A DECADE BEFORE AND AFTER THE GLOBAL FINANCIAL CRISIS: SECTORAL ANALYSIS

INTRODUCTION

The global financial crisis (GFC) occurred from mid-2007 to early 2009. It began with a downturn in the US housing market and became an international banking crisis due to excessive risk taking by banks which spread globally throughout the financial system. Governments around the world bailed out banks and implemented accommodative monetary and fiscal policies to prevent the collapse of the world financial systems. Immediately after the GFC came a global economic downturn, where many countries experienced their deepest recessions since the Great Depression.

The impacts of the GFC and the economic downturn were smaller for Australia than for other advanced economies, for example, the immediate decline in house prices was for a shorter duration compared to the United States. The Australian government and the Reserve Bank of Australia (RBA) implemented policy responses to ensure that the Australian economy did not suffer a major downturn. Policy responses included lowering the cash rate, expansionary fiscal policy and guarantees from the Australian Government on deposits and bonds issued by Australian banks. After the GFC, Australia implemented some of the new global banking regulations, with a major impact being tightening of lending standards.

This article compares the decade before and after the GFC and highlights changes in financial behaviour for the private non-financial, financial, national general (Commonwealth) government, and household sectors observed through the estimates published in this publication.


PRIVATE NON-FINANCIAL CORPORATIONS

Graph 1 shows private non-financial corporations’ investment (Gross fixed capital formation - GFCF) grew steadily up to December quarter 2008, slowed during the GFC, and grew more strongly up to December 2012. This growth was mainly due to mining investment. Mining investment’s contribution to GDP grew dramatically from September quarter 2000 to the GFC and then remained subdued during the GFC due to damaged business confidence and falls in commodity prices. Resource demand (in particular liquified natural gas) from Asia drove rapid growth in mining investment from 2010 to the peak in June quarter 2012. Since the peak, mining investment has slowed down as large projects concluded and new projects did not materialise as commodity prices weakened. Growth in recent quarters was driven by maintenance of existing mining productive capacity and some improvements in business confidence and conditions in non-mining investment.

Graph 1 shows private non-financial corporations (PNFC) investment is mainly funded through a mix of internal (gross saving) and external financing (net borrowing). In the year leading up to the GFC, most funding was through borrowing due to favourable credit market conditions. During the GFC and up to early 2011, as confidence in the financial market collapsed and credit became more expensive and harder to get, financing was mainly funded through saving, and PNFC started to pay off debt to reduce risk. Since early 2011, PNFC are again using a mix of saving and borrowing to pay for investment. The proportion of internal funding has grown in recent years with profits made by the mining sector being used to fund investment and pay off debt. Offsetting the internal mining financing has been the external financing used by other PNFC due to the significant number of privatisations of state government utility and port corporations, and mergers and acquisitions activity within PNFC sector.


Graph 1. Private non-financial corporations, investment and financing

Graph 1 shows Private non-financial corporations, investment and financing

Source: Australian National Accounts: Finance and Wealth (cat. no. 5232.0)

PNFC financing of investment from external sources can be broadly classified to equity (listed and unlisted) and debt (loan borrowing and debt security issuance). Graph 2 shows that in the three years before the GFC, there was an equal share of equity and debt financing, with financing via debt securities picking up compared to the early 2000s. Equity financing dilutes ownership and control while debt financing imposes borrowing costs and increases risk. Risk associated with debt financing may be considered prudent during periods of buoyant income, stable interest rates, and good investment opportunities (as was the case during the mining boom) as leveraged corporations stand to make substantial return on investment compared with unleveraged corporations. Graph 2 shows the significant repayments of loan borrowing and the decline in debt security funding during the GFC. In the decade since the GFC, the main external funding source has been equity financing followed by loan borrowing, with debt security funding only playing a marginal role. The significant amount of equity funding and to a lesser extent loan borrowing since late 2013 highlights the external financing used for privatisations, and mergers and acquisitions that have occurred in the last five years.

Graph 2. Private non-financial corporations, debt and equity financing, transactions

Graph 2 shows Private non-financial corporations, debt and equity financing, transactions

Source: Australian National Accounts: Finance and Wealth (cat. no. 5232.0)

Note: The significant negative equity transactions in December 2004 and June 2005 were due to a large corporate group restructure, with the eventual transfer of its Australian subsidiaries moving offshore.


FINANCIAL CORPORATIONS: BANKS AND SECURITISERS

Banks are an important part of Australia’s financial system. Their business includes taking deposits from the public, raising funds through capital markets and providing loans to households and businesses. This traditional banking activity of raising funds to lend directly to customers may be described as an “originate to lend" model. Ten years prior to the GFC the traditional banking model began to change and activities described as "originate to distribute" (where banks distribute loans rather than keeping them on bank balance sheets) started to appear in Australia in the form of securitisation undertaken by securitisers.

Securitisers are trusts or corporations that pool various types of assets such as property loans and credit card debt and package them as collateral backing for bonds or short-term debt securities (asset-backed securities) to sell to investors. The most common assets securitisers buy are residential mortgages originated by financial institutions such as banks, credit unions, or specialist mortgage managers. Securitisers use the income generated from the pooled loan assets to pay interest to the holders of the asset backed securities.

In Australia over half the securitisers are subsidiaries of Australian banks. One of the main reasons why banks undertake securitisation is to move some of their loan assets off the licensed bank balance sheet, and transfer them to securitisers which are under minimal regulation. Securitisation enables the large banks to expand their lending business and transfer credit risk to the holder of the securities.

During the GFC, to enhance liquidity in the financial markets, the RBA expanded the range of securities it was willing to hold under repurchase agreements, to include both residential mortgage backed securities (RMBS) and asset-backed commercial paper (ABCP) issued by securitisers. Initially the RBA accepted only the asset backed securities that were eligible for sale in the wholesale markets, however as the crisis worsened the RBA started to accept internal securitisation securities. Internal securitisation is where a licensed bank sells a pool of mortgages to a related special purpose vehicle (SPV), and this SPV issues debt securities which are held entirely by the licensed bank which originated the mortgages. The sole purpose of these asset backed securities is to use as collateral with the RBA in its repurchase agreement program, that is these securities are not available to investors on the wholesale markets.

Graph 3. Banks and securitisers net loan transactions

Graph 3 shows Banks and securitisers net loan transactions

Source: Australian National Accounts: Finance and Wealth (cat. no. 5232.0)

Graph 3 shows the significant growth in total bank and securitisation loan net transactions (new loan issuance less repayments) in the 10 years before the GFC. This growth was related to financial liberalisation in Australia from the early 1990s, plus lower interest rates and inflation making it cheaper to borrow. The growth in ‘on market’ securitisation was driven by relatively high mortgage interest rates relative to capital market interest rates, making funding of mortgage lending in the wholesale market quite profitable. Just prior to the GFC, in the June quarter 2007, total loan net transactions was $78.0b, with banks and 'on market' securitisers contributing $50.2b and $27.7b respectively.

As the GFC hit there were impacts on the 'on market' securitiser loan market (Graph 3), with negative net loan transactions (where repayments were larger than new loan issuance) from September quarter 2007 through to March quarter 2011. There were significant net loan repayments in the December quarter 2007 and from the June quarter 2008 to December 2009. The main factor driving negative growth in securitised loan assets was the oversupply of RMBS in the wholesale markets. Prior to the crisis well over half of Australian RMBS were bought by offshore investors. With the onset of the GFC, reduced demand from overseas investors resulted in a sell off of the RMBS into the domestic market as overseas investors liquidated their portfolios. As a result, cost of purchase of these securities was prohibitive to make new issuance of securities economic. Soon after the GFC, the Commonwealth government implemented a policy to support competition in the residential mortgage market by purchasing new RMBS issues within the 'on market' securitisation market. By December quarter 2011, the investment was nearly $12.0b. In the last three years the Commonwealth government has been gradually divesting the RMBS as the 'on market' securitiser market began to recover. From mid-2017 the ‘on market’ securitisation market has seen some resurgence of loan asset issuance coming through from non-bank securitisers.

Graph 3 shows that overall the banks loan market (including the internal securitised market) significantly slowed during the GFC. This reflected difficult credit conditions in the global wholesale markets; cautious behaviour by households; slowed economic activity; and stronger lending standards. Bank loan market growth picked up in 2010 reflecting ongoing strength in deposit funding for lending and less reliance on wholesale funding. It slowed down again in 2011-12 reflecting deleveraging behaviour by households and business, and also business moving more towards wholesale markets for their funding. From late 2012 there was significant growth in the bank loan market with a peak of $71.6b in March quarter 2015 reflecting the large demand in the housing market due to low interest rates, along with increasing house prices and high levels of investor demand within the housing market. Since then there has been an overall slowdown up to September quarter 2018 (with some volatility). This coincides with tighter lending standards (with investor housing slowing in particular in 2018), collateral requirements for higher-density residential projects and other commercial property development, and banks reduced exposures to resource related businesses.

Graph 3 shows the net positive transactions of the internal securitised loans evident during the GFC, as banks obtained funds from the RBA repurchase agreement program. Internal securitisation remained subdued from 2009 until the sovereign debt crisis in Europe in 2011, where transactions in internal securitisation can be observed as banks prepared for the deterioration in the credit markets, and planned to have RMBS ready for future transaction in the repurchase lending program with the RBA. Around the same time, APRA announced the introduction of the committed liquidity facility (CLF) in response to Basel III liquidity reform requirements, which came into affect on the 1st of January 2015. The CLF ensures that participating banks have enough access to liquidity to respond to an acute stress scenario. To meet the regulatory requirements set by authorities, the internal securitisation market of banks increased significantly up until 2015 when the CLF was introduced.


NATIONAL GENERAL GOVERNMENT

The national general (Commonwealth) government contributes to economic growth through spending on final consumption and investment. Prior to the GFC, this expenditure and investment was mostly funded through substantial gross saving driven by growth in tax receipts. During this time the national general government was in a net lending position (allowing it to invest in the financial markets or pay off liabilities). Since September quarter 2008, the national general government has been in a net borrowing position. Graph 4 shows the government expenditure to stimulate the Australian economy during the GFC (negative gross saving). In the years after the GFC, and up to early 2018, the national general government had been in a net borrowing position, however this borrowing is declining, reflecting improved taxation receipts from corporations due to increased profits related to commodity prices and increased compensation of employees.

Graph 4. National general government, investment and financing

Graph 4 shows National general government, investment and financing

Source: Australian National Accounts: Finance and Wealth (cat. no. 5232.0)

Graph 5 shows the national general government total outstanding liabilities. For the ten years up to the GFC, national general government liabilities were fairly stable and the average value of the total liabilities for the ten year period was $203.6b. Unfunded superannuation debt, national general government long term bonds and other liabilities (mainly accounts payable) were the major components of the liabilities and were on average $88.8b, $67.7b and $40.3b respectively for the 10 year period. During this period, the proportion of national government bonds started to fall (indicative of the national general government paying off some of their debt) while the unfunded superannuation liability and ‘other’ components were fairly stable.

Graph 5. National general government, outstanding liabilities

Graph 5 shows National general government, outstanding liabilities

Source: Australian National Accounts: Finance and Wealth (cat. no. 5232.0)

Graph 5 shows that the national general government funded its net borrowing from the onset of the GFC and up to September quarter 2018 by issuing substantial amounts of long term bonds. Since the start of the GFC, in the ten year period up to September 2018, total liabilities, long term bonds outstanding and unfunded superannuation liabilities increased by $735.6b, $522.2b and $220.3b respectively.

Graph 6. National general government, bonds outstanding, by holdings by sector

Graph 6 shows National general government, bonds outstanding, by holdings by sector

Source: Australian National Accounts: Finance and Wealth (cat. no. 5232.0)

Graph 6 illustrates the ownership of national general government bonds. Ten years prior to the GFC, institutional investors (pension funds, life and general insurers and investment funds) were the major investors, however their investment declined and foreign investors took up this declining share as the GFC approached. Since the GFC, foreign investors have been the major investor in these bonds. A couple of years after the GFC, foreign investors owned over 70% of the bonds outstanding; their ownership has started to decline as other sectors started to invest in the market, but despite their share declining to 54.4% at the end of September quarter 2018, foreign investors have maintained their level of investment, with the value of investment increasing to $316.5b as at the end of September quarter 2018. Graph 6 shows the increasing investment by banks since the GFC, reflecting tightening of regulative standards with banks required to hold a certain amount of high quality low risk assets. The institutional investors investment increased in line with total national general government issuance, and central bank investment increased from 2012 and reflects the use of these bonds in the repurchase agreement program.


HOUSEHOLDS

Household net worth (Graph 7) has grown in the decade prior to the GFC and after the GFC up to September quarter 2018, with favourable borrowing conditions and asset price growth. Net worth fell for five quarters during the GFC starting in March quarter 2008, however since the trough in March quarter 2009 household net worth has almost doubled, increasing to $10.4 trillion in September quarter 2018; net worth per person grew by 68.3% to $415,024 per person compared to $246,616 per person in March quarter 2009.

Graph 7. Households, net worth by component

Graph 7 shows Households, net worth by component

Source: Australian National Accounts: Finance and Wealth (cat. no. 5232.0)

Superannuation assets of households have grown substantially since the introduction of the compulsory superannuation guarantee system in 1992, from 15.1% of total household assets as at the end of September quarter 1998 to 22.4% by September quarter 2018 (Graph 7). During the same period, residential land and dwelling assets grew from 48.6% to 50.7% as a proportion of total assets. Superannuation assets and residential land and dwelling assets make up most of household assets; together they represented 63.7% in September quarter 1998 and 73.1% at the end of September quarter 2018. The rest of household assets are mainly financial: currency and deposit and shares. Housing loans are households’ largest liability, making up 59.6% of total liabilities at the end of September quarter 1998 and 74.0% at the end of September quarter 2018.

Graph 8 shows the compositional shift prior to the GFC of households moving towards share ownership up to and including June quarter 2007. During this time, the Australian share market was performing well and some households were taking advantage of low interest rates to borrow to invest in the share market. One of the most significant initial impacts of the GFC was a decline in the value of share markets around the world including the Australian Stock Exchange. Households left the share market and moved to less risky assets such as deposits. Also driving the significant increase in household deposit assets was the national general government economic stimulus payments during the GFC. Graph 8 shows the switch to deposits since the GFC has held despite the low interest rate environment, mainly due to banks providing competitive deposit interest rates to households to obtain these less risky source of bank funding for their loan books; and also due to mortgage offset accounts which have become a popular means for householders to decrease their mortgage interest payments.

Graph 8. Currency, deposits and shares as a proportion of households total financial assets

Graph 8 shows Currency, deposits and shares as a proportion of households total financial assets

Source: Australian National Accounts: Finance and Wealth (cat. no. 5232.0)

Graph 9 shows the household wealth effect produced by asset price changes adjusted for inflation. Prior to the GFC, households increase in net worth from holding gains was mainly due to real holding gains from residential land and dwelling assets, which was the most significant asset class held by the household sector (Graph 7). During the GFC, Graph 9 shows significant real holding losses from both non-financial and financial assets; however the financial assets recorded real holding losses one quarter before the non-financial assets, in December quarter 2007. Graph 9 illustrates the quick rebound after the GFC in real holding gains for both non-financial and financial assets, but also a small period of holding losses in mid-2010 to late 2011. Since then there have been robust total real holding gains and some real holding losses in the most recent quarters from residential land and dwelling assets.

Graph 9. Households, real holding gains and losses

Graph 9 shows Households, real holding gains and losses

Source: Australian National Accounts: Finance and Wealth (cat. no. 5232.0)

The housing debt to residential land and dwellings ratio shows the extent to which household residential land and dwelling assets are geared (i.e. assets are dependent on debt). An increase in the ratio indicates that mortgage debt grew faster than the growth in value of the residential land and dwelling asset. Graph 10 shows the ratio in September quarter 1998 was 18.8%, gradually growing to 24.4% in March quarter 2008 (early stages of the GFC), peaked in March quarter 2009 to 29.0% before falling to 25.4% in March quarter 2010. The peak in March quarter 2009 reflects a sharp decline in the value of residential land and dwellings during the GFC, while the fall in March quarter 2010 reflects the fairly rapid recovery in the housing market a year later. Since March 2010, the ratio has increased, peaking at 30.0% at 30 September 2012. In the four years up to September quarter 2018, the ratio gradually declined reflecting: significant growth in the value of housing; tightening lending standards and limits on the growth in investor housing loans; and the use of banking products such as offset accounts to minimise housing interest payments. In the last few quarters up to September 2018 the ratio has been trending up, this has been mainly due to recent declines in house prices, especially in Sydney and Melbourne.
Graph 10. Housing debt to residential land and dwelling

Graph 10 shows Housing debt to residential land and dwelling

Source: Australian National Accounts: Finance and Wealth (cat. no. 5232.0)

The housing debt to income ratio has increased throughout the last 20 years, from 62.4 to 147.8. The ratio indicates that housing debt was 62.4% of household annual disposal income in September quarter 1998 but in September quarter 2018, housing debt is 1.48 times the annual household disposal income. Graph 11 shows faster growth in the ratio in mid 2000s when housing debt grew faster than gross disposable income. This coincided with financial liberalisation in Australia, along with lower nominal interest rates and lower inflation, which increased households’ ability to borrow. Australian households in general took out larger and more flexible housing loans. Just before the GFC, as disposable income grew the ratio flattened. During the GFC, housing debt and gross disposable income growth both fell and the ratio stayed flat. For the last four years, with lower interest rates and slower growth in disposable income, housing debt has grown faster than disposable income and the ratio increased 17.9 percentage points.

Graph 11: Housing debt and gross disposable income, quarterly movements

Graph 11 shows Housing debt and gross disposable income, quarterly movements

Source: Australian National Accounts: Finance and Wealth (cat. no. 5232.0); Australian National Accounts: National Income, Expenditure and Product (cat. no. 5206.0)


CONCLUSION

This article has highlighted some significant changes in behaviour for each sector before, during and after the GFC, shown through finance and wealth data in this release.