A sticky situation

More than a year on from the start of the credit crisis, the picture looks an awful lot different for financial institutions in Australia. Back in August 2007, there were increasing signs the problems in the US mortgage market were spreading. Volatility had spiked across asset classes, equity had sunk, while liquidity in the interbank market evaporated literally overnight, prompting the European Central Bank to pump billions of euros into the money markets on August 9 - a move subsequently followed by other central banks.

But, at that point, Australia's banking system looked to have held up strongly against the storm battering financial markets. There were a few blow ups but they were, for the most part, the result of direct investments in US subprime mortgage-related assets.

Wind forward to the present day and things are beginning to look slightly stickier. Having shrugged off the initial effects of the crisis, the ongoing turmoil is starting to feed through to the balance sheets of the country's banks. In July, National Australia Bank reported a provision of A$830 million on its portfolio of 10 collateralised debt obligations (CDOs) of asset-backed securities, in addition to a A$181 million charge taken just four months earlier.

On top of that, several local councils are taking legal action against banks that sold them CDOs, alleging the dealers breached managed portfolio instructions and were misleading and deceptive in their conduct. A government-sponsored report on the losses, entitled Review of NSW Local Government Investments, recommended local councils be banned from investing in any more CDOs until December 2009 - a move that could have a knock-on effect on bank profits (see pages 4-7).

Elsewhere, the drying up of the securitisation market is starting to bite. For the many non-bank mortgage lenders active in Australia, the lack of access to wholesale funding has caused them to dramatically scale back their origination programmes. It has left a larger piece of the pie to the country's largest commercial banks - and they have wasted little time in upping their market share.

However, smaller lenders claim this could significantly reduce the level of competition in the mortgage market. Some bankers have called for the Reserve Bank of Australia to do more to stimulate the market. At risk, they argue, is the efficiency, competition and tight pricing of the mortgage lending market. If they are right, it could put a hard brake on the still-growing Australian property market.

Nick Sawyer, Editor.