Reserve Bank of Australia, Governor, Glenn Stevens
Address to the Committee for Economic Development of Australia (CEDA) Annual Dinner
Melbourne - 20 November 2012
Thank you for the invitation to join you for your Annual Dinner.
Financial markets and policymakers have been living in a more or less continual state of anxiety for over five years. While it was poor-quality lending in the US mortgage market that proved to be a key cause of problems, from quite early on it became apparent that European banks also had serious difficulties, because of their exposure to securities of doubtful quality, their high leverage and their need to fund US dollar portfolios on a short term basis. It was in August 2007 that those acute funding difficulties first became apparent in European markets.
Five years on, US banks have made a lot of progress in working through their asset quality problems and their capital deficiencies. At times the process was not pretty, but the US system is in better shape today as a result. US taxpayers have earned a positive return on the investments in major banks that were made at the height of the crisis.
In Europe progress has been much slower. There are various reasons for that, not least the sheer complexity of coordinating the process of evaluating and strengthening balance sheets across so many countries, where the national capacities to assist are so different, and within the strictures of a currency union. This exacerbates, and in turn is compounded by, the deterioration in economic conditions in Europe, which feeds back to bank asset quality and sovereign creditworthiness.
It is perhaps no surprise then that the news seems to have been dominated by the ebb and flow of anxiety over things like: whether or not the 'troika' will recommend further funding for Greece; whether a national constitutional court will strike down a government's participation in initiatives that will assist other countries; or whether the populace in a country under pressure will reach the end of its tolerance for 'austerity' - and so on. There is 'event risk' almost weekly. This is the European drama.