Bank Chief Warns More Pain To Come As Fear Takes Over

The Age

Wednesday March 19, 2008

Annabel Stafford, Sydney

FEAR - stoked by the sharemarket players who stand to gain from it - is fuelling the crisis in global financial markets, Commonwealth Bank head Ralph Norris has warned.

As a result, Australian banks are not immune from falling share prices, despite being in a much stronger position than banks in the US and other markets more exposed to the subprime loans crisis.

Speaking at a Sydney lunch for the American Chamber of Commerce yesterday, Mr Norris warned that the crisis in world markets would continue for a least a year.

His comments came a day after Commonwealth Bank's shares tumbled 6% following news that JPMorgan Chase had bought investment bank Bear Stearns at the bargain-basement price of $US2 ($A2.11) a share (it was worth $US172 a share in January last year).

Mr Norris said the Bear Stearns sale showed "the whole global banking industry is under pressure and many offshore banks will require significant injections of fresh capital in coming months".

And despite Australian banks having "run very disciplined businesses, which has enabled us to avoid the excess in risk exposures seen in many overseas institutions . . . Australian bank shares have been discounted on average by more than the US banks that have recorded huge losses", he said.

"A lot of the things we are seeing have been driven by fear. This fear was stoked by the people behind short-selling of shares . . . (whose) stock-in-trade is feeding rumour and innuendo into markets.

"That's how they make their money by unsettling individuals into selling their shares."

Short-sellers borrow shares, which they then sell in the hope that the share price will go down so they can then buy the shares back at the lower price and make a profit.

Mr Norris said the global credit crisis meant it cost more for banks to borrow money from overseas and those increased costs, together with higher interest rates, meant customers would continue to pay more for loans for the rest of the year.

He also took a swipe at the Reserve Bank for repeated interest rate rises, saying they were a blunt instrument for containing inflation and often took some time to work. Restraint in government spending and wage rises were also "essential" in controlling inflation, he said.

But it was not all bad news. Mr Norris argued that the turmoil in world markets would make traditional commercial banks more attractive to customers. Big banks were already attracting new customers fleeing smaller or more adventurous lenders in search of security and certainty, he said.