Banking

<html><body>
GUEST OBSERVER
We are not convinced that giving the largest banks in Australia $7.4 billion over the next ten years is good for the budget. – Opposition Leader Bill Shorten, leaders’ debate speech, May 29, 2016.
Opposition Leader Bill Shorten’s line of attack during the leaders’ debate focused squarely on the Coalition’s long-term plan to cut the company tax rate from 30 percent to 25 percent.
Twice during the debate Shorten said the proposed tax cuts equated to giving A$7.4 billion over ten years to Australia’s big four banks (National Australia Bank, the Commonwealth Bank, ANZ and Westpac).
Is that right?
Checking the source
When asked for a source to support that assertion, a Labor spokeswoman referred The Conversation to modelling conducted by think-tank The Australia Institute.
The Labor spokeswoman said:
"Bill was emphasising the clear point of contrast in this election campaign, which is that Malcolm Turnbull wants to spend $50 billion giving huge companies a tax cut while Labor wants to invest in schools, Medicare and growing good jobs."
The Australia Institute modelling
In a press release, The Australia Institute said that for their economic modelling:
"The value of company tax provisions was derived from 2015 full year annual reports for the big four banks. That figure summed to $11,123 million. That figure was projected forward to 2026-27 to give the no-change scenario."
To arrive at the figure of $7.4 billion, The Australia Institute modelling assumed bank profit would increase in line with nominal Gross Domestic Product. Under this assumption, the amount of tax payable would also increase in line with nominal GDP. This would give nominal increases of:
<ul>
<li>2.5 percent in 2015-16;</li>
<li>4.25 percent in 2016-17; and</li>
<li>5 percent in 2017-18 and subsequent years.</li>
</ul>
As the think tank noted in its press release, the company tax cuts would not affect the big banks until 2024-25. That’s when the 30 percent company tax rate will fall to 27 percent for all companies with further reductions of 1 percent per year, hitting 25% in 2026-27.
The Australia Institute calculated the following results:
<a href="/images/2016/05/31/image-20160530-7713-8cr5ue.png" target="_blank">Click to enlarge</a>
<img src="/images/2016/05/31/image-20160530-7713-8cr5ue.png" alt="">
A reasonable guesstimate – but not a fact
On these calculations, the “$7.4 billion over the next ten years” claim is not a fact. But it’s also not an unreasonable guesstimate – although it is, of course, really over the three years from 2024-25 through 2026-27. There is no advantage to the big banks over the first seven of the next ten years.
According to the Australian Taxation Office, the four big banks paid a total of $9.5 billion in company tax in the 2013-14 financial year.
The government has proposed increasing the turnover threshold below which the rate of company tax payable is 27.5 percent, from $10 million in 2016-17 to $1 billion in 2022-23.
The government’s proposed policy says that the company tax rate for all companies (including the four big banks) with turnover exceeding $1 billion will fall from 30 percent to 27 percent in 2024-25, and then by a further one percentage point in 2025-26 and another percentage point (to 25 percent) in 2026-27.
So, on that basis, The Australia Institute’s maths checks out.
A grain of salt
As with all economic modelling, this modelling and any claims based on it should be taken with a large grain of salt.
Any assumption about the banks’ profit growth over the next ten years is entirely arbitrary, and I have no idea whether it is at all justified. Only time will tell.
If the banks' profits grew by only 2 percent per annum over this period, then the benefit to them from the cut in the company tax rate proposed by the Coalition would be “only” $4.8 billion; if they grew by 10% per annum the benefit to them would be $12 billion (over the three years from 2024-25 to 2026-27).
Verdict
Shorten’s statement relies on modelling assumptions made by The Australia Institute think-tank about bank profit growth. It is not a statement of fact but rather a guesstimate. It is not an unreasonable guesstimate, but depends entirely on whether the think tank’s assumptions about bank profit growth come true or not.  
 <a href="https://theconversation.com/profiles/saul-eslake-665" rel="author">Saul Eslake</a> is vice-chancellor’s fellow, University of Tasmania and author for The Conversation. He can be contacted <a href="https://theconversation.com/profiles/saul-eslake-665" target="_blank">here</a>.
</body></html>

jchancellor-FAypfDUnLy

Will Australia's largest banks get a $7.4 billion benefit from tax cuts over next decade? Saul Eslake 

<html><body>
<img src="https://counter.theconversation.edu.au/content/66486/count.gif" alt="The Conversation" width="1" height="1">
GUEST OBSERVER
When Australia’s central bank moves interest rates as part of its monetary policy, it’s not just politicians who stand to lose if banks don’t follow suit. 
Retail lending markets form an integral part of the monetary policy transmission mechanism. If interest rate rises are passed on at a different rate to cuts it can adversely affect the efficacy of expansionary versus contractionary monetary policy.
In August 2016, APRA data showed the big four Australian banks held 83 percent of the home loan market (including both the owner occupier and investment categories). 
At an individual level, the ability and willingness of lenders to pass on the official interest rate cuts to borrowers depends on many factors. These include exposure to overseas funding sources, market power, the funding mix, reserves and the extent of securitisation. But it’s also clear delaying interest rate cuts can significantly impact their bottom line.
According to my analysis, the big four banks can make approximately $A8.6 million per day as a group if they do not fully pass onto borrowers a hypothetical 0.25 percent cut in the RBA’s cash rate. 
<a href="/images/2016/10/06/Screen%20Shot%202016-10-06%20at%2011.08.06%20AM.png" target="_blank">Click to enlarge</a>
<img src="/images/2016/10/06/Screen%20Shot%202016-10-06%20at%2011.08.06%20AM.png" alt="">
More specifically, if ANZ, CBA, NAB and Westpac manage to postpone lowering their mortgage interest rates say by 10 days, they can potentially make an extra A$16, A$28, A$16 and $A26 million dollars in profits, respectively.
Previous studies on mortgages, small business loans and credit card interest rates have found significant evidence for the “rockets and feathers” hypothesis. That is, when the cash rate increases, various lending rates shoot up like rockets but when the opposite occurs they go down like feathers.
In my research I used monthly data (2000-2012) for 39 bank and non-bank financial institutions including 7 building societies, 15 Australian-owned banks, 3 foreign subsidiary banks, 13 credit unions, and 1 major mortgage broker. The research found the mortgage interest rate spread of all lenders rose after the 2008 global financial crisis, albeit to varying degrees. 
In general, the research shows most building societies and some credit unions can offer more competitive home loans than banks.
There is no significant relationship between lenders’ markups and the level of over the counter customer service since the 2008 financial crisis. This is an important observation as the mortgage spreads of larger lenders are typically higher than those of their smaller non-bank counterparts. This puts lie to the view that the relatively higher mortgage interest rates of the larger banks in Australia are justified by higher overhead costs associated with the running of their large branch networks.
Abbas Valadkhani is professor of economics, Swinburne University of Technology, and author for The Conversation. He can be contacted <a href="https://theconversation.com/profiles/abbas-valadkhani-177513" target="_blank">here</a>.
</body></html>

Banks make millions in delaying interest rate cuts

<html><body>
<img src="https://counter.theconversation.edu.au/content/67151/count.gif?distributor=republish-lightbox-basic" alt="The Conversation" width="1" height="1">
GUEST OBSERVER
The large banks and AMP will be required to fund the establishment of a new independent body to oversee the professional standing of the much-criticised financial services industry, the government has announced.
The chairman and directors of the body, a Commonwealth company, will be appointed by the government, which will develop an ongoing industry funding model for it.
But the new professional standards regime for the industry will not start until 2019 and will take until 2024 to be fully operational.
The latest moves to boost the industry’s professional standards have been announced by the Minister for Financial Services and Revenue Kelly O'Dwyer ahead of an Australian Securities and Investments Commission (ASIC) report that further documents malpractice by the banks and AMP. The Australian Financial Review reports that it reveals they “have been shortchanging tens of thousands of customers tens of millions of dollars by charging them for services they didn’t receive”.
O'Dwyer foreshadowed action on professional standards in April but it fell by the wayside with the election. Given Labor’s urging of a royal commission into the banks, which has community support, the pressure on the government to respond has intensified.
O'Dwyer said legislation would be introduced into parliament this year to mandate professional standards for advisers.
They will include compulsory educational requirements for both new and existing advisers; supervision requirements for new advisers; a code of ethics for the industry; an exam that will be a common benchmark across the industry; and ongoing professional development.
The new standards regime will not commence until January 1 2019, and existing advisers will have until January 2021 to pass the new exam and until January 1 2024 to reach degree-equivalent status.
The standards body will develop and set the industry exam as well as the ethics code and determine the education and development requirements for both new and existing advisers.
Professional associations and other independent third party monitoring bodies will develop compliance schemes to monitor and enforce advisers’ adherence to the code. These compliance schemes will be approved by ASIC.
Michelle Grattan is professorial fellow, University of Canberra, and author for The Conversation. She can be contacted <a href="https://theconversation.com/profiles/michelle-grattan-20316" target="_blank">here</a>.
</body></html>

Slow start to new standards requirements for financial advisers

<html><body>
<img src="https://counter.theconversation.edu.au/content/65885/count.gif" alt="The Conversation" width="1" height="1">
GUEST OBSERVER
The US$185 million fine levied on US bank Wells Fargo for unauthorised accounts opened by employees seeking bonuses appears to have become a tipping point for industry action in Australia.
Reacting to sales targets and bonus incentives, Wells Fargo employees artificially inflated their sales by secretly opening accounts. They then transferred funds using these accounts, triggering overdraft fees and other charges. Staff also falsely opened credit card and debit card accounts, causing credit card holders to incur annual fees. Debit cards were issued with PINs, again without the customer’s knowledge. More than two million such fake accounts were created.
This week Westpac chief Brian Hartzer said the bank would remove all product-related incentives across its 2,000 branch tellers and instead base their incentives on customer feedback about service quality.
The move comes after a long history of sales-driven banking cultures. Wells Fargo confirmed it had fired over 5,300 employees for such behaviour, between January 2011 and March 2016.
Employees of Wells Fargo had been vocal about the high-pressure culture that existed in the bank in an LA Times article in 2013. They spoke of being regularly humiliated by managers in front of their colleagues and threatened with the sack for failing to meet targets. Some begged family members to sign up and open unneeded accounts. The root cause of this pressure on Wells Fargo employees was the bank’s corporate culture, and a cross-selling target of at least eight financial products per customer.
US regulators say the record fine levied on Wells Fargo should “Serve notice to the entire industry that such initiatives need to be carefully monitored as a basic element in any company’s compliance program, to make sure that incentives for employees are aligned with the welfare of customers”.
Such misdemeanour’s by financial services providers are not unusual. Earlier in 2016 Santander Bank was fined US$10 million for allegedly enrolling customers in overdraft protection services that they had never authorised.
Regulators in Australia have also become concerned that sales incentives are harming the financial industry’s integrity. The Australian Bankers Association is conducting a review of “product sales commissions and product based payments that could lead to poor customer outcomes”.
In its submission to the review, the Finance Sector Union of Australia (FSU) has focused on these poor customer outcomes. It puts much of the blame on the “conflicted remuneration” that causes “the systematic application of remuneration and work systems that drive employees to sell and/or push products and services” to bank customers.
The FSU submission is based on a survey of 1,298 bank employees undertaken in August 2016. Based on feedback from members, it says bank staff employment is often dependent on “their ability to gain referrals, sell the product of the week or reach a volume based target”. The FSU concludes that “existing remuneration systems are having a detrimental effect on the lives of bank employees” and that the Australian banking industry’s remuneration systems is “causing the industry harm”.
This week Reserve Bank Governor Philip Lowe also weighed in, saying remuneration structures within financial institutions should promote behaviour that benefits not just an institution, but its client.
Australian banks are some of the most profitable in the world and are in a strong position to lead by example in gaining and then sustaining the trust of their customers. Cross selling of products and services can be achieved by a rigorous focus on customer service that produces not just customer satisfaction, but customer delight.
Achieving this means confronting the dilemmas created by “conflicted remuneration,” whereby bank executive rewards are directly related to sales and subsequent profitability. If sales targets continue to lead to customer harm, banks will lose the vital ingredient of trust that banking relies on. And those calling for a banking royal commission will be granted their wish.
Steve Worthington is adjunct professor, Swinburne University of Technology and author for The Conversation. He can be contacted <a href="https://theconversation.com/profiles/steve-worthington-138" target="_blank">here</a>.
</body></html>

Banks can target service before sales to avoid a banking royal commission

<html><body>
Australian banks are believed to have followed the same path of the global banking giants leading to the Global Financial Crisis (GFC) of 2008. In order to avoid borrowers from losing their homes, the Banking and Finance Consumer's Support Association (BFCSA) urges a Royal Commission to be put in place.
"Our members have uncovered fraud, forgery and other criminal behaviour by bankers here in Australia.  
"BFCSA have found and reported the manipulation of valuations (in every case), Loan to Valuation ratios hyped up to 140% creating toxic lending activity by 17 members of an easily identifiable banking cartel. 
"Bankers deliberately approved large quantities of unverified, unaffordable mortgage loans to low income families and pensioners. Bankers ignored any known risks and failed to observe the fact that despite owning a home and debt free, the intended victim will lose everything. 
"Our nation’s elite of the banking sector suggest to regulators and parliament: 'most loans settle within 5 years'. These are 'intended 30 year interest-only loans. Customers believe they have 30 years where this system of buffer loans will work according to banker advice and strategies. The loans do not amicably 'settle'."
"People coming to BFCSA for help is proof enough of what is really taking place. Widespread bank bullying is an issue for another Inquiry." Denise Brailey, a criminologist specialising in white collar crime, wrote in the submission to the House of Representatives Standing Committee on Economics Inquiry into Home Ownership, on behalf of BFCSA.
"The Banking and Finance Consumer Support Association is in fact the only known consumer group operating collectively and gathering data relating to mortgage lending and home ownership from a ‘grass roots’ perspective. Our members have evidence in their files (and ours) that show alarming patterns of bad bank lending practices. 
"BFCSA notes that 100% of all cases we have examined are infected with fraud. All loans uncovered are approved, despite the banks being cognisant of the true income as to centrelink payments etc. These loans were unaffordable from inception.  
"Only a cartel could engineer such a structure, strategy and policies in order to engage in unsafe practices from an economic point of view. Control fraud activities such as those warned against by Prof William K Black, cannot continue to be ignored as occurred in the USA and other nation states. 
"It is the banking cartel members in 2005 who boasted a $100 billion market in targeting 'ARIP’s'. Not only did this announcement expose an undesirable intention but rather is a key indicator that double the stated quota was reached. 
"We did not escape the GFC, but we did allow bankers to continue to sell unaffordable loans to vulnerable citizens. The borrowers were not buyers. They were hunted down in their homes. There is no integrity in the banking files we have uncovered. 
"A Royal Commissioner is desperately needed in Australia to ensure the 17 identifiable bankers are questioned with authority and compelled to answer tough but important questions. 
"We survey members from time to time and we can see alarming patterns emerge, along with key indicators of a crimogenic environment across all states and territories in Australia."
In the submission BFCSA also recommends:
<ul>
<li>Every customer must receive a Loan Application Form (“LAF”) copy at the point of signing. That a second copy of the LAF will also be sent to the customer after the approval. This should minimise the fraud and forgery. </li>
<li>Credit Card applications must also be copied and given to the customer. </li>
<li>Sub Prime loans must be taken off the market because they force up property prices and distort the market. </li>
<li>All commissions to bankers and banker staff be stopped immediately. That sellers are acting as agents of the Bank and this is made clear to the public. </li>
<li>That the practice of ramping up of property prices by misusing LVR’s ie 130% LVR lending, in the interest of the Australian housing market, be investigated by the AFP. </li>
<li>Lenders (as members of the Cartel) to be investigated regarding sub-prime lending as to interfering with Homeownership, to the detriment of existing home owners. </li>
</ul>
</body></html>

Royal commission urged for banking industry

<html><body>
<img src="https://counter.theconversation.edu.au/content/57114/count.gif" alt="The Conversation" width="1" height="1">
GUEST OBSERVER
Is a royal commission into banking required? I think not. There have been many problematic incidents adversely affecting customers in the banking and financial sector in Australia – although whether they are more frequent and more substantive than elsewhere is open to question.
Moreover, examining those incidents, determining whether there are systemic causes, and identifying possible solutions can be done in simpler and potentially more effective ways. Indeed, even to the extent that the objective is to pinpoint responsibility for past wrongdoings, it is not clear that a royal commission has advantages over investigations by well-resourced and empowered financial regulators.
Royal commissions are likely to work best when there is one specific major issue to be addressed or where there is some substantive matter of policy formulation on which a primarily legal, inquisitorial, analysis can shed light. The current and recent concerns involve a wide range of different types of problems resulting in financial consumer detriment.
They involve actions of individuals within various types of financial organisations as well as how the objectives, culture, ethics and governance of the organisations themselves encourage, induce or incentivise particular types of behaviour.
These are not topics that are best addressed from a primarily legal perspective, or analysis of which requires the trappings and powers, and costs, of a royal commission. Rather, there is a need for analysis of what gives rise to these perceived problems and what policy (legislative or regulatory) changes might be made to reduce such problems.
And ultimately, some form of (at least implicit) cost-benefit analysis is warranted since the bad behaviour of concern is a byproduct of institutional arrangements and structures for providing financial services and products to meet the needs of consumers. Designing policy to balance efficiency and fairness in provision with mitigation of adverse effects is not a simple task.
Identifying problems and designing policy solutions can be done either via existing financial regulators with their existing (or enhanced) powers or through some other form of less costly and disruptive method of inquiry.
The recent David Murray-led Australian Financial System Inquiry (of which I was a member) examined the financial sector from a very broad perspective. Its terms of reference included reference to corporate governance and implications for outcomes for consumers of financial products and services consumers. But this was only one item on a long list of issues required to be investigated within a very short time frame.
The Murray Inquiry made a number of recommendations related to improving outcomes for consumers of financial products. One could argue that it would make sense to see whether the recommendations of the Murray Inquiry (once fully implemented), together with ongoing changes in global financial regulatory standards, improve the performance of the financial sector in this regard before undertaking another major review.
On the other hand it might be argued that the Murray Inquiry did not, reflecting the constraints of its terms of reference and short time frame, delve far enough into issues of ethics, culture, and governance. While these were front of mind in its deliberations, its approach was to design policy recommendations which would induce better outcomes.
These included addressing incentives created by conflicted remuneration arrangements, introducing manufacturer and distributor responsibilities for appropriate design and marketing of financial products and services, and improved resourcing and powers of financial regulators. That approach reflected a view that “good” ethics and culture cannot be created by regulation, that they are the responsibility of the leadership of financial institutions, but that policy settings can influence incentives to create and maintain good ethical standards and culture.
If it is believed that the problems are more deep seated, then perhaps further inquiry is warranted – but on topics which hardly warrant or need a royal commission. A number of issues come readily to mind. One is whether enforced structural separation of financial institutions would facilitate improved governance, risk-taking, staff-customer interrelationships, and remuneration and incentive structures.
Another is whether requiring directors of banks to put interests of depositors ahead of shareholders (much as occurs in insurance where policy holders interests are legally accorded priority). Yet another would be what increase in penalties for wrongdoing and increased resourcing for investigation by regulators would appropriately limit wrongdoing while not unduly harming efficient and innovative supply of financial services.
These types of issues require “research” more than “inquiry”. They are not the sorts of questions that a royal commission process is suited to answer. Calling for a royal commission looks to have been a smart political move. But like the Abbott Government’s Royal Commission into Trade Unions it would be tainted by political overtones associated with the inquisitorial nature of the process.
Far better to find an approach that will be seen to reflect the more explicit analytical approach necessary to answer the very complex questions involving the interplay between ethics, culture, incentives, governance and behaviour.
Kevin Davis is research director of Australian Centre for FInancial Studies and professor of Finance at Melbourne and Monash Universities, Australian Centre for Financial Studies and author for The Conversation. He can be contacted <a href="https://theconversation.com/profiles/kevin-davis-3497" target="_blank">here</a>.
</body></html>

Why Australia doesn't need a banking industry royal commission

<html><body>
GUEST OBSERVER
The Westpac/Melbourne Institute index of consumer confidence fell by 2.2 per cent in March to 99.1. A reading of 100 is the dividing line separating optimism from pessimism.
Wisest place for savings: “Banks” was the wisest place to put new savings according to the survey.
Overall 27.4 per cent believe the wisest place for savings was in “banks”, up 1.2 percentage points over the quarter.
Next highest was “Pay debt” (24.4 per cent – 4-year high, up 6.6 percentage points), which overtook “real estate” (14.7 per cent, down 8.7pp). A total of 7 per cent of respondents were unsure of what to do with additional savings – the highest reading in records going back over 20 years.
Home loans: The number of loans (commitments) for people who are buying or building homes to live in (owner-occupiers) fell from 7-year highs, down by 3.9 per cent in January. Refinancing of home loans fell from record highs, down by 4.4 per cent in January.
The housing finance data has implications for banks, building material suppliers and retailers. The consumer confidence data is important for retailers and consumer-facing businesses.
<a href="/images/2016/03/10/Screen%20Shot%202016-03-10%20at%2010.20.14%20AM.png" target="_blank">Click to enlarge</a>
<img src="/images/2016/03/10/Screen%20Shot%202016-03-10%20at%2010.20.14%20AM.png" alt="">
What does it all mean?
The monthly consumer confidence data is now merely useful as a check against the timelier weekly survey. The ANZ-Roy Morgan survey has the same number of survey respondents as the monthly series, has been running over the same number of years and covers the same questions, but is conducted each week. And what is clear from both surveys is that confidence levels seemingly consolidated over the month.
According to the Westpac/Melbourne Institute survey, consumer sentiment eased marginally in the latest result. The Roy Morgan weekly reading indicated similar volatility over the month with consumer sentiment lifting in the past week. The improvement in the global outlook, stronger domestic economic data and the recent strength in the Australian dollar should support confidence levels over the medium-term.
Where is the wisest place to put new savings?
According to the latest survey it’s in the bank, which strengthened its ascendancy in the latest quarter. Interestingly the major loser in the quarter was “real estate”. This was surpassed by “pay debt” as the second best option for additional savings. It was the first time in 3ó years that “paying down debt had surpassed real estate. In fact only 14.7 per cent of respondents believed real estate was the best option for additional savings – the weakest reading in over four years. It is quite a turnaround for “real estate” given that just six months ago it was considered the most attractive savings option with the highest reading in 12 years.
No doubt the run up in house prices, tighter home lending criteria by the banking sector and recent consolidation in the housing sector are prompting more households to focus on alternative asset classes to property. Interestingly the low interest rates on offer and volatility in stock markets has seen a substantial lift in the number of respondents that do not know what to do with additional savings. A total of 7 per cent of respondents claimed not to know what to do with additional savings – the highest reading in records going back over 20 years.
Despite the recent pullback the home loan market remains in good shape. Especially when you consider that loans to home owners eased from a 7-year high. Where the weakness is more paramount is in investor loans which have fallen substantially over the past six months. The value of investor loans is now down almost 15 per cent on a year ago. The result is a positive for the housing sector given over-lending to the sector last year. More prudent lending policies should ensure that the housing sector continues to remain resilient, contrary to the discussion of a substantial downturn.
The Reserve Bank is comfortably on the interest rate sidelines. Refinancing may have eased in the past month from record highs but the low interest environment is likely to prompt more home owners to shop around for the best home loan rates in coming months.
<a href="/images/2016/03/10/Screen%20Shot%202016-03-10%20at%2010.21.18%20AM.png" target="_blank">Click to enlarge</a>
<img src="/images/2016/03/10/Screen%20Shot%202016-03-10%20at%2010.21.18%20AM.png" alt="">
What do the figures show?
Housing finance - number
The number of new owner-occupier housing loans (commitments) fell by 3.9 per cent in January after rising by 2.7 per cent in December. Excluding the refinancing of dwellings, the number of loans was down by 3.6 per cent.
Loans by owner-occupiers for the construction of homes  down by 2.8 per cent in January; loans to buy newlyerected dwellings  fell by 3 per cent; and loans for the purchase of established dwellings  (excluding refinancing) fell by 3.8 per cent. The number of refinancing transactions  fell by 4.4 per cent.
Housing finance - value
The value of new housing commitments (owner occupier and investment) fell by 3.4 per cent in January after a 0.1 per cent fall in December. Owner-occupier loans fell by 4.3 per cent while investment loans fell by 1.6 per cent.
The value of loans by owner-occupiers and investors to build new homes  fell by 0.9 per cent in January after falling by 1.2 per cent in December. The value of loans to build new homes stood at $2.77 billion, weakening further from the record high of $2.93 billion in December 2014.
Consumer sentiment:
The Westpac/Melbourne Institute index of consumer confidence fell by 2.2 per cent in March to 99.1 after lifting by 3.9 per cent in February. The confidence index is down 0.4 per cent on a year ago. The current conditions index fell by 7.3 per cent while the expectations index rose by 1.7 per cent.
Three of the five components of the index fell in March:
The estimate of family finances compared with a year ago was down  by 8.2 per cent;
The estimate of family finances over the next year was up  by 0.2 per cent;
Economic conditions over the next 12 months was up  by 8.2 per cent;
Economic conditions over the next 5 years was down by 2.5 per cent;
 The measure on whether it was a good time to buy a major household item was down by 6.6 per cent.
Gender &amp; demographics: Men (index reading of 104.6, up 2.3 per cent) were more optimistic than Women (94.4, down 6 per cent). The sentiment index for young people fell by 17.1 per cent to 99.9 in March. Across the other demographics: 25-44 years (index 103.1, up by 0.4 per cent); 45 years plus (index 96.3, down 0.7 per cent).
Housing outlook: A good time to buy a dwelling? – Index up 5.5 per cent in the quarter and although still down 13.1 per cent on the year.
Wisest place for savings: “Banks” was the wisest place to put new savings according to the survey. Overall 27.4 per cent believe the wisest place for savings was in “banks”, up 1.2 percentage points over the quarter. Next highest was “pay debt” (24.4 per cent, up 6.6pp), followed by “real estate” (14.7 per cent, down 8.7pp), “shares” (7.6 per cent, down 2.3pp), and “dont know” (7 per cent, up 4.1pp) “superannuation” (4.9 per cent, up 0.4pp).
State sentiment levels: NSW (up 1.6 per cent), Victoria (down 5.3 per cent), Queensland (down 2.6 per cent), Western Australia (up 1.2 per cent) and South Australia (down 10.6 per cent).
<a href="/images/2016/03/10/Screen%20Shot%202016-03-10%20at%2010.22.27%20AM.png" target="_blank">Click to enlarge</a>
<img src="/images/2016/03/10/Screen%20Shot%202016-03-10%20at%2010.22.27%20AM.png" alt="">
What is the importance of the economic data?
Housing Finance data is produced monthly by the Bureau of Statistics and shows commitments by lenders, such as banks, to provide finance for housing purposes. The lending figures relate to those looking to buy or build homes to live in as well as those seeking to buy or build homes for investment purposes. Generally people get their finance organised first, so the figures are regarded as a leading indicator on the housing market.
Westpac and the Melbourne Institute release the Index of Consumer Sentiment each month. According to Melbourne Institute: “The survey of consumer sentiment was first undertaken in 1973 and was conducted on a quarterly basis until 1976, a six-weekly basis from 1976 to 1986, and has been conducted monthly ever since.”
Confident consumers may be more inclined to spend, especially on major items.
What are the implications for interest rates and investors?
From a broader sense, confidence levels are OK without being great. Looking forward, a period of calm on share markets and the recent strength in the Australian dollar could be key factors supporting household confidence.
For Aussie consumers, a stronger Aussie dollar means increased purchases on the internet and trips abroad, so the recent strength in the Aussie dollar will support confidence.
The Reserve Bank will be comforted by the more stable conditions in the investor housing market.
CommSec expects no change to interest rate settings for the foreseeable future.
<a href="/images/2016/03/10/Screen%20Shot%202016-03-10%20at%2010.23.38%20AM.png" target="_blank">Click to enlarge</a>
<img src="/images/2016/03/10/Screen%20Shot%202016-03-10%20at%2010.23.38%20AM.png" alt="" width="1525" height="500">
Savanth Sebastian is an economist for <a href="https://www.commsec.com.au/" target="_blank">CommSec</a>
</body></html>

“Pay debt” at a four year high: Commsec's Savanth Sebastian

<html><body>
<img src="https://counter.theconversation.edu.au/content/63396/count.gif" alt="The Conversation" width="1" height="1">
GUEST OBSERVER
The biggest Australian banks are fairing well in a year of increased pressure to reform from politicians, international events like the Britain’s exit from the European Union and more regulation from the Australian Prudential Regulation Authority (APRA).
A number of interrelated factors have contributed to the relatively strong performance of the Australian banks. For instance, the banks have limited exposure to the types of securities which led to massive losses for their counterparts in other countries. The banks also heavily rely on domestic loans, particularly the low risk household sector, so better lending standards and a proactive approach to prudential supervision by APRA may have contributed.
The Basel III regulatory requirements, brought in after the 2008 financial crisis, emphasise holding an increased amount of subordinated debt, as a measure of market discipline. However all the big four banks are holding less and less subordinated borrowings. More specifically, it declined by more than 50% from 2007 to 2014, according to our calculations.
APRA limits banks’ holdings of higher risk securitised assets, these are loans packaged into securities, to a maximum of 25% of the banks' loan portfolio. These are high risk if not properly understood or defined, as happened with United States home loans, blamed for the start of the global financial crisis.
When Australian banks calculate bank capital requirements, they need to fully account for securitised assets. This is a rule from APRA that goes beyond international standards, to reflect the risk inherent in these products.
Inter-bank liquidity tightened significantly with all banks increasing their holdings of Exchange Settlements Accounts at the Reserve Bank, this a form of low risk liquidity. Australian banks have lower interbank deposits compared to their Europe and USA counterparts and are also heavily involved in long term wholesale funding and are required to hold more liquid assets including government debt to deal with liquidity. All of this makes Australian banks less risky in times of crisis because spillover effects from other banks are less likely.
<h2>There has been a significant increase in concentration in the Australian banking industry since the global financial crisis. For example with Westpac and the Commonwealth Bank of Australia taking over St. George Bank and Bank West, respectively.</h2>
Following mergers, the big four account for 88 percent of the Australian banking system assets. This reinforces the idea that the banks are “too big to fail”.
The banks have also moved to more fee generating activities, which increases risk, but to a lesser extent in Australian banks. Data shows between 1998 and 2014, on average, 1.2 percent greater interest income was generated relative to non-interest income for Australian banks, according to our analysis. However, there is also similar evidence for the top eight publicly-listed Canadian banks. They exhibit on an average, a 2.5 percent increase in net interest revenue relative to non-interest income over the same time period.
This reinforces that Australian and Canadian banks demonstrated extra ordinary resilience during the credit turmoil in the global financial crisis. The World Economic Forum in 2008 reported that Australia and Canada were among the top four safest banking systems in the world.
Large banks in Australia are active in international markets through direct ownership of foreign based banks and having offshore operations as a source of capital. Deregulation of banking in countries such as the USA, Canada, Australia and many developing countries has opened up new markets for foreign banks. Australian banks' largest international exposure is to New Zealand, where all big four banks retain sizeable operations.
Although the growing interdependence among international economies and financial markets is certain to continue, the impact of Brexit on Australian banks remains minimal. It remains to be seen in the long-run how Australian banks will weather the international banking/economic developments.
As a last measure of the bank health, we can measure the domestic systemic risk with a methodology based on one used by the official Basel Committee on Banking Supervision. Based on July 2016 monthly data, the big four banks account for 80.38 percent of the systemic risk in the financial system and the riskiest, from highest to lowest, are the National Australia Bank, the Commonwealth Bank of Australia, Westpac and ANZ.
Mamiza Haq is lecturer in Finance, The University of Queensland, and author for The Conversation. She can be contacted <a href="https://theconversation.com/profiles/mamiza-haq-143872" target="_blank">here</a>.
Necmi K Avkiran is associate professor in Banking and Finance, The University of Queensland and author for The Conversation. He can be contacted <a href="https://theconversation.com/profiles/necmi-k-avkiran-298084" target="_blank">here</a>.
</body></html>

Company results wrap: weighing up the risks behind the profits of Australia’s big four banks

<html><body>
<img src="https://counter.theconversation.edu.au/content/68429/count.gif?distributor=republish-lightbox-basic" alt="The Conversation" width="1" height="1">
GUEST OBSERVER
Last week the Australian division of global financial institution Citibank became the first local bank to stop handling cash.
The bank’s retail head said it was not a precursor to closing bank branches, but it comes as banks are stepping up their investments in technology, while at the same time looking to reduce costs. But evidence shows customers still want branches or personal interaction with bank staff. 
Banks today spend a lot of time talking about technology. Their public documents are littered with terms like “simplification”, “process excellence”, “creating a footprint for a digital world”, “stepping up the pace of innovation”, “cloud based solutions”, “digital transformation”, “unparalleled digital capabilities”, “digital security”, “innovation labs”, “technology for leveraging data analytics” – it goes on and on. 
It is clear the banks are highly motivated to ride the technology wave to its full extent. And they cite several compelling reasons. The first is improving the customer experience. The banks argue they can build deep customer relationships through technology improvements. 
The way customers want to undertake banking is continually changing, and more and more customers want simplified solutions and to be able to do everything on digital devices. Part of the customer service improvement is heavy investment in data analytics to better understand customer profiles and the ways in which customers transact. 
The second reason is to drive down costs. Customers want the cost effective solutions that smart technology can offer them, and banks want to improve their own cost to income ratios.
Security is a third factor. Customers want their money to be safe and banks need to invest in secure solutions and the prevention of cybercrime. 
But what is the role of the traditional bank branch in all of this? Will increasing digital solutions lead to more branch closures? And do customers still want branch based solutions and interactions? 
<h2>Branch networks are declining, but at a slower pace</h2>
APRA figures show there were 5904 “points of presence” in Australia offering a branch level of service as at June 30, 2016. These figures include non-bank entities such as building societies, but the vast majority relate to bank branches. 
From 2012 onwards, the number of branches has shown negative growth each year, and there has been a particularly large slide of 5 percent in 2016. There has been a greater percentage of closure in rural areas. According to APRA’s branch classifications, there was a reduction of 315 branches, of which 173 (-4 percent) was in highly accessible areas, 75 (-10 percent) in accessible areas, 36 (-12 percent) in moderately accessible areas, 25 (-17 percent) in moderately accessible areas, 6 (-13 percent) in very remote areas.
<a href="/images/2016/11/17/image-20161114-21945-10joapy.png" target="_blank">Click to enlarge</a>
<img src="/images/2016/11/17/image-20161114-21945-10joapy.png" alt="">
APRA data, Author provided
These closures need to be put into context. They are small compared to the many closures that were seen in Australia from the early nineties to the early 2000s, when ATMs and other electronic solutions were being increasingly rolled out by banks. APRA figures show a reduction of more than 2,000 branches over this period. 
An Australian parliamentary report at that time put this down to banks seeking increased efficiency and reduced costs in a highly competitive global environment, fuelled by an increase in technology and electronic banking solutions. 
The US, like Australia, has also shown a relatively small reduction in branches in recent times. The UK on the other hand has had a comparatively huge number of branch closures. A parliamentary report showed branch numbers have fallen from more than 20,000 in the late eighties to less than 9,000 in recent times. These closures even led to an active group called the Campaign for Community Banking Services. It spent nearly two decades trying to stop the closures but disbanded recently, believing the tide could not be stopped.
Despite bank branch closures, there’s evidence to suggest customers still want branches or some sort of personal interaction with bank staff. 
A Canstar Blue 2016 survey showed that in Australia the top three drivers of bank customer satisfaction are enquiry and problem handling, fees and charges, and customer service (branch and call centre). Digital banking (mobile, website and apps) ranks only as the sixth key driver. In the UK, a study by McKinsey (2016) showed that customers still want interaction with branches, especially for more complex transactions.
But do branches still deliver value for the banks themselves? Well yes, not only do they serve to satisfy the needs of those customers who want personal interaction with their banks, these branches are also essential sales outlets for the banks.
There is also generally a desire among Australian banks to retain, and even expand, the relationship manager model for business customers, in contrast to a strong move over the last two decades by many global banks towards automated business processes such as credit scoring for small businesses. 
The banks in Australia have generally been reluctant to dispel further closures. And it’s clear they wish to move much further into technology-based solutions. However, there appears fairly wide acceptance among the banks that branches and personal contact still have an important role to play. This means branches are likely to keep evolving into smaller outlets focusing on sales and more complex transactions, while banks focus on other technology solutions as they evolve.
Robert Powell is associate professor, Edith Cowan University and author for The Conversation. He can be contacted <a href="https://theconversation.com/profiles/robert-powell-314697" target="_blank">here</a>.
</body></html>

Banks are hedging their bets on costly branch networks

<html><body>
<div>Australia's banks are mostly funded by domestic deposit these days, at nearly 60 percent of their funding composition.</div>
<div> </div>
<div>Equity accounts for a fair share of the remainder too. </div>
<div> </div>
<div>But what about their debt funding costs?</div>
<div> </div>
<div>Last week's Statement on Monetary Policy took a short look at this. </div>
<div> </div>
<div>And the answer is that debt funding costs have kept on falling in 2016.</div>
<div> </div>
<div>And what's more they will continue to do so in the near future. </div>
<div> </div>
<div><a href="/images/2016/11/07/RBA1.jpg" target="_blank">Click to enlarge</a></div>
<div> </div>
<div class="separator"><img src="/images/2016/11/07/RBA1.jpg" alt=""></div>
<div class="separator"> </div>
<div>After cuts to the cash rate May and August, the major banks’ debt funding costs also declined. </div>
<div> </div>
<div>The cost of short-term debt is now under 2 per cent (down from well above 6 per cent in 2007).</div>
<div> </div>
<div>Meanwhile, the marginal cost of long-term debt is a bit above 3 per cent.</div>
<div> </div>
<div>It is true that since the beginning of the year, these costs have declined by a little less than the cash rate.</div>
<div> </div>
<div>This was mainly because of changes to term deposit rates. </div>
<div> </div>
<div>But overall the difference was not material.</div>
<div> </div>
<div>And now funding costs are expected to fall further, since the cost of new wholesale debt remains below the cost of outstanding debt. </div>
<div> </div>
<div>
<div>
PETE WARGENT is the co-founder of <a href="https://allenwargent.com/" target="_blank" rel="nofollow">AllenWargent</a> property buyers (London, Sydney) and a best-selling author and <a href="https://petewargent.blogspot.com/" target="_blank" rel="nofollow">blogger</a>. 
His latest book is <a href="https://www.bigskypublishing.com.au/Books/General-Interest/Four-Green-Houses--and-a-Red-Hotel/1015/productview.aspx" target="_blank" rel="nofollow">Four Green Houses and a Red Hotel</a>.
 
</div>
</div>
</body></html>

Banking

Editor's Picks

Have something to contribute?

Developments

New apartments

New townhouses

News

Banking

Editor's Picks

Receive the latest news stories to your inbox

Have something to contribute?

Developments

New apartments

New townhouses

News