With all that’s been happening in US finance markets, I've asked our Chief Financial Officer (CFO) Neal Matotek to put together some details about the current market conditions and what it means for Savings & Loans and our members. Here's what he's got to say. Greg.
Look at any newspaper, television or news website over the last week and you’re sure to see something about the US financial crisis. It’s not surprising given the importance of the US economy to the rest of the world.
It was about a year ago when the trouble all started, with the onset of the global credit crunch. This was triggered by the sub-prime crisis, which refers to a type of loan where money was lent to borrowers who could least afford it. When borrowers started defaulting on loans, mortgage lenders started to go out of business.
After a period where things appeared to stabilise, the impacts of the credit crunch reared its head again in July when Fannie May and Freddie Mac, the two biggest mortgage companies in the US (they own or guarantee more than 40 percent of loans in the US), had to be bailed out by the US Federal Reserve.
Now the fallout continues. In the last week, we’ve seen the collapse of investment bank Lehman Brothers, and the rescue of another investment bank, Merrill Lynch as well as insurance giant, American Insurance Group (AIG). Now two of the United Kingdom’s largest banks, Lloyds and HBOS, are close to merging to shore up that country’s banking sector.
I’m watching these developments with great interest. The obvious question for every Australian is ‘how is this going to impact on my money?’ And the broader question for me is ‘how is this going to impact on Savings & Loans?’
Firstly, I feel pretty confident in saying Australia’s financial services industry is one of the most heavily regulated in the world, so the chance of this crisis leading to a disaster here is extremely low. This view has been echoed by the Reserve Bank and Federal Government.
Obviously, Australia has felt some impacts. That’s inevitable when we live in such a global and connected world. For most Australian financial institutions, the major impact has been the increased costs for securitised funding.
Speaking from a Savings & Loans point of view, we don’t have sub-prime lending and have never engaged in this type of lending. We also don’t have a heavy reliance on securitisation to fund our loans, rather we have a strong deposit base to draw on which we use to fund a large percentage of our mortgage business.
Most importantly, we don’t have overseas investments. Most of our assets are invested in mortgage secured loans, personal loans and deposits with Australian financial institutions.
As I said above, the biggest impact from the credit crunch for us has been that the small percentage of loans we fund through securitisation (about 20 per cent), has become more expensive. This simply means that our margins on these loans have reduced slightly.
If you have any questions or comments on this issue, send them through and I can certainly have a look at them and provide a response for you.
Neal Matotek
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