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ACFS report warns ‘GFC is not over’

A new report by the Australian Centre for Financial Studies has warned of the ‘significant danger’ of a panic in capital markets.

Authored by Melbourne Business School’s Dr Sam Wylie, the paper states that the biggest single matter for considering the provision of finance to Australian business over the next 10 to 15 years is that the GFC is not over.

“In particular, monetary policy has not been restored to normal,” Mr Wylie said.

“Until the balance sheets of central banks, especially the US Federal Reserve, are restored to normal there is a significant danger of a panic in the capital markets,” he said.

While Australia’s capital channels held up well in the panic of 2008/2009, Mr Wylie notes that this was without a large fall in property prices.

“The bank channel is vulnerable to a large fall in property prices,” he said.

“Policymakers should plan carefully for the possibility that bond markets will close at the same time the property market and other asset markets fall substantially during the long period of unwinding of QE.”

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Reflecting on the rise in M&A activity in the banking sector during the GFC, Mr Wylie said the consolidation of banking has decreased competition between banks while increasing bank profitability.

The paper cited the consolidation of Bankwest and St George as two key examples of lenders that merged or were acquired during the GFC.

“BankWest was put up for sale by its distressed foreign parent HBOS,” Mr Wylie said.

“St George was experiencing funding difficulties because it had relied on securitisation of assets for funding, and the securitisation channel collapsed,” he said, adding that during a banking crisis it is “natural and desirable” for distressed banks to be merged into healthy banks.

 

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