Banks

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EXPERT OBSERVER
Studies of European countries show that bank taxes similar to the 0.06% bank levy introduced by the government in the 2017 federal budget will be largely borne by customers, not shareholders.
The levy could also make the banking system more, rather than less risky. The fact that a bank is asked to pay the levy is a confirmation that it is “too big to fail”. This could in turn encourage riskier behaviour. The levy might also trigger a higher probability of default by reducing a bank’s after-tax profitability
But it is difficult to say whether banks will pass the levy on to customers by increasing their loan rates, fees or both.
In its response to the levy, NAB confirmed it will not just be borne by shareholders:
The levy is not just on banks, it is a tax on every Australian who benefits from, and is part of, the banking industry. This includes NAB’s 10 million customers, 570,000 direct NAB shareholders, those who own NAB shares through their superannuation, our 1,700 suppliers and NAB’s 34,000 employees. The levy cannot be absorbed; it will be borne by these people.
Aware of this problem, the government has asked the Australian Competition and Consumer Commission (ACCC) to undertake an inquiry into residential mortgage pricing. The ACCC can require banks to explain changes to mortgage pricing and fees.
When banks pass on these taxes
The bank levy is similar to taxes recently introduced by some G20 economies, including the UK. These had the dual purpose of raising revenues and stabilising the balance sheets of large banks in the aftermath of the global financial crisis.
An analysis of bank taxes in the UK and 13 other European Union countries shows that the extent to which taxes are passed on to customers depends on how concentrated the banking industry is.
The more the industry is dominated by a small number of banks, the greater the share of the tax that is passed on to customers and the less that is borne by shareholders. In more concentrated industries customers have relatively fewer alternative options and therefore tend to be less mobile across banks. This in turn gives the large banks greater market power to increase interest rates and fees without losing customers.
Australia’s banking industry is quite concentrated. In fact, we’re around the middle of the pack of OECD countries, much higher than the US, but lower than some European countries. From this we can surmise that at least some of the cost of the bank levy here will be passed on to borrowers through higher loan rates, fees or both.
An IMF study of G20 countries suggests that a levy of 20 basis points (i.e. 0.2%, approximately three times higher than the Australian government’s bank levy), could lead to an increase in loan rates of between 5 and 10 basis points. This means that the monthly repayment on a loan (assuming an initial rate of 5.5%) would increase by approximately A$6 for every A$100,000 borrowed.
The IMF also found that the bank levy doesn’t just hit customers. A 0.2% levy would reduce banks’ asset growth rate by approximately 0.05% and permanently lower real GDP by 0.3%.
The impact on customers
If the banks pass on the levy to customers then it becomes just another indirect tax, similar to the GST. The question then is whether this is regressive - does it have a greater impact on those on lower incomes than higher incomes.
Lower income earners are likely to borrow less than higher income earners. However, lower income earners are also less able to bear an interest rate increase. They are also more likely to be excluded from borrowing when the cost of borrowing increases.
In this sense, then, if the bank levy is passed on to customers it could become a barrier to home ownership for some lower income borrowers.
More generally, if the value of bank transactions is a higher proportion of low incomes than of high incomes, then the bank levy would operate as a regressive tax and contribute to sharpening (rather than smoothing) inequalities.
Both of these would be unintended, but undesirable, consequences of the levy.
Fabrizio Carmignani is a Professor at Griffith Business School, Griffith University. 
Ross Guest is a Professor of Economics and National Senior Teaching Fellow, Griffith University.<img src="https://counter.theconversation.edu.au/content/77782/count.gif?distributor=republish-lightbox-advanced" alt="The Conversation" width="1" height="1" style="font-size: 12.16px; line-height: 1.3em;">
All authors are for <a href="https://theconversation.com/research-shows-the-banks-will-pass-the-bank-levy-on-to-customers-77782" target="_blank">The Conversation</a>.
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jchancellor-FAypfDUnLy

Research shows the banks will pass the bank levy on to customers

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<img src="https://counter.theconversation.edu.au/content/77784/count.gif?distributor=republish-lightbox-advanced" alt="The Conversation" width="1" height="1">
GUEST OBSERVER
In its 2017 federal budget, the Australian government included a 0.06 percent levy on Australia’s biggest five banks: ANZ, the Commonwealth, NAB, Westpac and Macquarie Bank.
The levy will collectively cost the banks A$1.6 billion a year, and by some estimates will raise the overall cost of funding for the affected banks by around 0.03 percent. Many commentators have suggested this cost will be passed directly onto customers.
In an interview on the ABC’s Insiders program, Treasurer Scott Morrison said the banks could absorb the cost of the levy, given the size of their profits.
He said Australia’s large banks have between a 0.2 percent to 0.4 percent advantage because of the way Australia’s regulatory regime works and that Australian banks have a return on equity about twice that of banks in other advanced developed economies.
Is that right?
Checking the source
When asked for sources to support his statement, a spokesperson for Scott Morrison referred The Conversation to evidence presented by the Reserve Bank of Australia to the House of Representatives Standing Committee on Economics at its hearing on September 28, 2016.
In the report, the Reserve Bank included a chart provided below.
The spokesperson added that:
Importantly, the chart doesn’t adjust for M&amp;A [mergers and acquisitions] activity, given NAB’s 2016 sale of Clydesdale brings down average (unadjusted) ROE [return on equity] for Australian banks quite substantially.
Let’s check the facts.
What is the return on equity for Australian banks?
Return on equity, or ROE, is a measure of profit, expressed as a percentage of shareholder equity. It shows how much profit a company generates with the funds invested by its shareholders.
The figure below (from the Reserve Bank’s Financial Stability Review) shows the return on equity of the large banks in Australia was around 15 percent in 2015.
Including the smaller Australian banks, which have about 20 percent of the market, the average return on equity is somewhat lower and more variable than for the big four only, but it is above 12 percent.
<a href="https://www.propertyobserver.com.au/images/2017/05/19/return%20on%20equity.png" target="_blank">Click to enlarge</a>
<img src="https://www.urban.com.au/images/2017/05/19/return%20on%20equity.png" width="452" height="425">
A decade ago, Australian bank returns on equity were a few points higher, and not much different from those earned by banks in other developed markets.
However, during the global financial crisis, banks in the US and Europe sustained large losses, leading to negative returns for couple of years. US banks have since recovered somewhat. European and UK banks, however, continue to perform weakly: the returns on equity of large banks in Europe are about 5 percent, compared to about 3 percent in the UK. The ROEs of large Canadian banks have, like those of large Australian banks, remained higher and more stable.
Looking ahead, the Reserve Bank notes that:
Analysts’ expectations are for Australian banks’ [return on equity] to remain on average around 12.5 percent over the next couple of years. While this is high by international standards and appears to be above banks’ cost of equity, it is lower than the returns to which Australian banks and their investors have become accustomed. Do Australia’s biggest banks have an added advantage over smaller rivals?
The treasurer also claimed that “our major banks have about a 20 to 40 basis point [funding cost] advantage because of the nature of the regulation and structure of our financial system”.
Big banks do indeed appear to be able to borrow more cheaply because their lenders expect them to receive government support during crises.
In 2010, the International Monetary Fund (IMF) used a range of approaches to estimate the value of “implicit government support” – such as the bailouts provided to some US banks during the global financial crisis – for banks and other financial institutions in the Group of 20 nations, including Australia.
While the answers from the different approaches varied, the IMF concluded that implicit government support “provides too big to fail financial institutions with a funding benefit between 10 and 50 basis points, with an average of about 20 basis points”.
Here in Australia, the Reserve Bank has concluded that “the major banks have received an unexplained funding advantage over smaller Australian banks of around 20 to 40 basis points on average since 2000”.
Macquarie University researchers James Cummings and Yilian Guo found that the funding cost advantage was about 30 basis points from 2004 to 2013, but has declined to about 16 to 17 basis points since then, in part due to prudential reforms that obliged banks to increase the share of lending contributed by shareholders.
Verdict
Scott Morrison was correct: Australian banks do “have a return on equity which is about twice, if not more than that, what you see particularly in other parts of the advanced developed economies of the world”.
Australian banks currently have higher returns on equity than banks in many other major developed markets. Those returns are about twice as high or more than the returns of the troubled European and UK banks. But returns in Canada are close to the Australian level, and the returns earned by large US banks are only a few points below the Australian level.
The treasurer is also correct to point out that the major banks enjoy a funding cost advantage on the basis of expected government support in financial crises. However, the size of the support is less clear. While IMF and RBA studies are in line with the treasurer’s range, there is some evidence that the funding cost advantage may now be somewhat lower.
Jim Minifie is Productivity Growth Program Director at the Grattan Institute. You can follow him on Twitter <a href="https://twitter.com/jimminifie?lang=en" target="_blank">here</a>. 
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Do Australian banks have double the return on equity of banks in other developed economies?

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<img src="https://counter.theconversation.edu.au/content/82886/count.gif?distributor=republish-lightbox-advanced" alt="The Conversation" width="1" height="1">
GUEST OBSERVER
The view of Australian banks on the risk that mortgage stress poses to our economy and the banks’ own viability is worrying.
Shayne Elliott, CEO of ANZ Bank commented in this week’s Four Corners report:
"The reality is that housing loans are pretty good because they’re quite diverse in terms of lots of relatively small loans across ah across the country."
This view is in contradiction to research from the United States which finds housing markets there are less diversified than previously thought. This means any house price shocks will likely occur simultaneously across the country, causing large cumulative losses to borrowers and banks via mortgage defaults. Australian housing markets are likely to be even more concentrated than in the US because of the population size of Sydney and Melbourne.
Banking regulator the Australian Prudential Regulation Authority (APRA) has already issued guidelines to the banks on tracking exposure to mortgages and limiting the growth of loans to investors, in particular for interest-only loans. An independent review by Stephen Sedgewick on behalf of the industry also recommended banks stop paying mortgage brokers based on the volume of loans they secure, in an effort to reduce risks. But these steps might not be enough to ensure security.
Australian bank exposure to mortgage risk
Bank losses during the global financial crisis were in large parts driven by borrowers not being able to make their mortgage repayments. After receiving a loan, borrowers may experience income shocks like loss of jobs or demotion and expense shocks like higher petrol prices or interest rates, that affect their ability to service their mortgages.
Australian mortgage contracts are risky for borrowers in international terms. Unlike other countries, Australian banks offer to lend only up to five years at a fixed rate and the majority of loans are at a variable rate. 
This leaves Australian borrowers exposed to interest rate increases. In the past few years, interest rates were lowered as Reserve Bank of Australia economists targeted low inflation rates.
<a href="https://www.propertyobserver.com.au/images/2017/08/24/RentEarnings.png" target="_blank">Click to enlarge</a>
<img src="https://www.urban.com.au/images/2017/08/24/RentEarnings.png" alt="">
www.rba.gov.au, Author provided
Interest rates are now close to zero, limiting the ability of the RBA to stimulate economic growth. There’s the possibility the RBA could raise interest rates, causing shocks to mortgage borrowers. My research shows this shock could increase bank losses substantially.
At the moment 23% of consumer expenses are housing related and this number is likely higher for mortgage borrowers and could be growing. Interest rate increases, in combination with the current high debt levels, are therefore likely to increase inflation and trigger further interest increases. 
Dealing with the risk of mortgage stress
Current bank portfolios are not well diversified, if 60% of bank assets are in mortgages. Other loan classes such as commercial real estate loans and small to medium enterprise loans are also often property-backed. 
Bank lending standards need to be more consistent to avoid borrowers shopping around for the lender that offers them the highest loan amount. Lending standards should also consider the concentration of housing income and expenses in a borrower’s portfolio.
Banks should promote fixed rate mortgages. This type of mortgage transfers interest rate risk from borrowers to the banks, that are better placed to manage this risk. This may come at an additional cost but should be small compared to the cost borne by consumers should the housing bubble ever burst. 
There also needs to be more scrutiny of the use of offset accounts and redraw facilities, being used as an offset for outstanding loans. Borrowers often use these funds to purchase additional properties and they may not be available in the case of mortgage default. Instead of promoting offset accounts it may be better to give borrowers a prepayment on their mortgage, but not an option to redraw. Should consumers want to draw down on the equity in their homes, they could then apply for a second mortgage. 
Mortgage brokers should act as independent advisers, a tool for consumer information and bank competition, as smaller lenders in particular rely on mortgage brokers. The Sedgwick report suggested the loan to value ratio of mortgages should be considered when paying mortgage brokers. This would mean that loans with high loan-to-value ratios (where the borrower is more likely to default) would earn a lower fee.
The Sedgwick banking review has been a step in the right direction, but the focus should be on banks rather than mortgage brokers, as it’s ultimately the bank that is in a contract with the consumer. 
Some of this may require a fundamental value change. It’s not likely the Australian appetite for property will change but this means we need to hedge our bets against any risks by improving diversification and the way banks finance mortgages.
<a href="https://theconversation.com/profiles/harry-scheule-3573" target="_blank">Harry Scheule</a> is Associate Professor, Finance, UTS Business School, University of Technology Sydney and author for <a href="https://theconversation.com/au" target="_blank">The Conversation</a>.
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Banks shouldn’t underestimate the risk of concentration in the housing market

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Is it a case of banks don’t know what’s going on, or is it more a statement they don’t want to know? Pour yourself a fresh cup of coffee and read on. Don’t forget, your comments are welcomed and be sure to share them.
There are three main issues that banks appear to be very silent on and the question that is fitting in this property-climate is simply: “why are they so quiet?” A question which begs a straight answer; especially with the concerns surrounding foreign and local property investors buying newly built property and pricing local first-time-home-buyers out.
The three concerns and issues I refer to are:
·     Rental guarantees
·     Overly inflated commissions and
·     The scourge of the financial industry sector, selling property without a real estate industry license.
My immediate guess is, if you are riding the “Gravy Train” of “Overseas &amp; Local Investors” why should these seemingly illegal practices be of concern to banks? Again and for now, I’m just speculating that; it’s best to turn a blind eye than it is to confront what may well be considered unfair and unjust to local home buyers. After all, first-time-home-buyers aren’t the flavor of the month to all concerned, now are they?
It is my strong belief that the three topics noted, create an unfair advantage that has driven property values sky-high as developers reach for the skies.
Why is this unfair? I have previously discussed in other articles, “Rental-Guarantees” and “Overly-Inflated Commissions” are ultimately paid by the investor.
<a href="https://mail.privatemedia.com.au/owa/redir.aspx?SURL=buh8exBazU3bNSloPOr0rrJNNQesJNSotxGFO7YMkRixynWPdWzSCGgAdAB0AHAAOgAvAC8AdwB3AHcALgBsAGkAbgBrAGUAZABpAG4ALgBjAG8AbQAvAHAAdQBsAHMAZQAvAGkAbgB0AGUAcgBuAGEAdABpAG8AbgBhAGwALQBpAG4AdgBlAHMAdABvAHIAcwAtAGIAZQBpAG4AZwAtAGQAdQBwAGUAZAAtAHMAeQBkAG4AZQB5AC0AYQB1AHMAdAByAGEAbABpAGEALQBlAGQAdwBpAG4ALQBhAGwAbQBlAGkAZABhAA..&amp;URL=http%3a%2f%2fwww.linkedin.com%2fpulse%2finternational-investors-being-duped-sydney-australia-edwin-almeida"> </a>Ha! And you thought the developers were generous and paid for these right? Therefore, driving the values of the newly built properties upward.
Now allow me to break it down for you.
Rental guarantees:
What is common amidst most of the activity surrounding the sales of newly built property is the rental guarantees. Some rental guarantees are lasting for as long as 3 years.
It is my belief that any incentive made by the vendor or the agent to enhance the sale, the incentive has to be disclosed and must also form part of the contract of sale. The inducement being the rental guarantee but this is not limited to a rental guarantee.
In my time I have also seen cars and furniture packages form part of sales incentives, all in the aim to entice the investor to buy.
Inflated Commissions:
Yes, I know I speak out a lot about this very subject but when spruikers earn 5 times what the local agent earns in one sale, there has to be something wrong. If I don’t speak out, will the REI NSW step in or any of the REI’s for that matter?
I stopped holding that breath 4 years ago.
Nevertheless, the banking bodies should take note as their clients (the investors) are ultimately paying for this.
I also note that most of my endeared friends that have created this negative impact on the local home front, all sell newly built property. An arena where highly inflated commissions can and are paid out.
Selling without an industry license:
The temptation is just too great and the grass is greener on the other side. When so much money is at stake we have seen; brokers, accountants, financial planners and advisers jump the fence to moonlight as real estate agents as they lead their clients astray.
Again, this is an area where the banks should focus on, as local investors fall prey to the rogues within the financial sector.
A closer eye and perhaps a magnifying glass should be used to review contracts especially when the buyers are: Trustee Companies for Self-Managed-Super-Fund (SMSF) Trusts. More to the point when the property is new as this is the territory where these rogues, feast and boast about the high commissions earned.
Rental guarantees, overly inflated commissions and spruikers selling real estate without a license under the guise of calling themselves property-marketers: should send alarm bells ringing through the banking sector. But once more, why is there so much silence surrounding the very issues that have overly inflated the value of a new property in Sydney?
Getting to the nuts and bolts
Unethical real estate agents, spruikers, property marketing companies and the scourge of the financial sector; all have been ensnared by the prize of the high commissions and in turn lure investors by creating false perceptions of property: growth, demand, under-supply and high return on investment. How? By the simple use of instruments (such as rental guarantees) outside of the contract of sale and therefore, making the transaction questionable and unconscionable.
The falsely represented, high priced, new property sales ultimately filters down to established homes and we have what I refer to as “property-osmosis”. Property osmosis is an upward pull of established property's prices, caused by the exaggerated values of the surrounding new developments.
Most people are also under the impression that Overseas-Investors are paying for their properties with 100% cash. However, that it is not the case. Most investors buy property with a high deposit and borrow 50-60% through a loan vehicle.
In actual fact, Chinese citizens can only take up to $50,000 out of China through legal channels. However, there are means and ways to take $200K-$400K without much fuss.
Therefore, banks are more than happy to lend at 60% Loan to Value Ratios, as they are well secured even if the market dips by 20-30%. As you can see, there is very little risk for the banks.
Then there are our home grown Local-Investors that have been enticed to buy. Their property investment guides as previously mentioned are mainly, property spruikers and financial experts that assist in creating (SMSF) schemes to buy property. These vehicles also requiring low LVRs to purchase.
Typically, the SMSF schemes may borrow 70-80% to buy the investment property. Again the banking sector feeling secure on all counts.
What banks and Industry bodies need to do
The first and foremost prudent demand banks should place on the real estate industry is, for the “Sales Inspection Report and Agency Agreement” to be disclosed. Disclosure of what the “AGENCY” is being rewarded for the sale, will provide a twofold and strong indication to the valuer if there are any hidden agreements not being revealed.
·     Overinflated commissions
·     Payments made to agent/agency to cover rental guarantees and other incentives not disclosed in the Contract of Sale, which are passed on to the investor.
A copy of the agency/corporation license, should also accompany the contract of sale when providing the relevant documentation to the valuers. For the bank valuers to properly asses the true value of the property.
·     An agency or business name on the front page of the contract inserted after "Vendor's Agent" does not represent that the agent holds an industry license.
Perhaps at this very moment there is simply too much at stake to curve these questionable practices. The banks, financial institutions, real estate agents and we may also include the government, are all making too much money on this gravy train, to really care about our local first home buyers.
I am troubled nonetheless to think that all these practices that may be considered highly questionable if not illegal, have and continue to go on and right under the very noses of the banking institutions.
EDWIN ALMEIDA is licensee in charge of <a href="https://www.just-think.com.au/" target="_blank">Just Think Real Estate</a>.<a href="https://www.just-thin.com.au/"> </a>
He is also the creator of <a href="https://www.youtube.com/user/JustThinkProperty" target="_blank">Oz Real Estate.TV</a> and a presenter for <a href="https://propertyinvestingvault.com/" target="_blank">propertyinvestingvault.com</a>.
 
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ealmedia-arK4DBYLjS

Banks turning a blind eye: Edwin Almeida

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EXPERT OBSERVER
Australia’s banks will change the Banking Code of Practice to overhaul the way they manage a customer’s estate when they have died and end ‘fees for no service’ across the industry.
Further to this they will seek new legislation to end grandfathered payments and trail commissions for financial advisers. 
These reforms are the first of several key changes in response to the Royal Commission and include:
<ul type="disc">
<li class="x_MsoBodyText">Ending ‘fees for no service’ - Banks will change the way they manage ongoing financial advice, proactively contacting customers to confirm what advice is required and only charging for what is provided</li>
<li class="x_MsoBodyText">Changing the Banking Code of Practice to improve the way banks manage a deceased estate - Once notified of a customer’s death, banks will proactively identify fees that are for products and services that can no longer be provided in the circumstances, stop charging those fees and refund any paid</li>
<li class="x_MsoBodyText">Seeking new legislative changes to the Future of Financial Advice (FOFA) reforms to remove all legislative provisions that allow grandfathered payments and trail commissions in financial advice</li>
</ul>
These initiatives addressed two of the strongest concerns raised by the Royal Commission’s Interim Report.
It has always been unacceptable for any organisations to charge fees without providing a service.
This announcement will put beyond the shadow of a doubt that this practice has no place in Australia’s banking industry.
Banks will change the way they manage a customer’s account, proactively contacting them to confirm what services are required for their investments and only charging for those provided.
This issue of charging fees without service, particularly when customers have recently died, was raised during the Royal Commission and identified as unacceptable.
When someone loses a loved one, they need support and compassion as they finalise their loved one’s financial affairs. Charging ongoing advice fees to dead people is clearly unacceptable.
Right now banks are working with customers to refund those charged a fee where no service was provided. Latest ASIC data indicates customers will receive more than $1 billion in refunds.
In addition to these changes the industry is supporting legislation to remove grandfathering provisions in relation to financial advice.
This is another important piece in the puzzle of ensuring there are no conflicts for advisers.
ANNA BLIGH is the CEO of the Australian Banking Association and is the former Premier of Queensland. 
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jrobinson-rf4aSBido9

Ending fees for no service, grandfathered payments: ABA's Anna Bligh

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GUEST OBSERVATION 
Last week the Australian Prudential Regulation Authority (APRA) sent an <a href="https://www.apra.gov.au/capital-management">extraordinary letter</a> to Australia’s banks and insurers, essentially telling them to cut their dividend payments to shareholders in light of the coronavirus crisis.
It said it expected banks and insurers to “seriously consider deferring decisions on the appropriate level of dividends”.
<a href="https://images.theconversation.com/files/326728/original/file-20200409-188923-1pxiqkj.jpg?ixlib=rb-1.1.0&amp;q=45&amp;auto=format&amp;w=1000&amp;fit=clip"><img src="https://images.theconversation.com/files/326728/original/file-20200409-188923-1pxiqkj.jpg?ixlib=rb-1.1.0&amp;q=45&amp;auto=format&amp;w=237&amp;fit=clip" alt=""></a>
Read the full <a class="source" href="https://www.apra.gov.au/sites/default/files/2020-04/Capital%20management.pdf" target="_blank">APRA letter to financial institutions, April 7, 2020</a>.
Where a board was confident that it could approve a dividend on the basis of robust stress testing that had been discussed with APRA, it should “nevertheless be at a materially reduced level”.
Where dividends were paid those payments should be “offset to the extent possible through the use of dividend reinvestment plans and other capital management initiatives”.
With Australia’s big four banks potentially suffering big losses due to mortgage defaults among other things, their capital bases are at risk.
Equity research analysts at <a href="https://www.nytimes.com/reuters/2020/04/08/world/asia/08reuters-health-coronavirus-australia-banks">Macquarie</a> outline a scenario under which bank losses reach A$25-27 billion per bank, and their capacity to pay dividends (without raising equity) materially diminishes
Why did APRA do it?
The letter isn’t a “ban” on dividends, and APRA wasn’t telling the banks anything they don’t already know. So why did it bother?
The answer lies in the economics of how investors react to firms that don’t pay the dividends expected.
Seen through that lens, APRA was very clever indeed.
In a classic 1985 paper <a href="https://onlinelibrary.wiley.com/doi/epdf/10.1111/j.1540-6261.1985.tb02362.x">Merton Miller and Kevin Rock</a> provided a theoretical answer to the puzzle of why paying dividends seems to signal good news to investors, and why cutting dividends seems to signal bad news, and cuts the share price.
In the Miller-Rock model, the managers of a firm have better information about its future prospects than outside investors.
To keep it simple, imagine there are two “types” of firms: good and bad.
Good firms have high future cashflows, bad ones have low ones.
Only the managers know which is which.
Because both types of firm can earn something from investing in the business, it is in the interest of both (more so the good firm) to invest rather than pay out dividends.
Miller and Rock wondered whether what each type of firm did provided clues to investors about whether the managers thought it was good or bad.
Surprisingly, they found that usually good firms will pay high dividend and bad firms no dividends.
It is surprising because good firms are sacrificing more by paying dividends.
Their logic was that the bad firms were the least able to afford good dividends and that good firms knew this and paid high dividends to signal they could afford to.
It has a striking implication with <a href="https://www.nber.org/papers/w4244">strong empirical support</a>.
If a firm gets a temporary negative shock to its cashflow or investment prospects it won’t want to cut its dividend lest investors think it has turned “bad”.
It will borrow or even do short-term damage to its prospects in order to maintain investor confidence and hence a high stock price.
Get out of jail free
Notice that the signalling theory of dividends implies that the managers of firms would like to cut dividends in tough financial times, and probably should, but they worry about sending a bad signal to investors.
<img src="https://images.theconversation.com/files/328304/original/file-20200416-192698-pj1hzp.jpg?ixlib=rb-1.1.0&amp;q=45&amp;auto=format&amp;w=237&amp;fit=clip" alt="">
An announcement like APRA’s provides them with cover – an excuse.
And it does more. It is what economists refer to as a “coordination device”.
If the big four banks got together and agreed cut their dividends by the same amount, say in half (which would be illegal) investors would get no differential signal and no new information about which bank was “good” and which was “bad”.
APRA’s message opens up the possibility of all four coordinating without talking – merely by following advice.
As 2005 Nobel laureate Thomas Schelling put it in his book, <a href="https://www.hup.harvard.edu/catalog.php?isbn=9780674840317&amp;content=reviews">The Strategy of Conflict</a>,
"People can often concert their intentions or expectations with others if each knows that the other is trying to do the same."
And they’ve an interest in coordinating. If one bank falls over during this crisis and needs to be bailed out that’s bad for all of them. All of their stock prices will tank, it will be hard for them to raise the capital they need to fund their operations.
Australia’s banks compete, but they are “frenemies”, right now more friends than enemies.
We will have to wait and see if they pick up the get-out-of-jail card APRA has handed them and cut dividends together.
APRA could have taken a tougher stance. It could have banned dividends. But that would have sent a bad signal to domestic and international capital markets about the solvency of our banks.
I have been critical of some of APRA’s moves in recent years. But this one is brilliant. Let’s hope the banks can see a life raft when they’re offered one.<img src="https://counter.theconversation.com/content/136407/count.gif?distributor=republish-lightbox-basic" alt="The Conversation" width="1" height="1" style="border: none !important; box-shadow: none !important; margin: 0 !important; max-height: 1px !important; max-width: 1px !important; min-height: 1px !important; min-width: 1px !important; opacity: 0 !important; outline: none !important; padding: 0 !important; text-shadow: none !important;">
<a href="https://theconversation.com/profiles/richard-holden-118107">Richard Holden</a>, Professor of Economics, <a href="https://theconversation.com/institutions/unsw-1414">UNSW</a>
This article is republished from <a href="https://theconversation.com">The Conversation</a> under a Creative Commons license. Read the <a href="https://theconversation.com/vital-signs-apras-extraordinary-gift-to-banks-under-pressure-to-pay-dividends-136407">original article</a>.
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rh-YsoTT2xMuQ

APRA's extraordinary gift to banks under pressure to pay dividends

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Six of Australia's largest banking and financial services institutions have paid or offered a total of $1.05 billion in compensation, as at 30 June 2020, to customers who suffered loss or detriment because of fees for no service (FFNS) misconduct or non-compliant advice.
This is an additional $295.9m in compensation payments or offers by the institutions from 1 January to 30 June 2020.
AMP, ANZ, CBA, Macquarie, NAB and Westpac (the institutions) undertook the review and remediation programs to compensate affected customers [i] as a result of two major ASIC reviews. ASIC commenced the reviews in 2015 to look into:
<ul>
<li>the extent of failure by the institutions to deliver ongoing advice services to financial advice customers who were paying fees to receive those services and</li>
</ul>
<ul>
<li>how effectively the institutions supervised their financial advisers to identify and deal with ‘non-compliant advice’ – i.e. personal advice provided to a retail client by an adviser who did not comply with the relevant conduct obligations in the Corporations Act, such as the obligations to give appropriate advice or to act in the best interests of the clients, at the time the advice was given. </li>
</ul>
The table below provides a breakdown of the compensation payments made or offered by the institution as at 30 June 2020.
<table border="0" cellspacing="0" cellpadding="0"><tbody>
<tr>
<td rowspan="2" valign="top" width="99">
Institution
</td>
<td colspan="2" valign="top" width="240">
FFNS misconduct
</td>
<td colspan="2" valign="top" width="262">
Non-compliant advice <a href="https://asic.gov.au/about-asic/news-centre/find-a-media-release/2020-releases/20-193mr-asic-update-on-compensation-for-financial-advice-related-misconduct/#note-iii">[iii]</a>
</td>
</tr>
<tr>
<td valign="top" width="120">
Compensation paid or offered
</td>
<td valign="top" width="120">
No. of customers paid or offered compensation
</td>
<td valign="top" width="118">
Compensation paid
 
</td>
<td valign="top" width="144">
No. of customers paid compensation
</td>
</tr>
<tr>
<td valign="top" width="99">
AMP
</td>
<td valign="top" width="120">
$145,719,911
</td>
<td valign="top" width="120">
199,425
</td>
<td valign="top" width="118">
$28,647,008
</td>
<td valign="top" width="144">
2,043
</td>
</tr>
<tr>
<td valign="top" width="99">
ANZ
</td>
<td valign="top" width="120">
$66,653,885
</td>
<td valign="top" width="120">
26,461
</td>
<td valign="top" width="118">
$39,182,569
</td>
<td valign="top" width="144">
1,920
</td>
</tr>
<tr>
<td valign="top" width="99">
CBA
</td>
<td valign="top" width="120">
$167,131,529
</td>
<td valign="top" width="120">
54,826
</td>
<td valign="top" width="118">
$9,354,027
</td>
<td valign="top" width="144">
626
</td>
</tr>
<tr>
<td valign="top" width="99">
Macquarie
</td>
<td valign="top" width="120">
$3,970,000
</td>
<td valign="top" width="120">
983
</td>
<td valign="top" width="118">
-
</td>
<td valign="top" width="144">
-
</td>
</tr>
<tr>
<td valign="top" width="99">
NAB
</td>
<td valign="top" width="120">
$368,075,052
</td>
<td valign="top" width="120">
626,863
</td>
<td valign="top" width="118">
$52,185,609
</td>
<td valign="top" width="144">
1,623
</td>
</tr>
<tr>
<td valign="top" width="99">
Westpac
</td>
<td valign="top" width="120">
$130,508,318
</td>
<td valign="top" width="120">
28,350
</td>
<td valign="top" width="118">
$34,197,446
</td>
<td valign="top" width="144">
1,647
</td>
</tr>
<tr>
<td valign="top" width="99">
Total
</td>
<td valign="top" width="120">
$882,058,695
</td>
<td valign="top" width="120">
936,908
</td>
<td valign="top" width="118">
$163,566,659
</td>
<td valign="top" width="144">
7,859
</td>
</tr>
</tbody></table>
<h2>ASIC released REP 499 in October 2016 describing systemic failures in the advice divisions of AMP, ANZ, CBA and NAB, as well as some of their product issuers. These included the failure to ensure provision of ongoing advice services to customers who paid fees to receive those services, the failure of advisers to provide those services, and the failure of product issuers to switch off advice fees of customers who did not have a financial advise.</h2>
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j.ballantyne1990-6AQqhLzZaK

Banks compensate fees for no service misconduct

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Banks may increase variable mortgage rates to recoup pandemic-induced losses despite a stagnant cash rate, according to experts.  In this month's <a href="https://www.finder.com.au/rba-cash-rate" target="_blank" rel="noopener noreferrer" data-auth="NotApplicable">Finder RBA Cash Rate Survey</a>, all the experts surveyed expect a cash rate hold in September (40/40), more than half of those who weighed in (57%, 16) believe that banks will raise their variable mortgage rates despite the Reserve Bank indicating that the cash rate will remain motionless for some time.
Another course of action the banks took is, earlier in August, Westpac and ANZ announced that they are cutting or deferring dividends to shore up company profits.
The majority of economists who weighed in (88%, 22) believe that the nation’s other big banks will soon follow suit by slashing dividends or removing them altogether.
Cooke said that banks are taking a cautious approach as we enter a period of economic uncertainty.
“Banks are slashing shareholder dividends in an attempt to mitigate the financial disruption caused by the virus."
“This won’t come as welcome news for existing shareholders, but many investors will be seeing these plunging share prices as a great opportunity to buy discounted stocks,” he said.
Economic sentiment spikes
Finder’s Economic Sentiment Tracker, which gauges five key indicators – housing affordability, employment, wage growth, cost of living and household debt– shows a significant increase in overall economic sentiment since its lowest point in March 2020, rising from 8% to 24% in August
<img src="https://mcusercontent.com/cc5e9bce699fa1d71a67cf499/images/232c13b1-5dcf-4681-b36f-67bd31c9a816.png" data-imagetype="External"> Despite the uncertainty regarding the virus, more than half (57%, 20) of respondents believe that Australia will see GDP growth in 2020.  Leanne Pilkington of Laing+Simmons said Australia has been able to weather the economic storm of coronavirus better than other nations.  "Relatively speaking, the economic fallout of the coronavirus that is reverberating around global markets has not impacted Australia as hard as many other nations.  Even considering Victoria’s second wave and the potential for subsequent outbreaks elsewhere, employment figures are encouraging and other key indicators point to our economy’s overall resilience,” she said. 
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Experts forecast Australian banks will cut or defer dividends: Finder Survey

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The <a href="https://www.greater.com.au/" target="_blank">Greater Building Society</a> has confirmed it will change its name to Greater Bank in May after receiving approval from the regulator, APRA, to better explain what it does.
Chairman Wayne Russell said the new name would help The Greater position it for further growth and stressed there is no change to ownership structure.
He said research shows an increasing number of people don’t understand the term ‘building society’ so they don’t know all the financial products and services The Greater offers. 
“Using ‘bank’ takes the work out of explaining what we do as it is well understood and makes sense to customers of all generations,” Russell said. 
The name change was approved at the Greater’s AGM last November. The Greater has changed its name a number of times in its 90-year history.
Unlike the major banks, Greater Bank will still be customer-owned and not by shareholders.
“The name change is part of continuing changes we’re making to our products and services to remain a viable challenger to the big banks for local people,” added CEO Scott Morgan.
“As a customer-owned bank our focus on customers and community will remain the same.” 
“We will still be offering the same great rates, low fees and outstanding service.”  
The Greater currently provides banking services to around a quarter of a million customers in NSW and South East Queensland.
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