Australia Seeks to Buttress Bank System as Macquarie Slumps

By Jacob Greber

Sept. 18 (Bloomberg) -- Australia's central bank pumped extra liquidity into the banking system and Prime Minister Kevin Rudd said the nation's regulations are strong enough to give customers ``certainty'' after lenders' shares plunged.

Rudd said Australia is aiming to ensure ``the liquidity of the financial system,'' just as the U.S. government's takeover of American International Group Inc. deepens concern about the global financial structure.

Rudd moved to temper concern about banks after Australia's benchmark stock index slumped near a three-year low, led by its biggest investment bank, Macquarie Group Ltd., which tumbled 23 percent. Infrastructure manager Babcock & Brown Ltd. fell to a record low as lending seized up on concern more financial companies will follow Lehman Brothers Holdings Inc.'s bankruptcy.

``Let there be no doubt, there will be real business impacts and consumer impacts from these events'' as banks wind back lending, said Clifford Bennett, chief economist at Sonray Capital Markets Ltd. in Sydney. Australia's economy ``is definitely going to have a more severe slowdown than was expected a month ago.''

The Reserve Bank of Australia, which added A$3.02 billion ($2.4 billion) to the financial system today, is heading for its biggest week of injections since August 2007, when concern surged about the solvency of banks following a wave of defaults in the U.S. housing market. So far this week, central bank officials have added A$11.25 billion to the market.

Rudd told reporters in Canberra today he is in daily contact with the Governor of Australia's central bank, Glenn Stevens, as well as the nation's financial regulator.

Close Contact

``Our overall concern has been to ensure not just the liquidity of the financial system, but to ensure regulators are in close contact with overseas regulators,'' Rudd told reporters today. ``This is a very difficult and challenging set of circumstances.''

``The government intends to apply all preexisting and well- established regulatory arrangements,'' Rudd said. ``That applies to BankWest as well.''

BankWest is the Australian unit of HBOS Plc, which will be bought by Lloyds TSB Group Plc after the U.K. mortgage lender lost three-quarters of its market value this year.

BankWest, which had about A$36 billion of deposits as of Sept. 5, is operating normally and the buyout of HBOS by Lloyds TSB ``is a matter that is being managed from the U.K.,'' the unit's spokesman, Adam Connolly, said today.

Stocks Fall

Australia's S&P/ASX 200 Index slipped 2.4 percent to 4,607.30 points, the lowest since December 2005.

Commonwealth Bank of Australia, the nation's largest mortgage provider, declined 2.5 percent, and Westpac Banking Corp. shed 4.4 percent. Macquarie plunged A$7.88 to A$26.05, taking this year's decline to 66 percent. Babcock has plunged 97 percent in that time.

``It will take people a long, long time to forget the pain of today,'' said Tim Morris, an equities analyst at Sydney-based investment advisory Wise-Owl.com.

Concern about financial stocks spread to Suncorp-Metway Ltd., Australia's third-largest general insurer, which slumped to an eight-year low on investor concern the global credit crisis may force it to sell assets.

``It could be forced into a fire sale,'' T.S. Lim, a financials analyst at Southern Cross Equities Ltd. in Sydney, said in a telephone interview. ``It looks like the model is coming apart.''

`Robust' Finances

Australian Finance Minister Lindsay Tanner was also prompted to defend the finances of state-owned Medibank Private Ltd. after he was questioned in parliament about the position of the nation's largest health insurer.

``I looked at Medibank two weeks ago and its finances were robust,'' Tanner told parliament in Canberra today. ``I will re- examine Medibank again.''

Turmoil on financial markets is making banks less willing to lend to each other than at any time since Bear Stearns Cos. collapsed six months ago, money market rates show, and may increase pressure on Australia's central bank to cut its benchmark interest rate again in coming months, said Adam Carr, a senior economist at ICAP Australia Ltd., in Sydney.

The difference between the rate banks charge each other for three-month loans and the overnight indexed swap rate, which measures the availability of funds in the market, rose to 77.83 basis points, or 0.7783 percentage point, today in Sydney, from 59.67 basis points yesterday.

``In an environment where the Reserve Bank is expected to cut rates, the fact that banks are charging each other more for money is pretty concerning,'' Carr said.

More Cuts?

Investors increased bets on the size of the central bank's future cuts to borrowing costs, according to interest rate futures. Governor Stevens will cut the benchmark by 114 basis points in the next 12 months, compared to 83 expected on Sept. 2.

Stevens, who cut the benchmark lending rate from a 12-year high by a quarter point to 7 percent this month, the first reduction in seven years, said yesterday that investors ``can have confidence in the robustness of our banking system.''

Australia's banks are reporting ``very good profits, have access to capital and funding,'' Stevens told a gathering of business leaders in Sydney. ``This is light years from what's happening in other banking systems.''

To contact the reporter for this story: Jacob Greber in Sydney at jgreber@bloomberg.net