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Australian households ‘too big to fail’: Morningstar

A banking analyst believes that it is actually the “highly leveraged Australian household sector” that is too big to fail and not the major banks — as most expect.

In an equity research paper on ANZ Bank released this week, Morningstar analyst David Ellis acknowledged that high household debt is a risk to the economy, something that the Reserve Bank has warned about repeatedly.

“The four major banks are considered too big to fail, but really it is the highly leveraged Australian household sector that is too big to fail, accounting for 55 to 60 per cent of domestic consumption,” Mr Ellis said. 

“For this reason, we anticipate the RBA will tread carefully when it eventually starts to normalise interest rates. We expect the RBA will remain at 1.5 per cent throughout 2018.” 

Economists are divided on what the next rate movement from the central bank will be. ANZ recently forecast two rate hikes form the RBA next year.

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While the potential impact of tighter monetary policy on households has become a concern, Morningstar’s Mr Ellis highlights that wholesale funding accounts for approximately 35 per cent to 40 per cent of total funding for the major banks. 

“Wholesale funding costs can increase independent of changes in the RBA cash rate, and disproportionate increases in the cost of international wholesale funding could trigger increases in mortgage rates irrespective of any RBA tightening,” the analyst said. 

Approximately 50 per cent of the big four banks’ wholesale funding is sourced offshore. The major banks' long-term wholesale funding debt is currently trading around three-year lows as represented by credit default swap spreads.

[Related: Morningstar rejects ‘doomsday’ UBS report]

Australian households ‘too big to fail’: Morningstar

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>In an equity research paper on ANZ Bank released this week, Morningstar analyst David Ellis acknowledged that high household debt is a risk to the economy, something that the Reserve Bank has warned about repeatedly.

“The four major banks are considered too big to fail, but really it is the highly leveraged Australian household sector that is too big to fail, accounting for 55 to 60 per cent of domestic consumption,” Mr Ellis said. 

“For this reason, we anticipate the RBA will tread carefully when it eventually starts to normalise interest rates. We expect the RBA will remain at 1.5 per cent throughout 2018.” 

Economists are divided on what the next rate movement from the central bank will be. ANZ recently forecast two rate hikes form the RBA next year.

While the potential impact of tighter monetary policy on households has become a concern, Morningstar’s Mr Ellis highlights that wholesale funding accounts for approximately 35 per cent to 40 per cent of total funding for the major banks. 

“Wholesale funding costs can increase independent of changes in the RBA cash rate, and disproportionate increases in the cost of international wholesale funding could trigger increases in mortgage rates irrespective of any RBA tightening,” the analyst said. 

Approximately 50 per cent of the big four banks’ wholesale funding is sourced offshore. The major banks' long-term wholesale funding debt is currently trading around three-year lows as represented by credit default swap spreads.

[Related: Morningstar rejects ‘doomsday’ UBS report]

Australian households ‘too big to fail’: Morningstar
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