Banking sector set for US-style meltdown

The historically large housing price and large personal debt bubbles have created the preconditions for a banking and housing market crash that Australian banks are unlikely to survive without recourse to tax-payer funds. 

In his submission to the Financial Services Inquiry (FSI), Brisbane-based planner Bruce Baker stated the preconditions were the same as those which led to the “near collapse of the US banking system” in 2008. 

“Australia has the biggest house price bubble in its history, a bubble that has been funded by Australia’s historically-largest private debt bubble (which is predominantly mortgage debt),” Baker said. 

He also claimed that “Australia is not sufficiently prepared to deal with such a crisis” and that “our banking system is unlikely to cope any better than the USA’s banking system in the face of an historic house crash”. 

“The data suggests that it is quite likely that the coming Australian house price crash will be bigger than what APRA has prepared for - ie, bigger than a 30 per cent fall. From an economic perspective, this should be cause for great concern as this is a major risk to the Australian economy and Australia’s financial system,” he said. 

Baker stated that in the event of a banking failure “the Australian taxpayer is likely to end up underwriting the Australian banking system”, which had developed institutions that had taken on too much risk but did bit pay for the implicit tax-payer guarantee. 

He stated that the FSI should examine current thinking from the Bank of International Settlements that argues that in the event of a bank failure its creditors and share-holders bear the bulk of the losses, while also enacting further measures to minimise the cost to tax payers.

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