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Report on Impacts of the credit rating downgrade of the four biggest banks in Australia
Executive summary
On the 2nd of December 2011, Standard & Poor's, one of three biggest ratings agencies in the world, downgraded credit ratings of four major Australian banks including ANZ, Commonwealth Bank, National Australia Bank and Westpac one notch to AA-minus, the fourth-highest credit rating on Standard & Poor's scale (Jacob 2011). These four banks are the biggest banks in Australia, listed in the top 20 of Global Finance’s ‘World’s 50 Safest Banks Report 2011’ (Reed 2012) and account for 80 per cent of lending in Australia, based on about 40 per cent of their funds raising in credit markets (Greber 2011). Due to the important role of Standard & Poor's and its credit rating service in the international financial market and the central position of four top Australian banks in the Australian financial market, this opinion of Standard & Poor's is likely to impact significantly financial institutions as well as federal and local government in Australia.
Based on the relationship between economic factors such as interest rate, exchange rate, unemployment; the nature of banking activities and the role of credit ratings, the paper forecasts that:
(1) Four banks will meet difficulty to raise money with funding cost higher or they probably do not mobilize enough money for lending demand because of reputation risk, losing public trust and the pressure of mobilizing money for lending demand. Due to the difficulty of borrowing capacity, there will be the reduction in lending capacity of these banks and therefore, the borrowing and lending interest rates of four banks will go up.
(2) If there is not any intervention from the government, the increasing lending interest rates will lead to a large amount of borrowers who will start to default. As a result of this, the equity of mortgage holders is likely to decrease and some of them possibly go... [continues]
Report on Impacts of the credit rating downgrade of the four biggest banks in Australia
Executive summary
On the 2nd of December 2011, Standard & Poor's, one of three biggest ratings agencies in the world, downgraded credit ratings of four major Australian banks including ANZ, Commonwealth Bank, National Australia Bank and Westpac one notch to AA-minus, the fourth-highest credit rating on Standard & Poor's scale (Jacob 2011). These four banks are the biggest banks in Australia, listed in the top 20 of Global Finance’s ‘World’s 50 Safest Banks Report 2011’ (Reed 2012) and account for 80 per cent of lending in Australia, based on about 40 per cent of their funds raising in credit markets (Greber 2011). Due to the important role of Standard & Poor's and its credit rating service in the international financial market and the central position of four top Australian banks in the Australian financial market, this opinion of Standard & Poor's is likely to impact significantly financial institutions as well as federal and local government in Australia.
Based on the relationship between economic factors such as interest rate, exchange rate, unemployment; the nature of banking activities and the role of credit ratings, the paper forecasts that:
(1) Four banks will meet difficulty to raise money with funding cost higher or they probably do not mobilize enough money for lending demand because of reputation risk, losing public trust and the pressure of mobilizing money for lending demand. Due to the difficulty of borrowing capacity, there will be the reduction in lending capacity of these banks and therefore, the borrowing and lending interest rates of four banks will go up.
(2) If there is not any intervention from the government, the increasing lending interest rates will lead to a large amount of borrowers who will start to default. As a result of this, the equity of mortgage holders is likely to decrease and some of them possibly go... [continues]
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