Lots of publicity has been given to the Deutsche Bank report casting doubt on St George Bank’s accounts — as reported by Crikey yesterday. And it raises some serious questions about disclosure and the big banks’ use of conduits set up off balance sheet to raise money and make loans.

The establishment and the use of these conduits by all the banks raises questions about the adequacy of disclosure, the true and fair nature of the banks accounts, the role of the auditors and the level of knowledge at the key regulators: ASIC, APRA and the Reserve Bank.

What hasn’t been explained is why the banks thought it necessary to set up these conduits. Why couldn’t they lend this money through their normal lending functions, on balance sheet, or is there something dodgy brothers about the entire arrangement?

And why have a bunch of highly paid bank analysts and other big investors simply accepted this and not wondered why it happened and got upset. Did their employers structured credit or finance departments help the banks set up these off balance sheet vehicles?

The fact that the banks are taking these deals back onto their balance sheets means they have always been responsible for their loans and assets, so they should have appeared on balance sheet at all times.

A better story for bank analysts is to ask themselves why they didn’t know about the conduit arrangements of the banks, or if they did, why haven’t they written about them in their reports before the credit markets froze.

Bank analysts are paid an awful lot of money and if they didn’t do their jobs, what hope did small shareholders have of finding out?

While the papers blithely reported what St George said was an utterly wrong analysis from Deutsche Bank, a bigger story broke yesterday: the utterly disgraceful way the National Australia Bank revealed that it was cleaning up its off balance sheet conduits. The bank said in a presentation to an investor conference in London, that it had taken $6 billion of debt back onto the balance sheet from a conduit, and another $5 billion might be taken back onto the balance sheet in this financial year.

Those amounts were not disclosed in the official release, which only revealed this: “Conduit assets are moving on balance sheet (via draw down of liquidity facilities) but we have the balance sheet strength to accommodate this impact. All conduit assets are subject to NAB’s normal credit processes in terms of origination and on-going assessment. At Sep-07, the impact of conduit assets is forecast to reduce core capital by approximately 15 bps.” The figures were extracted through media inquiries.

That this statement was made offshore, away from prying analysts and media, by the bank’s chief financial officer is appalling governance. It came one week after the ANZ Bank issued a trading update which warned about the impact of the rise in short term interest rates, but didn’t mention conduits.

It only emerged in later discussions that the ANZ had at least one conduit with around $4.6 billion of capacity, with $2.5 billion to be brought onto its balance sheet by the end of the month (and the remainder could be brought onto its balance sheet by next March).

Then the Commonwealth Bank issued a short statement yesterday afternoon in which it confirmed it too had used these off balance sheet conduits:

The Commonwealth Bank today clarified its position in relation to exposure to sponsored or third party asset-backed conduits. The Group said that given the high level of market interest in the exposure of all banks to these funding vehicles, it was appropriate to advise the current position of its exposure.

The Group has two sponsored Asset Backed Commercial Paper (ABCP) conduits, Prime Investment Entity (PIE) and Shield, for which it has standby liquidity facilities totalling A$2.5bn. These are currently drawn down to A$1.3bn. The assets within these vehicles comprise Australian Residential Mortgage Backed Securities (RMBS) and Commercial Mortgage Backed Securities (CMBS) which are rated AA- or better (PIE) and AAA prime RMBS issued under the Bank’s Medallion programme (Shield).

In terms of other standby facilities to ABCP conduits, the Group has a total of $1.5bn to a variety of other conduits that have either highly rated prime RMBS and CMBS securities or other assets including receivables. None of these vehicles has exposure to sub-prime assets. These are currently drawn down to A$50m.

And Bloomberg said in a report yesterday that: “Westpac Banking Corp., the fourth-biggest, has A$6 billion of asset-backed commercial paper in one conduit, according to Jane Counsel, a spokeswoman for the bank. ‘It continues to have access to funding and has drawn down about 15 percent of its backup facility,’ Counsel said.”

So we have all the banks sort of fessing up, but if the subprime mess hadn’t triggered the worldwide freeze of credit markets, we’d be none the wiser. And what have the key regulators, APRA, ASIC and even the Reserve Bank done?

Yesterday’s the RBA widened the types of securities it will do repurchase deals in, to include prime full doc Australian dollar RMBS (Residential Mortgage Backed Securities) and Asset Backed Commercial Paper backed by prime full doc Australian dollar residential mortgages (direct or securitised).

That Asset Backed Commercial Paper is thought to be what is in these conduits the major banks are revealing. There is thought to be around $30 billion of this paper issued in Australia. The RBA said it won’t start dealing in these securities for a month.

Banking industry commentators say the bank will be visiting all the banks and other Authorised Deposit Taking Institutions to ask if they have conduits and then to examine what sorts of paper they are and the quality of the assets backing the issued paper (and any other arrangements).

Now in terms of the capital it’s not much: but if they do have to bring $30 billion back onto balance sheets, that could cut their combined capital by around $2 billion to $3 billion. The banks all have capital adequacy ratios well above the minimum required by regulators, so the capital won’t make a serious dent, but it will have an impact. But to look at it another way, that $30 billion estimate for Asset Backed Commercial Paper is roughly equal to the NAB’s March 30 equity of around $30 billion.