What's the chance Aussie banks go bust

Christopher Joye

Coolabah Capital

In The Australian Financial Review I present new research that quantifies the likelihood that Australia's major and regional banks default on their debts and go bust. The results are really interesting. Using a more advanced version of the "Merton model" the RBA recently adopted for measuring changes in credit risk, we find that markets were signalling very high probabilities of default---defined as the likelihood of assets falling below liabilities---during both the GFC (more than 25%) and the 2010 and 2011 European sovereign debt crises (north of 10%) that implied Aussie banks were no better than "junk" credit quality. Yet more recently a substantial deleveraging of the banks' balance-sheets and a reduction in asset volatility has meant that notwithstanding the 30-40% fall in share prices, the Aussie banking systems' default risks have remained well-contained within the AA and AAA credit rating bands during (see chart). Read for free here (VIEW LINK)


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Portfolio Manager & Chief Investment Officer
Coolabah Capital

Chris co-founded Coolabah in 2011, which today runs over $8 billion with a team of 26 executives focussed on generating credit alpha from mispricings across fixed-income markets. In 2019, Chris was selected as one of FE fundinfo’s Top 10 “Alpha...

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