Rudd warned major bank on the brink in 2008

Ian Rogers Financial institutions / Big five & fintech
Former Australian prime minister Kevin Rudd reveals a
Former Australian prime minister Kevin Rudd reveals a

A major Australian bank was on the mat at the height of the global financial crisis in 2008, the second volume of memoirs by former Labor prime minister Kevin Rudd reveals.

Rudd lifts at least some of the veil that has long obscured public understanding of the most disconcerting facts defining the apex of that year’s banking crisis.

Writing of events on the morning of Friday, 10 October 2008, Rudd states: “We were particularly worried about three Australian banks – two second tier, one first tier – as we developed a range of contingency plans to prevent the collapse.”

APRA and the Reserve Bank of Australia have to be the central sources briefing Rudd and his ministers on this worry and the whopping, and – until now – hidden detail that a major bank was down for the count.

The former prime minister has obliged readers with a disclosure of the utmost public interest in his new book, but teasingly Rudd does not name the major bank, nor the minor banks judged by financial regulators to be in catastrophic strife. Banking Day today narrows the field; read on.

Banking industry rescues were already the order of the day, or at least of that week, in Australia.

By the 10th, Commonwealth Bank had (on the Thursday) announced its opportunistic takeover of Bankwest. This was a rushed agreement curated by regulators in the wake of the early September collapse of Lehman Brothers in the US, which in turn tore down HBOS and two other UK banks (themselves bailed out on the Wednesday night, Australian time). Leaning against the resistance of the ACCC, APRA and the RBA and CBA ensured Bankwest did not join RAMS Home Loans in the echelon of ruined financiers.

Of the two second-tier banks worrying Rudd on the Friday, one is obviously Suncorp, where a bank run was by then well and truly underway. Bank of Queensland has long been a warm bet as the second.

The Labor PM described the stress in banking this way: “We were sitting on the edge of a crisis of confidence which could turn into a [wider] run on one or another of the banks when they opened for business on Monday.”

The response of Kevin Rudd’s government over the weekend of 11 and 12 October was informed by policy options mostly well prepared by the Treasury and the Council of Financial Regulators.

Decisions reached that weekend were taken against the backdrop of the Reserve Bank of Australia’s drastic 100 basis point cut in the cash rate target (on the Tuesday), lousy national accounts data for the June quarter, slumping equities markets (locally and globally) and the move by Ireland (on September 30) to make explicit guarantees over deposits and interbank funding.

The Irish angle was paramount, as Rudd explains: “The rest of the international community began to follow suit, led by the British, as funds began to flee to London-based Irish banks in order to obtain the security of the newly announced sovereign guarantee from Dublin.”

By this point, the Rudd government’s then-reliance on a yet to be legislated system of deposit insurance (announced back in June) lacked any relevance among the mass market, and a clear-cut guarantee on bank deposits was needed.

In one misstep, Rudd had (at the beginning of the month) ruled out a guarantee.

Rudd finally announced the deposit guarantee for all Australian banks and credit unions on the Sunday morning, the 12th of October.

This averted the otherwise imminent announcement by Suncorp that it would accept a low-ball takeover from ANZ. The guarantee also served to terminate, for a time, further rumour-mongering on the names of banks in strife.

So, which “first tier” name among Australia’s banks was in the most delicate – and near fatal – condition in October 2008?

None of Rudd’s fellow memoirists of the era (including another Labor prime minister, Julia Gillard, and the treasurer at the time, Wayne Swan) have opened up any more than Kevin Rudd when it comes to nailing the identity of this bank.

Swan and Gillard have left it to their boss’ memoir for a more revealing (if incomplete) narrative on the most extreme dimension of the crisis.

Was Australia about to be hit by bank failures [plural], queues of people wanting to withdraw deposits degenerating into riots, mass unemployment and suicides?” Julia Gillard, deputy prime minister at the time, asked in her 2014 memoir, “My Story”.

"It all seemed so heart-stoppingly possible. Almost overnight the government's economic strategy had to shift from managing a robustly growing economy … to dealing with the risk of runs on banks and recession,” she wrote.

In his account “The Good Fight", also published in 2014, Wayne Swan wrote that “the pattern had begun to emerge of people taking their money out of smaller financial institutions, and, in some cases, out of the financial system altogether."

Kevin Rudd and his former mates in the Labor cabinet of 2008 leave the naming of the big bank in dire trouble that October weekend to conjecture and inference.

A couple of red hot contenders among the Big Four banks have jostled for this dubious honour in cautious, way-off-the-record retellings of the most depraved highlights of the crisis.

So, one of these two entities - on the accounts heard by Banking Day from diverse sources – was in more severe peril than the other major bank name on our shortlist of the hapless, with both of those in unquestionably more difficult straits at that time than either of the other two majors.

At this critical time, this bank’s CEO and chair were the leaders of a chorus (alongside their three major bank peers) pleading directly with Kevin Rudd and Wayne Swan for unambiguous, urgent deposit and wholesale funding guarantees.

They would be insolvent sooner rather than later," was the substance of the combined warnings from all four big banks, Ross Garnaut and David Llewellyn-Smith related in their history of the crisis, “The Great Crash of 2008”.

In reality, and relying on Rudd’s newly-published memoir, it’s fair to finally report that one of Australia’s four major banks was teetering toward flat out insolvency around the second week of October 2008.

The alternative, if drastic, remedy – the appointment of a statutory manager and then nationalisation for this miscreant major banking name – would have been an unprecedented escalation.  And one dodged by Rudd and Swan and APRA and the RBA.

The former PM in his memoir does not mention that this was even canvassed at the time.

Naming the major bank at the epicentre of the despair, it’s a game of elimination. Banking Day may finally corner them straight out in Wednesday’s edition.