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Banks in the firing line as interest rates soar

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The rising interest rates pose a significant risk for banks as they anticipate a potential surge in bad loans and defaults, writes contributor Will Banks

This concern is further amplified by the recession pressures on the global economy. If this scenario unfolds, a substantial number of mortgage holders may find themselves unable to keep up with their repayments.

Australia is not exempt from these risks, with the International Monetary Fund (IMF) recently warning that the level of risk in Australia’s housing market is the second highest in the developed world.

The IMF has identified higher levels of household debt, rising interest rates contributing to higher mortgage rates, and elevated house prices as factors that increase the risk of defaulting on mortgage repayments for Australian households with mortgages.

Today’s recession fears versus the GFC: What’s the difference? READ MORE

The IMF also notes that economies with higher house prices and household debt are particularly vulnerable to stresses in the financial sector, although it acknowledges that banks are better capitalised now than during the global financial crisis.

Despite this concern, Australia’s major banks have experienced a highly profitable 18- months, with earnings reaching nearly $AUD 30 billion, in 2022. The Commonwealth Bank (CBA) reported record 2023 half-year cash profit of $5.15 billion, representing a 9% increase. This substantial profit growth can be attributed to the rapid-fire interest rate rises, having inflated the bank’s profit margins.

In response to this positive financial performance, the bank significantly raised its dividend rate and increased the size of its share buyback program, actions that are expected to be well-received by shareholders.

KPMG: Major Australian Banks: Half Year 2023 Results Analysis

KPMG: Major Australian Banks: Half Year 2023 Results Analysis

On June 6th, the Reserve Bank of Australia (RBA) raised the cash rate target by 25 basis points to 4.10 per cent. The decision by the RBA in response to inflation in Australia, is likely to take some time before it returns to the target range. The banks should therefore not be complacent and understand the potential consequences of the current economic climate and consider measures to mitigate

the risks associated with higher mortgage repayments and the possibility recession pressures. It also remains to be seen how these challenges will unfold in the 12 to 24 month and how banks will navigate through them.

Bank profitability

Prevailing interest rates are a significant factor influencing a bank’s profitability. While rising interest rates can present challenges, they also create opportunities for banks to generate sustainable profits. Banks can achieve this by focusing on their net interest margin, which is the difference between the interest earned from lending and the interest paid on deposits. As interest rates rise, banks can adjust the rates they charge on loans to reflect the higher cost of funds. This allows them to preserve or even expand their net interest margin, ultimately leading to increased profitability.

CBA is a good example of this, as they have been increasing their lending rates at a faster pace than their deposits, which serve as their primary source of funding. In the last quarter, CBA’s net interest margin, rose by 18 basis points to 2.1%, underscoring record profit.

Australian banks have also benefited from having a diversified loan book.

By offering a mix of fixed-rate and variable-rate loans, banks can mitigate the impact of rising interest rates. Fixed-rate loans ensure a stable income stream as they are not directly influenced by interest rate fluctuations. On the other hand, variable-rate loans provide opportunities for these banks to adjust interest rates to align with market conditions. This diversification helps banks’ balance their risk exposure and maintain profitability.

Effective capital management is also crucial for banks during periods of rising interest rates.

As interest rates increase, the market value of fixed-rate assets can decline, potentially impacting a bank’s capital position. Banks must assess their capital adequacy and manage their asset-liability mix appropriately. This may involve adjusting the term of assets and liabilities to mitigate interest rate risk. Prudent capital management strategies enable banks to maintain a strong capital base and absorb potential shocks, safeguarding profitability.

On the other hand, other opportunities arise through investment and trading activities, with increasing yields on fixed-income securities.

Banks play a crucial role in ensuring economic stability by providing support to customers, maintaining strong capital reserves, practicing responsible lending, and collaborating with regulators. Through these efforts, banks must make significant contributions to the overall stability and strength of the financial system.

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Moody’s downgrades U.S. credit rating amid rising debt

Moody’s downgrades US credit rating to Aa1, citing rising government debt and interest costs amid ongoing fiscal deficits.

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Moody’s downgrades US credit rating to Aa1, citing rising government debt and interest costs amid ongoing fiscal deficits.

In Short:
Moody’s has downgraded the US credit rating from Aaa to Aa1 due to rising government debt and interest costs. This downgrade may lead to higher yields on Treasury debt and highlights the need for significant fiscal reforms to address a substantial budget deficit.

Moody’s has downgraded the United States’ credit rating from Aaa to Aa1, marking a significant setback for the nation.

The downgrade comes amid escalating government debt and rising interest costs associated with the federal budget deficit, which Moody’s states have reached levels higher than other similarly rated countries.

As a result of this adjustment, investors may demand higher yields on U.S. Treasury debt, reflecting increased risk. The yield on the 10-year Treasury note rose to 4.48% in after-hours trading, while major stock indices also faced declines.

Moody’s had previously maintained the highest rating for U.S. sovereign debt but has now aligned its rating with rivals like Standard & Poor’s and Fitch Ratings, which also downgraded the U.S. in recent years.

The U.S. is currently grappling with a substantial budget deficit of $1.05 trillion, significantly higher than the previous year. Analysts predict that without substantial fiscal reforms, federal deficits will continue to widen.

The potential extension of tax cuts from the 2017 Tax Cuts and Jobs Act could exacerbate these issues, pushing federal deficits to nearly 9% of GDP by 2035.

Economists have noted a decrease in foreign demand for U.S. Treasuries, indicating a changing perception among investors regarding U.S. debt. The Moody’s downgrade is seen as a wake-up call for policymakers, as the U.S. faces continual pressure to address fiscal challenges.

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Defending the Territory – Can Darwin be the AFL’s 20th Club?

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When the Tassie Devils join the AFL, in 2028, as the 19th team, Darwin will be the only capital city in Australia without an AFL or NRL team. Will the AFL go in and defend their territory which it failed to do in Canberra all those years ago?

The Footy Case for the Northern Territory

The case for a NT team in the AFL – to be called the Darwin Dingoes or Darwin Crocsis considered a romantic notion in some ways, but the footy case is strong. The Territory has produced rich reservoirs of football talent from Alice Springs to the Arafura Sea. Playing talent like Michael Long, the Rioli family, Andrew McLeod and Nathan Buckley roll off the tongue of any Aussie Rules diehard, and many Territory (often Indigenous) players become famous in the state leagues of SA and WA as well as the AFL. Many play in the Northern Territory Football League (NTFL) before heading down south in what is the ‘off season’ for the Top End.

In fact, according to James Coventry’s neat little book, Footballistics (2018), the NT is truly Aussie Rules heartland in terms of participation and talent. In terms of ‘footy readiness’, according to Coventry, the NT often comes top in terms of participation rates.

For a small population of just over 240,000 people, over 13 percent of Territorians participate in AFL programmes, compared to 8 per cent in WA, 6 per cent in SA and 2 per cent in Victoria. NT is top in terms of adult participation and top four in terms of children’s participation. In fact, in non-metropolitan areas, Coventry found there were 22,000 registered participants (in 2018), which means every child outside Darwin and Alice Springs plays footy—not allowing for the many unregistered participants who are also playing. In 2022, this had grown to around 40,000 participants. And in terms of talent, the NT produces 56 elite AFL players per million people, with only Victoria and SA ahead.

And in the NT, they simply love footy. Just watching the finals from the Tiwi Islands or Central Australia will tell you that! It also shows up statistically, with almost half the population favouring the AFL column in terms of Google searches—ranking it with the traditional Aussie Rules states Tasmania, SA, Victoria and WA.

AFL Club Taskforce – The Strategic Business Case

The NT AFL Club Taskforce, in their Strategic Business Case for the 20th licence, has examined a number of options. These include more AFL matches in Darwin and Alice Springs, a relocated team, or a Darwin-based stand-alone Northern Territory team that also plays in Alice. They even consider a Northern Australia team (Darwin-based but also playing in Cairns in Far North Queensland), although it may be better to have the Queensland teams—Brisbane Lions and Gold Coast Suns—develop Far North Queensland, Central Queensland and the Sunshine Coast, and let the NT team focus on Darwin and Alice Springs. Hawthorn is also considering playing a few games in Cairns.

The Economic Challenge

Of course, that’s the footy case. It seems an open and shut case. But the economic case for the NT is much harder—especially given climate, population and financial considerations if the NT team requires a new stadium or upgrades to TIO Stadium in Marrara, Darwin and TIO Traeger Park Oval in Alice Springs.

As experience shows with NT teams, even the basketball team the Darwin Crocs struggled.
ABC News: NT Sports Club Struggles

Even with a significant AFL contribution of $7.83 million per year, the Taskforce forecasted that the NT AFL Club would need Federal and NT Government to fund an operational funding gap of $18.89 million per annum. This would include a new or upgraded stadium, with AFL NT chairman Sean Bowden explaining that:

The Stadium will anchor the opportunity to bid for a 20th licence in the AFL should that opportunity arise.”

However, the Taskforce noted:

The economic benefit to the NT could be as much as $559 million if the new club was provided with a new stadium. The Strategic Business Case indicates that an AFL Team would create 160 full-time jobs, bring game day activation of the economy and add $116M a year in economic output to the Territory economy.”

AFL NT makes its case

Social Impacts and National Significance

Hand in hand with the economic benefits come the social impacts. The NT has a serious problem with diabetes and associated health problems, low educational attainment and imprisonment. The Taskforce would develop pathways for participation—not only for elite footballers in an AFL and AFLW team—but also create a social safety net of social programs for all Territorians under the umbrella of the NT AFL team. Social cohesion is important for internal security in the same way as defence is important for external security.

In some ways, the NT team might be considered a national security (internal social cohesion) project. In the same way as the PNG team in the National Rugby League (NRL) is getting support from the Commonwealth Government for geo-political reasons (external security) to the tune of $600 million as part of a $750 million ambitious investment by the NRL:

An AFL team in Darwin might be considered in the same way. Darwin was the only capital city bombed in wartime in 1942. It is considered vital to our defence strategy, and the new tensions in global geo-politics will see a review of our defence assets and arrangements. For instance, the lease of the Port of Darwin to a Chinese Government-linked company would never have happened in today’s global climate.

So just like having an NRL team in PNG, the Commonwealth might consider having an AFL team in Darwin as important to national security.

And as many seasoned commentators (hello Ross Gittins) always say—what do you do when economists question a project? Put it in the defence budget under ‘national security’. It may be a stretch to consider it part of defence, although the AFL might like this, as it would allow them to ‘defend their territory’ and keep the NT a predominantly Aussie Rules zone.

Completing the National Jigsaw

And there’s no doubt that the Aussie Rules footy community would love it. As the legendary AFL commentator Bruce McAvaney once said, the NT would “complete the jigsaw” in the national competition of Australia’s truly indigenous home-grown game.
McAvaney’s View on the 20th Team

There’s that romance coming up again. Australia’s only indigenous game—with AFL teams from Tasmania to the Top End, and from the East Coast to the West Coast in every Australian capital city. It might be just too much for the AFL, as custodians of the great Australian game, to resist.


*Professor Tim Harcourt is Industry Professor and Chief Economist at the Centre for Sport, Business and Society (CSBS), University of Technology Sydney, and author of Footynomics and the Business of Sport.

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Secret IMF meeting sparks US-China truce

Covert IMF meeting sparks US-China trade breakthrough with 115-point tariff cut for 90 days, marking significant progress since the Trump trade war.

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Covert IMF meeting sparks US-China trade breakthrough with 115-point tariff cut for 90 days, marking significant progress since the Trump trade war.


A covert meeting in the basement of the IMF has set off a diplomatic shockwave, leading to a major breakthrough in US-China trade talks.

Top officials from both nations have now agreed to slash tariffs by 115 points for 90 days—marking the first real progress since the Trump-era trade war began.

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