Bank mergers are just beginning

The notion that Australia's banks are somehow quarantined from the global credit meltdown is under challenge amid a wave of consolidation in the banking sector.

Our banks are surely better capitalised than their counterparts in the US and UK yet the freeze in wholesale funding markets is forcing a round of emergency negotiations, both regulatory and corporate.

Already, Commonwealth Bank has agreed to swallow BankWest after its parent HBOS fell to the funding squeeze in the UK, Westpac has committed to take over St George and Suncorp has hoisted the ''for sale'' flag.

Don't be surprised to find the big bank chiefs have beaten a path to the Treasurer's door this week to pave the way for the jettisoning of the Four Pillars policy.

And don't be surprised to learn that ANZ and National Australia have been chewing over a merger.

Both have been left out of the play for BankWest and St George and both are in the field with CBA to buy the distressed Suncorp. But both are susceptible to ratings agency downgrades were they to strike a deal for the Brisbane-based bank.

Lehman collateral damage

The preservation of confidence in the banking system now overrides Four Pillars policy.

ANZ and NAB are the two banks of the Big Four with the greatest problem exposures to derivatives such as credit default swaps (CDS) and collaterallised debt obligations.

Indeed, it's still unclear how much Australian banks are exposed to the CDS imbroglio arising from the collapse of Lehman Brothers.

The unwinding of the Lehmans CDS book is occurring and everyone needs to have cash, just in case.

With no cash from banks (ie, often each other), the only fast access is sell equities. And forced selling only drives down values, particularly with the volumes.

The volumes on Wall Street on Thursday were stunning - some 1.6 billion shares, following massive redemptions from mutual funds. Of course, the issues affect more than banks, but also companies such as General Motors, which is struggling to cope with unfunded health care and pension funds at a time when people aren't keen on a new car even if they can get the financing.

Interbank lending withers
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More consolidation among Australian banks is feasible given the global credit meltdown; ASX:ANZ; ASX:NAB;ASX:WBC; ASX:CBA; ASX:SUN