'They came with suitcases asking for cash': Kelly
An insider described it as like a bushfire. Just when you thought it was under control the wind changed or spot fires broke out.
On the fifth anniversary of the collapse of US investment bank Lehman Brothers, Kelly reveals the depth of Westpac's concerns, its crisis management and the extent of collaboration between the big four bank chiefs, government and the Reserve Bank.
In the first account by a major Australian bank chief executive, Kelly says: "They [depositors] would want to pack their money into the suitcase and take it away with them."
The panic in the community in the four weeks following the collapse of Lehman, before the government stepped in to guarantee deposits, was palpable.
"People were reading what was going on around the world, they were seeing other people losing their money, seeing banks collapse - so naturally people were thinking, 'I had to protect myself first."'
Reserve Bank governor Glenn Stevens was monitoring the flow of banknotes that were physically being taken from bank accounts. In September 2008 the Reserve reported printing an additional 24 million $100 notes.
Now, despite the fact the US economy is growing again and there is less hysteria about European banks, Kelly says the financial crisis is not finished. "Financial crises have long tails ... because they are about leverage and we still have so much leverage in the system ... so many countries with huge overhangs of budget deficits. [Some] banks are still struggling to get their own gearing into order and manage the new regulatory environment."
At Westpac headquarters, the response to the financial crisis was militaristic in its precision. At the start of 2008 - nine months before Lehman fell over - Westpac established the equivalent of a war room staffed by an inner circle of key executives. This committee was codenamed Helix.
"We didn't want to call it a crisis committee because you don't want to send messages through your organisation that will end up being leaked outside that you see some level of crisis going on in the banks," Kelly says.
Kelly and her key lieutenants - the chief financial officer, the head of the retail bank, the leader of risk management, the head of corporate banking and the bank's treasurer - were its tactical response team. When Lehman collapsed the team met twice a day to assess the situation.
"We were trying to get the best assessment we could of the market ... in that immediate aftermath. Funding was a major area of concern in Australian banks because of our reliance on offshore wholesale funding," she says.
Thanks to the decision by the American government to allow Lehman to fail rather than stage-manage a rescue, banks around the world - even the AA-rated institutions like the big four in Australia - moved into uncharted territory.
"By September 2008, on the back of this Lehman situation, we had to look at funding that was falling due and which markets were open," Kelly says. "Credit markets literally froze - banks would not lend to each other because nobody quite knew who was sitting with problems, who might be the next domino to fall and therefore you might not get your money back."
The task of the Helix committee was to track the unravelling of the hugely interrelated financial system. Lehman was part of this tangled financial web - it had counterparties who themselves had counterparties.
"[We were] trying to understand any exposures that we may have had in that scenario," Kelly says. "We didn't think we had that much [exposure] but you want to run those down, understand who may have been at the other end of the counterparties that Lehman may have been engaging with, think through the next step, what might be next to fall and what that might mean."
Another Westpac insider described it as like a bushfire. Just when you thought it was under control the wind changed or spot fires broke out.
It is a process that Westpac's Australian competitors were also undertaking and from which none ultimately escaped unscathed.
Helix had another vital task. Its members had to execute what the banking industry calls "deep dives" across the portfolio of its own clients. Chief on the watch list, Kelly says, were the margin lending book and "those big highly leveraged entities in Australia - your Babcock & Browns, Allcos and ABC Learning - and reviewing those for any unexpected exposure that we wanted to bring to the surface early".
Meanwhile, in Canberra, another war cabinet had been formed. It was made up of then prime minister Kevin Rudd, his deputy Julia Gillard, treasurer Wayne Swan and finance minister Lindsay Tanner.
This gang of four, as it became known, were the touch point for senior executives in the banking industry and Kelly explains that at the height of the financial crisis communication was regular. Every two weeks the four major bank chief executives (and sometimes their chairmen) would meet with Rudd, Swan and others, and in between times they spoke on the phone.
The inner circle was completed by senior Treasury officials, the chairman of the Australian Prudential Regulatory Authority, John Laker, and Reserve Bank governor Stevens.
The collapse of Lehman Brothers stamps the climax of the global financial crisis in memory. Like the death of Princess Diana or the assassination of JFK, people can recall what they were doing at the time.
"I can remember that very weekend having dinner with a very senior banker from one of the investment banks in the US and [he] obviously knew just how parlous the situation was," Kelly says. "He thought Lehman wouldn't be allowed to fail. When it did I think that was a really crystallising point about just how much into unknown territory we were going."
Kelly tells of the intensity of the ensuing weeks. She says she is not a person who needs much sleep and during this period it was a real advantage.
"[I remember] night after night after night sitting and watching the [US stockmarket index] Dow Jones in particular and wondering what was happening - the extraordinary volatility. Stock prices were moving 6 per cent in a day."
Australia's big four banks, were among the strongest, best capitalised and best rated in the world, but the second-tier lenders were more vulnerable.
Kelly says nervous depositors were actually taking money from other areas (smaller banks, credit unions, cash management trusts etc) and putting them with the big banks.
"We saw deposits flooding in our door. They were coming from somewhere and that was clearly not good for the system.
"I tried to urge calmness and assure them of their safety."
She acknowledges the situation was placing a great strain on the smaller banks and argues the government's move to guarantee customer deposits and banks' wholesale funding was "entirely the right response".
Five years on, she warns against complacency. "There will be another crisis at some point. It may emerge out of shadow banking systems that are not subject to those regulations. Who knows exactly when and how [it] will evolve."