Deutsche & Citi Dropped From Australian Interbank Rate Setting Group

Post by NeilMc on December 31, 2008 · Under Australian Economy, banking, interest rates · Comment

The trading group of eight banks that set Australian daily interbank financing rates has dropped Citi and Deutsche Bank from its pool after credit rating agency Standard & Poor’s cut both lenders global risk ratings.

The Australian Financial Markets Association (AFMA) which set up a system under which eight “prime banks” can trade their short term debt instruments “homogenously” in terms of credit risk rating and liquidity. Trading is able to occur on a “blind” basis with no fears over counterparty risk since the credit quality was deemed to be the exactly the same for every member of the group.

AFMA guidelines demand that the eight banks must be rated at least AA minus to participate in the pool Deutsche and Citi no longer fulfil the requirement and therefore their short term debt appears to no longer be part of the scheme.

Last week in New York, S&P downgraded 12 US and European banks, shifting Deutsche and Citi from AA minus to A+. The average trading price of the banks’ paper was then used in the setting of the bank bill swap rate. The move to cut Citi and Deutsche, which was not contested, prompted the 90-day bill rate to fall by 9 basis points to a recent low of 4.24 per cent. It is understood that Citi has $1.5 billion worth of bank bills in the market and Deutsche about $5 billion.

The contribution of the two banks to the short term debt markets is far smaller than the amount of paper issued by other members of the group. The top four domestic banks issued $40 billion each in short term debt instruments this year.

The prime banks’ pool originally consisted of the four domestic banks. BNP and Citi were added in 2005, and then Deutsche and HBOS last year. The dumping of Citi and Deutsche is the first time that banks have been removed. The pool is now made up of the four Australian retail banks, plus HBOS and French bank BNP Paribas.

From now, traders will have to declare that they are selling Citi or Deutsche paper before the trade is executed. It is expected that both banks will support their own paper, and buy it back if investors choose to sell. Deutsche and Citi said their removal from the rate setting pool would not affect funding strategy or ability in the local market.

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