Australia’s Major Problem: The 4 Major Banks Are Stuffed Full


One key attribute of the Australian financial system that people need to know about is the reliance on the 4 Major Banks to fund the economy. The lack of wholesale markets, driven by local insurance and local superannuation funds desire to invest sub-investment grade credit or equity portfolios (as opposed to investment grade and AAA/AA/A securitisations), has led to a reliance on the 4 Major Banks to fund the economy.

This is most easily seen in the following tables:

Total Assets $AUDm as Per Annual Reports
30/06/04 30/06/05 30/06/15 30/06/16
CBA 305,995 329,035 903,075 933,078
WP 237,036 254,355 812,156 839,202
NAB 411,309 419,588 955,052 777,622
ANZ 259,345 293,185 889,900 914,900
4 Major Total 1,213,685 1,296,163 3,560,183 3,464,802
GDP (past 4 Qs) 1,190,000 1,229,000 1,617,000 1,658,000
As % of GDP 101.99% 105.46% 220.17% 208.97%


Lending Liabilities $AUDm As Per Annual Reports
  30/06/04 30/06/05 30/06/15 30/06/16
CBA 205,946 235,849 674,466 700,547
WP 170,863 188,073 623,316 661,926
NAB 247,836 260,053 532,784 510,045
ANZ 204,962 230,952 570,200 575,900
4 Major Total 829,607 914,927 2,400,766 2,448,418
GDP (past 4 Qs) 1,190,000 1,229,000 1,617,000 1,658,000
As % of GDP 69.71% 74.44% 148.47% 147.67%

For the past decade, Major Bank balance sheets (both total assets and total loans) have grown, on average, at 10% CAGR (except NAB, which has been impacted by overseas businesses). These assets and loans are mostly domestic.

At the same time, GDP has grown at 3% CAGR in nominal terms, leading to approximately 7% higher bank balance sheet growth than GDP each year. The 4 Majors used to have total assets/loans at 100%/70% of GDP but now have 220%/148%.


At what point do the 4 Major Banks get full? How can the economy continue to grow at a strong level if the bank balance sheets can no longer grow credit above GDP growth as either deposit growth struggles to keep up or financial stability reduces given the high concentration risk of funding via such a narrow channel. Can this lead to a credit crunch? My view is that they may already be sufficiently full to prevent new lending at anything close to the rate experienced in the last decade (noting the below trend YoY growth in 2015/2016, albeit with NAB’s Clydsdale disposal making an impact).

Possible Mitigation

As a response, only a few alternative strategies are really available:

  1. Overseas Wholesale
  2. Local Wholesale
  3. Interest Rate Reduction
  4. RBA Funding (QE)

The 4 Major banks need to tactically grow overseas and local wholesale markets. Overseas distribution of securitisations, particularly the US market, has continued to be an available option but banks may need to consider how the pass fully desonsolidated deals into this market and what return requirements they are willing to take to facilitate this. Even if the 4 Major Banks don’t take the bulk of the spoils, the overall support this gives to the wider economy will lead to better outcomes for the 4 Majors. This may require supporting non-ADI Australian lenders, including FinTech, and identifying high-value opportunities in assisting these business. This may also lead to the development of broader local wholesale options.

Local wholesale potential is split between expanding the lending performed by insurance companies – which could be enhanced by regulatory changes – or by encouraging superannuation to take on a higher percentage of fixed income assets in their portfolios, particularly senior tranches of asset-backed securities. The obvious rationale: if super funds don’t support lending in Australia, there will be detrimental impacts to equity returns that make up the majority of their portfolios as net new lending is an input to economic growth.

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An alternative approach will be for the RBA to buy financial assets. If a local securitisation market does expand, this could be supported by a form of QE. This would be inline with actions the US Fed took in buying agency RMBS or the ECB in corporate bonds.

The last option will be lower interest rates that may be linked with QE. Lower interest rates will support further credit growth and help banks manage a higher balance sheet level versus GDP. But note that interest rates are already low for an economy where the banks have mostly been well-run and capitalised.

Something has to happen

Without a system-oriented movement into addressing the runaway growth of the 4 Major Bank balance sheets, I would expect a major debt-driven problem to emerge in Australia within 5 years. This doesn’t imply a crisis at this point in time but does suggest an eventual fall in the rate that the economy can grow. If house price growth has been driven by credit expansion, this trend simply cannot continue without the financial system becoming top-heavy due to the 4 Major Banks’ balance sheets.

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