markets to remain volatile.

© 2008 The Age

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