Bomb ticking for off-balance banks

[RobertB]

Bomb ticking for off-balance banks

Adele Ferguson | February 18, 2008

A TICKING bomb for the banking sector is its off-balance sheet activities, which at last count stood at $12.9 trillion.

Australian banks have a big exposure to derivative markets. Their total shareholder value of $110 billion is dwarfed by the size of the banks' collective exposure to derivative markets of $12.9 trillion.

Put simply, the total derivative positions of the banks are 117 times as big as the banks' shareholder value. If even 1 per cent of these derivatives contracts default because third parties at the other end get into trouble, the whole shareholder wealth would be wiped out and our banks could be broke.

Given total bank assets are $2.1 trillion, it begs the question why Australia's banks have exposure to $12.9 trillion of derivatives positions. All banks hedge to reduce risk, but this is a big amount of hedging.

For example, Westpac has a face value of $1.4 trillion in derivatives at September 30, 2007, compared with an equity base of $16 billion, which is a multiple of almost 100 times.

http://www.theaustralian.news.com.au/story/0,,23229288-7583,00.html

[jds6958]

good article...total global derivatives may actually be understated...

[Nova]

If Australian banks are that overextended, you have to figure so are American ones. I haven't been able to find any solid figures. One article I read said the total money tied up in US derivatives is twice the value of the US stock markets combined. Granted not all the derivatives are bad investments. But even if only 10% are losses, that is more than the total worth of the Australian banks. If the same thing follows here in the US, than banking is in dire straits. Just consider at all the money the FED has loaned banks in the past 2 months.

I've switched from looking at whether things will get bad. To looking at how bad. Am I blowing smoke or is there really a crisis brewing? One of the factors that concerns me is the growth in money supply. Not that graphs about M1, M2, M3 & CPI are my forte. But since inflation in goods (rising CPI) follows large expansions in currency circulation, I expect double figure inflation within the next year.

[jds6958]

If Australian banks are that overextended, you have to figure so are American ones. I haven't been able to find any solid figures. One article I read said the total money tied up in US derivatives is twice the value of the US stock markets combined. Granted not all the derivatives are bad investments. But even if only 10% are losses, that is more than the total worth of the Australian banks. If the same thing follows here in the US, than banking is in dire straits. Just consider at all the money the FED has loaned banks in the past 2 months.

I've switched from looking at whether things will get bad. To looking at how bad. Am I blowing smoke or is there really a crisis brewing? One of the factors that concerns me is the growth in money supply. Not that graphs about M1, M2, M3 & CPI are my forte. But since inflation in goods (rising CPI) follows large expansions in currency circulation, I expect double figure inflation within the next year.


The last I read the U.S. accounts for $180 trillion of the "known" global $514 trillion.