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Households' wealth all tied up in banks' fortunes

Bank bashing may be a favourite sport for many, but the fact is households have never had such a large portion of their wealth tied up in the industry.

That is the finding of recent analysis which highlighted just how inter-linked the fortunes of households and banks have become.

‘‘So what?,’’ you might ask.

Well for one, it raises questions about the ripple effects of any trouble in the banking sector, something Australia has thankfully avoided so far.

It also sparks a debate about whether households are perhaps ignoring that favourite cliche of investing, and putting too many of their eggs in one basket.

A recent report from Barclay’s chief economist, Kieran Davies, estimated that Australian households have a whopping $1.4 trillion in assets tied up in the country’s banking system. That’s about 36 per cent of household financial assets, a record high.


This figure includes deposits, bank shares, other securities issued by banks, and super funds’ investments in bank financial assets.

Why has it increased to this record high?

In part, increased saving by households has resulted in tens of billions of dollars being funnelled into bank deposits after the global financial crisis.

But the trend has also been driven by the love affair with bank shares. Banks account for 58 per cent of all shares held directly by households, even though they make up 29 per cent of the sharemarket. On top of this, super funds have a record 10 per cent of their assets held in bank financial instruments.

In the jargon, households are highly ‘‘overweight’’ on bank stocks.

This hasn’t been a problem recently because bank shares have performed extremely well. Commonwealth Bank shares, for instance, have gained 20 per cent in the past year and have a gross dividend yield of more than 6 per cent.

But there is a question mark over whether consumers are fully aware of just how heavily they are invested in the banking system.

If there was a severe downturn in the property market, for instance, bank stocks would probably fall because mortgages to home buyers are banks’ biggest assets by a long way.

That’s well known, but when people are so heavily invested in banks there could be a ‘‘double whammy’’ effect because consumers would also suffer a big fall in their investments, as well as enduring a weak economy.

Davies says that if there was a fall in house prices, households and banks would be put at greater risk.

‘‘To us, this suggests that in a scenario where house prices unexpectedly corrected, banks would be affected, but there would also be second-round effects on households via significant household ownership of bank assets,’’ he said.

Most experts are not predicting such a scenario. But given what happened in many countries during the global financial crisis, it should not be dismissed out of hand.