The problem with our big banks

After a recent slight downgrade of our big four banks in November 2011 by Standard & Poor’s from AA to AA-, there have been discussions that April will be important in ascertaining whether any or all of our big four banks will again be downgraded due to their dependence on overseas funding.

There is no doubt that when compared to many of their global peers, our banks have a strong market structure and are reasonably concentrated. However, our banks’ persistent reliance on offshore wholesale credit markets makes them more risky than other AA rated banks.

What this means is that our big banks have less deposits to tap into if they needed emergency funding while other stronger offshore banks can utilise their higher deposit base to cushion any possible banking crisis that could occur in the future. Our banks on average have only between 54% and 65% of the funding mix coming from deposits. This compares less favourably to strong Asian banks that have close to 100% of the funding mix from deposits or even Canada’s big banks with around 80%.

The ratings agencies are looking at these funding structures and the risk they pose to the banks as their rationale for this possible downgrade.

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