Australia’s banks heavily exposed to derivatives

by Richard Kilner

Story link: Australia’s banks heavily exposed to derivatives

Australian banks are standing on the tip of a derivative iceberg.

The combined shareholder value of Australia’s banks is $110bn, but their combined exposure to derivatives is a staggering $12.9 trillion.

This means that the derivative exposure outmatches shareholder value by more than one hundredfold.

Indeed, the exposure also dwarfs the banks assets, worth an estimated $2.1 trillion.

The reason behind the massive exposure is thought to be simply that banks can get away with it. Due to their unique position within an economy, banks can and will be rescued by the taxpayer if necessary (as has been seen with UK bank Northern Rock).

However, financial institutions in Australia consider themselves to be excellent at managing risk, and at minimising the potential losses that could be entailed.

It remains to be seen, given the worldwide economic turbulence, how Australia’s banks will fare in the long run.