Joye on Banks and the AUD

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My friend, Chris Joye, today published a note on what he thought of some of the Q+A with RBA Gov Stevens’ following the CEDA dinner.

As I see it, Chris has three key points — and as I’ve been asked to comment, here’s my view on each of them.

The first is that APRA’s supervision should be extended to non-banks. Here I disagree. The point is not to prevent Banksia-like failures. The point is to change the system so that Banksia-esque failures can happen safely. While there are doubtless many hard times for those directly involved in Banksia’s failure, it does not seem to have had systemic consequences — so I regard the system as working well enough.

The second is that Australia’s major banks ought to hold more capital. Here I agree. Supervision and capital are substitutes — if you accept intrusive supervision, you are presumably less profitable than you might otherwise have been. That’s the cost of supervision — and it’s also the implicit price of things like government guarantees and liquidity support from the RBA’s discount widow (which I suspect probably amount to a massive subsidy from the taxpayer to bank shareholders).

I would prefer a better capitalised banking system, with lighter regulation. Put enough capital in banks, and add some ‘living wills’ and other regulation, and we might just be able to make the system robust to failure — getting rid of ‘too big to fail’ would be a significant achievement.

Chris’ third point is really an observation — that Gov Stevens used the speech to acknowledge that the odd developments on the RBA’s balance sheet did indeed signal something new. Stevens said:

As for the so-called “passive intervention”, let’s say that was customer business that we decided to keep on the balance sheet because the prices seemed attractive to do that as this time.

We don’t know who the client was, but the price Stevens is referring to is the foreign exchange value of the Australian Dollar. Someone wanted to buy AUD, and the RBA expanded their balance sheet, providing them with AUD and obtaining foreign exchange reserves on the other side.  Some call this money printing — but that’s not quite right. It’s reserve creation — which is a little bit different.

This isn’t the scale of intervention that has characterised Swiss or Japanese currency interventions — however there’s no doubt that this is a change of behavior and though small it is designed to lower the foreign exchange value of the AUD.

I am surprised at this development — but i think that those who identified this development as a change in the RBA’s stance on the AUD are indeed correct.


  1. Those things won’t reduce tbtf. In reality when the bank needs to be chopped up its assets that it had designated for sale would be close to worthless and market liquidity wouldn’t exist. At the end of the day commercial banks will always have a symbiotic relationship with central banks. Unless bank size is massively curtailed.

    1. I agree in part. For sure if BIG Aussie bank was in trouble and asked for a bid in 20bn of even short end ACGBs it would cause a massive crisis, so it is inevitable that the central bank has to enter the market at such times. But it is at least worth noting that aussie banks had lots of capital and few problems in the depression, despite heavy economic going.

  2. Yes, increase capital is important… it would also be very important to reduce max LVR allowed for residential (i.e. 80%).

    Why are you surprised at this AUD development? RBA has repeatedly said they are concerned that the AUD is not acting as the usual shock absorber. High AUD is still very deflationary and can’t be simply compensated by cutting rates. Imports are cheap and the money that is left is making everything made here more expensive.

    1. Haha, well i am. I did’t think they would even lean into the wind like this. I suppose it is likely to be low cost, and putting your money where your mouth is does have more meaning … so perhaps this is the optimal solution.

      And yes, i strongly agree with LVR caps. i think that is the main lesson of the crisis.

      1. It’s interesting: even with open comments like this by Stevens and the very dovish RBA minutes, the AUD just does not want to move. It’s all priced-in??? So again, I think only a real risk of recession can bring the AUD down. If we do not get a “end of the boom” recession risk sentiment, then it means the economy can sustain a high AUD, and the AUD will keep above parity.
        One wonders what will happen should the easing cycle come to an end! Short AUD is still very obvious to me.. too obvious… so probably wrong. But for now, I am still short! Ah, Ah

  3. Re the ”massive subsidy”, given reasonable banking competition amongst the Big Four, doesn’t any subsidy flow through to bank borrowers?

  4. In hindsight we (or at least I) probably should have paid more attention to mckibbin re how rba might take some upward pressure off aud. probably more coincidental but the start of these transactions by the rba did mark a fairly decent turnaround in euraud.

    1. Hard to see such a small transaction making that much difference to pricing, but the demonstration effect may be more powerful than i think. It was both mckibbin and pagan pushing the idea — suggests that they retain a lot of influence, though they have both left the board.

  5. since Joye-boy works for Stutch, and he runs paper, my guess is this was carefully checked by AFR leadership. Joye-boy is breaking some terrific news stories.

  6. Nah, It is Joye speculating again.

    Stevens doesn’t work like that.

    Remember Stutch is Australianising the AFR

  7. Stevens doesn’t talk to people such a joye about what he wi ldo in his job.

    not signing another 5 yeat contract is NOT an early exit.

    The is the last time I take any Joye ‘exclusive’ serious.

  8. Your argument is with Joye not me.

    Another indictment on him.

    feel free with your comments there.

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