THE DISTILLERY: Banking stress

We’re talking global economic matters this morning, with three business commentators weaving together the implications of the European Union's initial plan for a Cyprus bailout, the stress tests by the Federal Reserve and the money printing going on the world over. Also in this morning edition of The Distillery, there’s a sneak peak of an important black-tie speech on the balance between big business and small business that’s going down this evening.

But first, Fairfax’s Malcolm Maiden points out that the biggest takeaway from the European Union's proposed Cypriot bailout plan (rejected by the Cyprus parliament overnight) is that Europe’s bank deposits are not entirely protected from regional bailouts.

“There is no logical reason why reconstruction writedowns cannot extend to deposits that are not guaranteed if lenders have taken writedowns and balance sheet repair is still needed. The rehabilitation of Europe is likely to require other deposit ‘bail-ins’ before it is over. Here in Australia, deposits of up to $250,000 are guaranteed. Deposits above are technically unprotected, but in practice the principal is safe. The big Australian banks are in rude health. They have taken over distressed competitors in the past to protect the system, and could do so again if necessary, and from 2015 onwards they will have a deep liquidity facility with the Reserve Bank to allow them to meet cash withdrawal surges if they occur. European bank deposits, on the other hand, carry balance sheet reconstruction risk that varies from bank to bank, and from EU member nation to EU member nation.”

Business Spectator’s Stephen Bartholomeusz looks across the Atlantic to find the Federal Reserve announcing the results of its latest stress tests as Europe deals with Cyprus. It’s an interesting comparison that reveals quite a lot about the contrasting approaches of the US and Europe to their banking problems.

“European stress-testing of its banks, while not adopting as conservative approach as the US, has found many of them short of sufficient capital but because the region has been teetering of the edge of a fiscal abyss and in effective recession ever since the global financial crisis erupted the authorities have been reluctant to push the banks to recapitalise at a faster pace. That has, of course, left them vulnerable and exacerbated the financial fragility of the weaker members of the eurozone…The US is now into its third round of annual stress testing. Its tests are based on worst-case scenarios, against the backdrop of a deep recession in the US, Europe and Japan. In the test unemployment is set at about twice current levels, the share market at about half current levels, house prices are assumed to decline significantly and financial markets generally to be severely disrupted.”

Meanwhile, The Australian’s John Durie is also talking central banks this morning with comments from Westpac bank Rob Whitfield, who is concerned about the difficulty central banks will encounter when they attempt to wind back this liquidity, particularly the longer they wait.

“He has urged the US Fed to start hitting the brakes when the timing is right but says when this happens it will test the global recovery. In an interview yesterday, Whitfield echoed fears from Australian Prudential Regulation Authority chief John Laker and others that too much liquidity threatened to send the global financial system back to where it was at the start of the GFC. The short-term danger is the wall of liquidity that is already resulting in lower standards. Whitfield, a former head of risk management at Westpac and now head of its institutional bank, says his big business customers are now talking more about balance sheets. ‘Risk aversion is still there,’ he says, but terms like ‘lazy capital’ are being used more, which suggests the windows are opening.”

Elsewhere, Fairfax’s Adele Ferguson gives us a preview of the upcoming address to a black-tie dinner by Victorian Automobile Chamber of Commerce executive director David Purchase, who will express growing concerns for the way that big businesses are squeezing smaller businesses, either as competitors or suppliers.

“It is a phenomenon that isn't isolated to Australia. It has inspired much thought, including a book, Supercapitalism, by University of California professor Robert Reich, which argues that since the end of World War II, the world has seen a shift from the citizen to the consumer and investors. ‘The last several decades have involved a shift of power away from us in our capacities as citizens and towards us as consumers and investors.’ Purchase draws on Reich's hypothesis to explain the new aggressive competitiveness of big business, some of which he believes have become a law unto themselves.”

Sticking with local matters, The Herald Sun’s Terry McCrann dials up the language in a piece describing the letter to the Gillard government from the Business Council of Australia, Australian Chamber of Commerce and Industry, Australian Industry Group and Australian Mines and Metals Association on the proposed changed to the Fair Work Australia Act. That’s quite a list of lobbyists.

The Australian Financial Review’s Matthew Stevens says talks between the waterfront union and the employers of its members over efforts to improve industry safety appear to have broken down.

In company news, The Australian’s Richard Gluyas looks at the surge in local banking stocks against the decline in resources shares, typified by the wafer-thin gap that now exists between BHP Billiton and Commonwealth Bank of Australia.

The Australian’s Bryan Frith runs through the possible benefits of the proposed merger between Equity Trustees and Trust Co, as laid out in the bidder’s statement.

The Australian Financial Review’s economics editor Alan Mitchell quotes from the Grattan Institute report Australia’s Bad Drug Deal, written by a former senior health bureaucrat, about how Australians are being ripped off on the price of generic drugs and the public benefit scheme should be reworked to model the New Zealand system.

And finally, The Australian Financial Review’s Chanticleer columnist Tony Boyd looks back at what was supposed to be the trade of early 2013, buying mining stocks for a leveraged upside of the global economic recovery. At the end of the first quarter, that ain’t lookin’ so hot.