Are Australian Banks into Derivatives?

Discussion in 'Markets & Economies' started by errol43, May 22, 2012.

  1. errol43

    errol43 New Member Silver Stacker

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    A video about Derivatives in the USA. Just wonder if Australian Banks are into derivatives.

    Errol 43[youtube]http://www.youtube.com/watch?v=qawqNjCT-uo[/youtube]
     
  2. errol43

    errol43 New Member Silver Stacker

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    No answer as yet..All the gurus will be awake soon in the Land of Auz..They are asleep now dreaming about kookaburras, koalas and kangaroos.

    Regards Errol 43
     
  3. Cracka

    Cracka Active Member Silver Stacker

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    Derivaties is a wonderful catch-all word that covers a multiplicity of things, by definition. "A security whose price is dependent upon or derived from one or more underlying assets. The derivative itself is merely a contract between two or more parties. Its value is determined by fluctuations in the underlying asset. The most common underlying assets include stocks, bonds, commodities, currencies, interest rates and market indexes. Most derivatives are characterized by high leverage."

    They have been around for hundreds of years initially in the form of futures contracts, originally I believe over rural commodities like grain.

    Do Australian banks get involved in the derivatives market, off course. Do they get involved in the type of supposed hedge structure that JP Morgan lost so much on - not sure.

    The classic one recently for a major Australian bank is that NAB's exposure to Collateralised Debt Obligations in the USA. NAB has written off over $1.0B due to its exposure here and is facing a $480M class action relating to this exposure as well. Interestingly, it's own subsidiary MLC is a party to the class action on behalf of it's investors.

    There's not much that the big Australian banks don't play in, it's just the size and the scale of the bets that are different.

    The other biggie for the NAB was it's $4.0B loss on Homeside in the US - it all stemmed back to a flawed hedging strategy on interest rates (read derivatives portfolio) that didn't do what it was supposed to. Big fall in US interest rates and the business was wiped out - classic.

    Derivaties can be a good thing, it's when the wrong bets are made and a "Black Swan" or "X factor" event happens that wasn't foreseen when the potentially complicated stratgey was put in place happens, that all hell brakes loose.

    Are the evil - no. Are they dangerous - potentially. Should they be banned - ???
     
  4. Nukz

    Nukz New Member

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    I posted this somewhere on this forum before but yea... quite worrying.

    [​IMG]
     
  5. null

    null Member

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    +1 with cracka.

    It's a catch-all word which is made to sound evil/bad when financial instos blows up. But no one told "mums and dads investors" (really hate that phrase) they were also toying with derivatives when they went in T1, T2, T3, (and that brissy airport ring road?).
     
  6. errol43

    errol43 New Member Silver Stacker

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    Those SS members who have taken a look at the post The four most profitable banks on the planet...quoted by NZ Herald and posted by Nugget..

    I don't know how to reproduce the graph of Australian Big 4 Banks as posted by Nukz on the 23.5.12 which shows Assets, Liabilities and Derivatives. It would certainly be interesting to know how much profit they generate each year from derivatives as against profits such as bank charges and interest on loans.

    Hope that you can all take a look at post 4 to see how all our banks are exposed to derivatives.

    Regards Errol 43
     
  7. systematic

    systematic Well-Known Member

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    [youtube]http://www.youtube.com/watch?v=ThB9aol7syw[/youtube]

    [youtube]http://www.youtube.com/watch?v=x5Ch2lUhzU0[/youtube]
     
  8. Peter

    Peter Well-Known Member

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    Looks like westpac is the safest bet to have money with.
     
  9. finicky

    finicky Well-Known Member Silver Stacker

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    I remember that the NAB especially came out of the GFC with a big derivative loss and googled a reference.

    Personally I don't feel any of the banks are a safe investment for anyone with a view that another stage of the financial crisis is to come. Investors will dump first and find out some nebulous version of the facts later, because one thing for sure, you can't trust what the bank executives reassuringly say about the situation* (I think I'm channeling Marc Faber). Plus there is our own housing loan/lending deterioration to come probably.

    For depositors, the government will probably come to the rescue again with a boost in deposit guarantees? Government will also probably again stand behind our big banks' creditworthiness in the overseas wholesale borrowing markets.
    Read more: http://www.theage.com.au/business/nab-under-fire-on-cdo-writedowns-20100517-v9g8.html#ixzz1z3QgEqGT
     
  10. systematic

    systematic Well-Known Member

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    While we were assured our banks are strong, both the NAB and Westapc borrowed billions from the Federal Reserve, including the Reserve Bank for more than $U53 Billion, although this was not reported in the mainstream media at the time...

    NAB, Westpac tapped Fed
    December 3, 2010

    NATIONAL Australia Bank and Westpac were among global banks to borrow billions of dollars in emergency funds from the US Federal Reserve at the height of financial crisis.

    The Reserve Bank also tapped the US central bank for than $US53 billion over six months after the financial crisis caused a global shortage of keenly traded US dollars.

    Documents released yesterday by the US Federal Reserve offer some insight into more than 21,000 emergency loans that the Fed provided to investment banks, foreign central banks and other institutions. Most of the funds were released at the peak of the crisis as banks scrambled to secure crucial day-to-day funding.

    Only two Australian banks took advantage of the funding window opened by the Fed as the US bank tried stabilise financial markets, the documents show. European banks and several Japanese banks also took advantage of the facility.

    NAB was the biggest user of the emergency facility among local banks, borrowing $US4.5 billion from the US central bank. NAB, which operates a small US bank, turned to the Fed three times as the crisis intensified.

    A New York-based entity owned by Westpac borrowed $US1 billion from the Fed, at the time pledging more than $US3.3 billion in collateral to back the loan.

    The Westpac borrowings are unusual, as it barely has a North American presence, operating only a US representative office.

    The Reserve Bank also made available billions of dollars of additional funds for local banks during the financial crisis. But it does not break out individual banks. During 2008-09 the Reserve's overnight lending averaged almost $4 billion a day, compared with about $750 million a day in the five years before the financial crisis.


    The Reserve was also one of 10 central banks to use currency swap lines offered by the Fed, the documents show. Others include Britain, Japan, South Korea and Switzerland, while the European Central Bank was the biggest user of the currency swap facility to support US dollar-backed markets.

    The disclosures also show the extent to which day-to-day US businesses were forced to rely on the Fed to raise funds to pay suppliers and pay workers. While Australia has a relatively small corporate debt market, many US companies tap short-term money markets to manage their cash flow.

    The documents show issuers such as Caterpillar, General Electric, McDonald's and Toyota turned to the Fed after the market for short-term notes dried up.

    The Australian borrowings pale in comparison with the big US banks, with players such as Bank of America, JPMorgan and Citibank borrowing $US15 billion at a time.

    A separate US Fed facility set up for investment banks showed Citigroup drew on $US1.8 trillion in loans during the crisis, followed by Merrill Lynch, which used $US1.5 trillion.

    Goldman Sachs borrowed money through an overnight loan program 52 times in amounts as high as $US18 billion.


    http://www.theage.com.au/business/nab-westpac-tapped-fed-20101202-18i58.html#ixzz1z7zDuGf6
     
  11. errol43

    errol43 New Member Silver Stacker

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    Thanks for your post Systematic..Our banks are not as safe as we are some times led to believe.

    I don't suppose if you know, Has Westpac and The National paid the borrowed sums back yet or are they paying it the form of time payment?

    Regards Errol 43
     
  12. nonrecourse

    nonrecourse Well-Known Member

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    Makes me wonder if I should not move my bullion from the bank vault to Guardian Vaults in William Street Melbourne

    http://www.guardianvaults.com.au/

    Anyone else have an opinion on this ?

    What sort of fee is there? I am currently paying around $300 p.a.

    Kind Regards
    non recourse
     
  13. systematic

    systematic Well-Known Member

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    We are practically always lead to believe our banks are safe as any hint of otherwise seems to be "unthinkable".

    I don't know if the sums have been paid back but the NAB posted a multibillion dollar profit according to BusinessDay May 10, 2012

    "NAB's first-half earnings rounds off the big bank interim reporting season with a collective $12.6 billion in profits handed down by the big four over the past few months.

    Despite the offshore problem's NAB's cash profit came in at $2.83 billion for the six months to March, up a robust 6 per cent from the same time a year earlier. Momentum, though, slowed from the September half where cash profit growth came in at 1.3 per cent."

    Read more: http://www.smh.com.au/business/australian-crawl-holds-back-nab-20120510-1ye68.html#ixzz1z8OWx07O
     
  14. errol43

    errol43 New Member Silver Stacker

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    Here is another graph on derivatives! Another take on derivatives.


    Regards Errol 43[youtube]http://www.youtube.com/watch?v=bBCN6dJ-m1Y[/youtube]
     
  15. errol43

    errol43 New Member Silver Stacker

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    For all those SS members concerned about Fractional Reserve Banking, Have a look at Post 4 from Nukz.

    Australian Banks are big time gamblers too and why not. If you loose,don't worry we are covered by the government.

    Derivative trading is far more of a danger than FRB.

    Regards Errol 43
     
  16. hawkeye

    hawkeye New Member Silver Stacker

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    I think the the thing with derivatives is that they are a market solution to the problems caused by FRB and fiat. Credit default swaps, etc.

    That is, derivatives are looking at the symptoms and trying to solve them. It's the equivalent of giving someone painkillers to solve appendicitis. Hey, the pains gone, problem solved!

    Of course, the reason that the underlying problem can't be solved is because govt's have outlawed any competition to their own extremely flawed monetary system.
     
  17. kkkrazy

    kkkrazy New Member

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    about 4 years ago australian news paper reported 13.1 trillion exposer for the big 4
     
  18. hyperinflation

    hyperinflation New Member Silver Stacker

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    Of course Aus banks are into derivatives.. They are some of the largest market-makers in AUD interest-rate swaps, not to mention quite active in CDS markets, FX options, etc...

    NAB lost $300 million about 10 years ago when they had a rouge trader that sold loads of FX options.
     
  19. Roswell Crash Survivor

    Roswell Crash Survivor Well-Known Member Silver Stacker

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    Unreservedly, yes.
     

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