The contagion effect: how much will Australian banks be buffeted by Europe?


Westpac chief executive Gail Kelly this week warned about Australian banks are vulnerable to “the contagion effect” of Europe’s ongoing financial woes, after the Commonwealth Bank of Australia delayed a Euro-denominated fund raising issue.

Professor Kevin Davis, Research Director at the Australian Centre for Financial Studies at University of Melbourne explains contagion and what could be in store for Australian banks.

What was it that the CBA planned to do and why is the significance of delaying it?

The CBA planned to do a covered bond issue in Europe – that’s a new facility available to Australian banks that is different from “traditional” securitisation and which is commonly used in Europe and is quite attractive to European investors. It’s only been available to Australian banks for a couple of months.

But one of the issues the banks are facing is the unsettled state of financial markets, particularly in Europe, with investors wary about lending funds to banks – even when they are secured against very good assets like the Australian mortgages involved here.

Although Australian banks have had a fairly large presence as borrowers in Europe, I think everybody is looked at suspiciously at any new security issues into the market the moment. Even though Australia’s four major banks are among only nine banks in the world that have AA ratings, when you get into a situation of general uncertainty, as you saw during the global financial crisis, markets just dry up. Investors aren’t confident about the safety of any assets.

Doldrums… Spanish market woes.

The Conversation

Kevin Davis, Research Director, Australian Centre for Financial Studies

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