The public should be ‘shocked, dismayed and disgusted’ at the major banks



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ANZ and NAB have settled with ASIC over manipulation of the Bank Bill Swap Rate.
Shutterstock

Pat McConnell, Macquarie University

The Australian public should be dismayed and disgusted that the major banks are still attempting to cover up the extent of their complicity in manipulating the Bank Bill Swap Rate (BBSW), a key interest rate benchmark.

For years, the banks covered up the involvement of their traders in manipulating not only interest rate but also foreign exchange benchmarks, by attempting to outspend the corporate regulator, ASIC, in the courts, using shareholders’ money.

Faced with publication of the evidence they caved in at the very last minute to settle with ASIC, paying even more shareholders’ funds, for fines and legal costs.

Has any director or senior manager taken personal responsibility, or even apologised, for either the rampant misconduct or the failure to monitor it – No!

Little contrition

In a short media release, ANZ acknowledged, with little contrition, that

in the course of trading on the BBSW market, a small number of traders attempted to engage in unconscionable conduct on ten dates between September 2010 and February 2012. ANZ also did not have in place adequate policies and systems to monitor trading and communications of its BBSW traders.

But we should not be fooled by the references to the “small number of traders”, or “ten dates”.

Last year, CBA and NAB agreed to enforceable undertakings with ASIC in relation to manipulating the foreign exchange benchmark, which was arguably much more egregious than the BBSW manipulation, as it involved sharing of information with other market participants, in particular sensitive information about clients’ trades.

Not one of the directors or senior managers of these banks took personal responsibility for the actions of their staff or their collective failure to monitor such obvious misconduct.

The agreement between ASIC, NAB and ANZ stipulates that

Traders involved in the breaches will have to be retrained before they are allowed back on their banks’ trading floors

Trading on nonpublic confidential information, which is what “manipulating the bank bill swap rate to their advantage and the disadvantage of others” was, is often punished by custodial sentences not some short court-ordered training course. This would just reiterate the rules that the traders should have been following anyway and which diligent management should have been enforcing.

The failure to monitor staff seems not to have slowed the progress of some senior managers. For example, ANZ CEO Shayne Elliot, was head of ANZ’s Institutional Bank (i.e. trading operations) during most of the period in which the unconscionable conduct took place.

Why did they pursue the court cases?

So what were the boards of directors of some of Australia’s largest companies doing while this failure to monitor unconscionable conduct was going on?

While neither superstar chairmen Ken Henry (NAB) nor David Gonski (ANZ) were in place during the original misconduct, they have been in place since 2014 and have had ample opportunity to inquire into the details of the scandal.

Having read the same evidence as Justice Jagot, directors chose to proceed with the case before caving in on the day it was due to be heard in court. Investors should be tearing their hair out at such colossal waste of money on high-priced (and in the end useless) lawyers.

The LIBOR and foreign exchange scandals cost overseas banks billions of dollars in fines.

Did they really believe this time was different, given that other banks had already pleaded guilty to manipulating BBSW? Even if they were not in place at the time, the non-executive directors of both banks are certainly responsible for continuing this expensive charade.

Such lack of oversight should surely trigger the first investigation when the new Banking Executive Accountability Regime (BEAR) legislation comes into force, as it covers directors and senior managers.

Pulling no punches

Federal Court Justice Jayne Jagot certainly pulled no punches in her statutory approval of the settlement between ASIC and the ANZ and NAB banks, saying that the Australian public should be “shocked, dismayed and disgusted” by the behaviour of the two banks.

The Australian public is right to be perplexed as to why no one considers themselves personally accountable for such a fiasco. And investors must be afraid that in pursuing the failed litigation so far, without apologising, that further harm is not done by possible class action litigation in the United States.

The Australian taxpayer would be justifiably annoyed to learn that the offences admitted by the banks took place between 2010 and 2012, when the very same banks were given the free handout of a government guarantee following the global financial crisis (GFC) – that really is biting the hand that feeds you.

So, should Australian investors, taxpayers and the public be “shocked, dismayed and disgusted” as the judge suggested? Yes.

The ConversationBut recent history suggests that the largest banks will just try to tough it out before returning to their previous modus operandi. Only a royal commission into banking regulation will break this vicious circle.

Pat McConnell, Visiting Fellow, Macquarie University Applied Finance Centre, Macquarie University

This article was originally published on The Conversation. Read the original article.

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It’s time for a royal commission into banking regulation


Pat McConnell, Macquarie University

The handling of recent financial scandals show that regulators are confused about what they do, or should do. And as a result the regulation of the financial system, which is vital to a strong functioning economy, is just not working effectively.

We can see the problem in the recent testimony to the House Economics Committee. Recounting the sequence of events that led the Commonwealth Bank to inform regulators of the alleged breaches of money-laundering legislation, CBA Chair Catherine Livingstone said:

We were having board meetings at the time I was being called to Canberra by the Treasurer. When the board meeting, which went over multiple days, finished, which was lunchtime on the Wednesday, I immediately phoned the other two regulators, ASIC and APRA.

This raises a raft of questions. Having known about the allegations of money laundering since 2015, why did CBA not inform the regulators until August 2017? Why did the treasurer warn CBA before CBA talked to the two regulators? When did the Treasurer first hear of the money-laundering breaches? And why did the treasurer not instruct AUSTRAC (an agency of the Attorney General’s department) to inform ASIC and APRA?

In a previous parliamentary hearing, Greg Medcraft, Chairman of ASIC, had said:

I met two days before with the chairman of the Commonwealth Bank, the chair of risk and the chair of the audit committee… There was no mention of what happened. Then I saw the announcement and, about a week later, the chair called me in to apologise. Timeliness and transparency are big issues in this one

So, either ASIC and/or APRA were aware of the allegations of money laundering at CBA and took no action until prompted by the treasurer, or the communications between the various agencies of government are not working as planned. Either way, this is no way to regulate a modern financial system.

Even more regulatory confusion

Just as he is due to leave his role as head of ASIC, Greg Medcraft managed to end two high profile cases with modest wins.

Both ANZ Bank and NAB have settled with ASIC for their parts in manipulating the BBSW intereset rate benchmark. Although the settlement remains to be approved by the Federal Court.

Westpac remains the hold out, and the prosecution’s case has opened in the Federal Court.

But in the euphoria at ASIC, a niggling question remains – what about the Commonwealth Bank?

For some time, Medcraft has warned that action against CBA had not been ruled out and that information was being gathered. Recently Medcraft confirmed that the regulator had “plenty of time” to take action against CBA.

This also raises a number of questions. Not least why ASIC has not filed claims against CBA or announced that there would be no action taken against the bank. If CBA has no case to answer then ASIC should come out and exonerate the bank and relieve its long-suffering shareholders.

But if CBA has even a minor case to answer, and the regulator has held off hoping that the bank would settle without going to court, then ASIC may have been much too clever for their own good.

As a result of a shareholder action following the alleged money-laundering scandal, ASIC is now looking at whether the CBA board “complied with continuous disclosure laws when it decided not to alert investors to the suspicious behaviour”.

This leaves ASIC in an extremely difficult position – looking at a possible failure to disclose the money-laundering scandal at CBA, while at the same time hinting that CBA may have done the same thing with BBSW.

But ASIC is not the only regulator to be operating in the dark. The latest Banking Executive Accountability Regime (BEAR) legislation only adds to the confusion on how best to regulate financial services.

When questioned in recent Senate Estimates about the regulatory impact statements that have been done for new BEAR legislation, Helen Rowell, deputy Chair of APRA, replied that she personally had “not seen them; I couldn’t say whether anyone else within APRA has seen them”.

This is despite the fact that APRA has been given an extra A$40 million over four year to handle the new legislation – for what, and where did this figure come from?

Again, this is no way to regulate a banking system. The confusion around what regulators do and how they do it, must be sorted out.

Where next?

The most obvious answer to clearing up this mess is to initiate a royal commission that looks specifically at banking regulation. In particular, what form a modern banking regulation system should take; which regulators should do what; what the responsibilities of parliament, ministers and regulators should be; and how regulators should share information and tackle common problems (such as banking culture).

Such a royal commission should concentrate on clearing up issues of regulatory philosophy, structure, legal requirements and administration. Whether or not there is an all-purpose banking royal commission, the failures in the current system have to be remedied.

Of course, the government has only got itself to blame for getting in this mess.

The government’s own Murray Inquiry into the Financial System made a recommendation that could have helped. The inquiry recommended the establishment of a new Financial Regulator Assessment Board (FRAB), which would:

advise government annually on how financial regulators have implemented their mandates. Provide clearer guidance to regulators in Statements of Expectation and increase the use of performance indicators for regulator performance.

Sounds sensible? Not to the government, as it chose to accept all of the major recommendations of David Murray’s inquiry except for this one.

And, instead of having one professional body that looks at the performance of regulators, there has been a nonstop procession of “independent” inquiries, by banks themselves, the banking industry and even regulators. No big picture, just a patchwork of unconnected recommendations. And undoubtedly more to come.

The ConversationAn opportunity missed.

Pat McConnell, Visiting Fellow, Macquarie University Applied Finance Centre, Macquarie University

This article was originally published on The Conversation. Read the original article.

Allegations against the CBA show the need for a Royal Commission into the banks


Thomas Clarke, University of Technology Sydney

The Commonwealth Bank is facing another scandal as the Australian Transactions Reports and Analysis Centre (AUSTRAC) launches civil proceedings accusing the bank of being complicit in money laundering.

This exposes a deeply worrying prospect, that the Australian public are vulnerable to crime and terrorism directly funded through the Australian banking system.

AUSTRAC alleges CBA breached the Anti-Money Laundering and Counter-Terrorism Financing Act (2006) 53,700 times since 2012, where transactions were not reported by the bank, or reported too late. The bank faces a potential penalty of A$18 million per breach, which could amount to billions of dollars.

According to AUSTRAC, criminals deposited cash, amounting to tens of millions of dollars, over a period of two years in intelligent deposit machines where it was automatically counted and credited instantly to the nominated recipient account. The funds were then available for immediate transfer to other accounts both domestically and internationally.

In their evidence AUSTRAC details how four identified criminal syndicates were able to readily use CBA ATMs to breach the A$10,000 transaction threshold on 1640 occasions amounting to A$17.3 million. A total of A$625 million of suspicious transactions flowed through these CBA ATMs.

CBA’s response to these serious allegations is that it reports 4 million transactions to AUSTRAC per year contributing to the effort to “combat any suspicious activity as quickly and efficiently as we can.” The bank insists all key personnel have been trained in compliance with the Money-Laundering Act. The CBA acknowledges there was a software fault with a number of their ATMs which allowed these transactions to take place, but apparently this took several years to fix.

Unfortunately this response in the circumstances only provokes further questions.

Regulators asleep at the wheel

What this really shows up is the government’s “light touch” regulatory approach which translates into soft touch regulation. It seems regulators in Australia are too frightened to take action even when there is mounting evidence of illegality.

AUSTRAC itself did not launch any proceedings under the Anti-Money Laundering and Counter-Terrorism Financing Act until 2015. This followed a lengthy report of the Financial Action Task Force which concluded:

[AUSTRAC’s] graduated approach does not seem to be adequate to ensure compliance.

Since then AUSTRAC has taken action against Tabcorp on a money-laundering case which reached a A$45 million settlement in February 2017. This contrasts with far larger fines imposed on international banks for money laundering including a US$1.2 billion fine for HSBC and a US$262 million fine for Standard Chartered in 2012 from the US Justice Department.

At a US Senate hearings in 2012, a HSBC chief compliance officer famously quit his post on the spot in answering money laundering allegations, implying he could not defend the indefensible.

The Australian banking industry has faced minimal pressure to reform compared to other countries, where the restructuring of the banks is progressing. Australia has seen a succession of inquiries however each has focused on particular aspects of the banks functioning and proposed specific reforms.

It will require a Royal Commission into the Australian banks to examine the structural and systemic failures of the banks. The banks have become the main providers of not only retail but investment banking, insurance, superannuation and financial advice, and this deserves critical scrutiny.

If the AUSTRAC allegations against the CBA are proven in the Federal Court, this matter is of a different order of magnitude to earlier problems. It suggests a degree of irresponsibility which is unacceptable in major financial institutions.

It also suggests it’s deeply embedded in the banks cultural and operating processes, which undermines the security of Australian citizens. This would demand a substantive inquiry into the management, integrity and culture of the banks that only a Royal Commission could provide.

The ConversationIn the meantime, the CBA needs to provide firm evidence to the Australian public that none of its ATM machines can continue to be used for money laundering. It also needs to prove there are procedures in place for ensuring all suspicious banking activity by potential criminals or terrorists is fully reported to the Australian authorities as soon as the CBA has any knowledge of such activity.

Thomas Clarke, Professor, UTS Business, University of Technology Sydney

This article was originally published on The Conversation. Read the original article.

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


Fabrizio Carmignani, Griffith University and Ross Guest, Griffith University

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 Conversation

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, Professor, Griffith Business School, Griffith University and Ross Guest, Professor of Economics and National Senior Teaching Fellow, Griffith University

This article was originally published on The Conversation. Read the original article.

Budget 2017: lack of competition is why government is moving so hard against the banks


Harry Scheule, University of Technology Sydney

With it’s latest budget the government has made a number of moves to create a level playing field in the banking system. It’s taxing the five largest banks, announced a review of rules around data sharing, a new dispute resolution system for banks and other financial institutions, and new powers for the regulator to make bank executives accountable. The Conversation

All of this is on top of a Productivity Commission inquiry into the competition within the Australian financial system, announced this week.

While some of these moves – such as the bank levy – will have a positive effect on making smaller banks more competitive, there are more policies that could be considered. These could include the separating out of the retail arms from the other areas of the large banks, increasing the capital requirements of larger banks to equal those of smaller banks, and developing new sources of funding for smaller banks.

More for competition

A new “one-stop shop” for dispute resolution will replace the existing three schemes – Financial Ombudsman Service, the Credit and
Investments Ombudsman and the Superannuation Complaints Tribunal. Called the Australian Financial Complaints Authority (AFCA), it will give consumers, businesses and investors a binding resolution process when dealing with financial services companies. The scheme will provide for a basis for more competition as disputes on financial services are consistently resolved regardless of the provider.

And A$1.2 million has been given to fund a review of an open banking system in which customers can request banks to share their data, which could assist financial startups and other competitors enter the market and compete against the big four banks. Banks will likely be forced to provide standardised application programming interfaces (API) that enable financial technology companies to provide services for interested consumers.

The government has also provided A$13.2 million to the Australian Competition and Consumer Commission (ACCC) to further scrutinise bank competition and to run the AFCA. This follows a House of Representatives report that called for an entity to make regular recommendations to improve competition and change the corporate culture of the financial industry.

The ACCC will provide Treasury with ongoing advise on how to boost competition in the sector. This may include a reduction of cost advantages of big banks, barriers to entry for new firms including change costs for consumers.

A more concentrated and changing finance sector

All of these changes come after a decade of consolidation and upheaval in the financial system, which has hurt competition and increased risk.

This chart shows the market shares of the big four Australian banks in terms of Australian loans and deposits:

Market share Big 4 banks.
Australian Prudential Regulation Authority

As you can see, since 2002 their market share has grown from 69.7% to 79.6% for loans and from 66.3% to 77.3% for deposits. Also, the gap between market dominance in loans versus deposits has closed since the global finance crisis. This means the big banks are attracting a greater share of bank deposits, which has an impact on the smaller banks.

With limited access to deposits, which is a relatively cheap way of raising capital, smaller banks have had to rely on the more expensive wholesale debt markets. Small banks also have difficulties to tap other funding sources such as covered bonds. This makes their products less competitive, and they have struggled as a result.

In part, that’s because a number of banks disappeared or merged with the big banks after the global financial crisis. This includes St George, Bankwest, Bendigo Bank, Aussie Home Loans, Adelaide Bank, RAMS and Wizard.

The Murray Inquiry found the big four banks have less than half the capital set aside for emergencies than some smaller financial institutions do. Again, this makes the smaller banks less competitive and needs to be addressed. The government should increase the capital requirements of larger banks to close the cost advantage for larger banks.

In addition, rising house prices have led to a further increase in the concentration of mortgage and other housing loans in the Australian banking system. Today Australian banks have about twice as many mortgages on their books as in the next highest developed economy.

New financial startups, such as peer-to-peer lenders, have entered the banking system. In time they may rival the big banks in areas like personal lending, but they remain small in terms of market share. And the big banks’ unwillingness to share data may be a hindrance.

Something needed to be done

The concentration in the banking sector does not provide the best outcome to all Australians. It has led to a low range and low quality of financial services as well as high costs. This needed to be addressed.

The new banking levy will support competition, as it pushes up the cost for the big banks. The review into data sharing could also be a boon to financial startups and other competitors, although we don’t yet know what the outcome will be.

But even stronger government actions may needed to create a level playing field. The government should consider separating out of the retail arms, from the other areas, of the large banks. Failing that, the low capital buffers of the big banks need to be addressed.

Harry Scheule, Associate Professor, Finance, UTS Business School, University of Technology Sydney

This article was originally published on The Conversation. Read the original article.

Banks may squeal about new tax but they are outgunned



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Scott Morrison and Malcolm Turnbull have landed themselves in a fight with the banks.
AAP/Lukas Coch

Michelle Grattan, University of Canberra

Paradoxically, the budget item currently generating the most heat is one that instantly won bipartisan support. The Conversation

The big banks are livid at the new tax on them, designed to raise more than A$6 billion over the budget period in the cause of “budget repair”. It is accompanied by measures to force better behaviour, and to help people who’ve been treated badly to get redress.

What’s not yet clear is whether the banks will ramp up their anger from rhetoric into a serious campaign.

The fight against Labor’s mining tax springs to mind. But the banks aren’t in the position the miners were in 2010 and later.

Mining companies mightn’t have been corporate favourites, but the banks are deeply unpopular. Their cries of woe and warning are likely to fall on the deafest of ears.

Most important, the mining tax was seized on by the then-opposition to flay Labor, and that strengthened the miners’ hand. When government and opposition agree about a tax, it is extremely hard for the affected sector to get political leverage.

The banks did get some comfort on Wednesday from former prime minister John Howard. Calling what the government dubs a “levy” a “tax”, Howard said “the arguments against the mining tax applied by Wayne Swan can be applied here with equal force” and contested the government’s point that the tax was in line with other advanced countries. “I think some of the comparison with the UK are not complete,” he said.

He was also concerned about the government’s level of intervention in relation to the banks, notably its proposed Banking Executive Accountability regime, that will require senior executives to be registered with the Australian Prudential Regulation Authority, with the threat of breaches leading to disqualification from holding executive positions.

For a government that has trenchantly resisted a royal commission into the banks – which is still a partisan division between the Coalition and Labor – its measures are certainly highly interventionist.

While the government continues to protect the banks from the ultimate probe, it demonstrably has little patience with them. “Cry me a river” was Morrison’s reported dismissive remark in the budget lock-up about how the levy would go down with them.

The government’s attitude is seen in the argument about who’ll be hit by the new tax. It insists the banks should absorb the levy, not pass it on to customers.

But Westpac chief Brian Hartzer said: “There is no ‘magic pudding’. The cost of any new tax is ultimately borne by shareholders, borrowers, depositors, and employees.”

Morrison was blunt at his National Press Club Wednesday lunch: “A company has its value in the way it treats its customers.

“The banks want to send a message to their customers about how much they value them? Don’t do what they may be contemplating doing. Don’t do it. They already don’t like you very much,” he said. “Tell them you’ll pony up and you’ll help fix the budget.”

There’s been speculation of a personal element in Morrison’s issue with the banks, such was his fury at the Australian Bankers’ Association’s appointment of former Queensland Labor premier Anna Bligh as its CEO. The job had been sought by Morrison’s then-staffer Sasha Grebe.

But the key point is that the big five banks are the ideal soft target for a tax raid because they are both rich and lacking in friends.

Less ideal is the target of the budget’s other tax impost – the general taxpaying community.

The budget’s planned 2019 increase in the Medicare levy to fund the National Disability Insurance Scheme is being sold as a necessary measure in a good cause. Morrison drew on his own family experience on Wednesday by telling the story of his brother-in-law Gary – present at the lunch – who suffers from multiple sclerosis.

Labor has yet to announce its attitude to the levy increase. It’s caught between the temptation to score off the government over a tax rise and its commitment to the NDIS. One option would be to propose the increase should not apply to those on lower incomes.

What’s been termed by some a “Labor-lite” budget has raised the degree of difficulty for Shorten in crafting a budget reply that isn’t seen to fall short.

In Thursday’s speech he will reiterate that Labor opposes the ending of the deficit levy on high-income earners, saying: “At a time when the government is asking every other working Australian to pay a higher rate of tax, Labor will not support spending at least $1.2 billion each year on the wealthiest 2%.”

But the opposition has no power to stop the removal of the deficit levy, which comes off automatically at the end of June.

While Shorten is expected to leave open the possibility of reintroducing the levy, he is not expected to commit to doing so. If Labor had won the 2016 election it would have been easily able to maintain it. Once it’s gone, reimposing it becomes harder.

https://www.podbean.com/media/player/55eic-6aa7da?from=yiiadmin

Michelle Grattan, Professorial Fellow, University of Canberra

This article was originally published on The Conversation. Read the original article.

Budget bank levy: too big to fail, not too big to take a hit


Kevin Davis, Australian Centre for Financial Studies

The budget announcement of a 0.06% levy on a subset of bank liabilities looks arbitrary, and is certainly politically opportunistic. But it could be rationalised as a response, albeit probably not the best response, to offsetting a number of distortions in Australia’s banking market. The Conversation

The levy will certainly have consequences for bank pricing, forms of funding and competition – and will interact in complex ways with other prudential regulatory changes in the pipeline.

The levy will affect the four major banks and Macquarie. It will apply to liabilities other than deposits protected by the Financial Claims Scheme (ie. under A$250,000) and additional Tier 1 capital instruments.

As a ballpark estimate, it will apply to around 50% of a bank’s total funding, raising the overall cost of funding for the affected banks by around 0.03%.

The large banks are perceived to receive a competitive benefit (lower borrowing costs) from an implicit government guarantee associated with being “too big to fail”. On this basis, the levy could be seen as a charge for that benefit.

As it is in Europe, Australia could establish a “resolution fund” to enable the Australian Prudential Regulation Authority (APRA) to facilitate a smooth exit (ie by merger) of a failing bank. Although this levy is going to be set aside by the government for budget repair, rather than being set up in another separate fund, it could be argued that it strengthens the government to support APRA in regulating the banks.

The nature of the regulatory system (such as capital adequacy requirements) creates a competitive imbalance favouring the big four banks. The imposition of higher minimum capital requirements for mortgage loans by banks (five banks were actually subject to this levy) was only a partial response to this imbalance.

It’s often argued Australian banks have relied too much on funding, other than “core/stable” deposits and capital, with potential consequences for safety and systemic stability. Indeed, the large banks have funded their increased share of home mortgage lending since the global financial crisis to a significant degree from wholesale borrowings.

However there are better ways of dealing with these perceived distortions than the government’s quick, politically opportunistic, measure. And, together with other bank accountability measures introduced in the budget, it may neutralise whatever support exists for a Banking royal commission.

The levy is likely to have a number of significant effects on financial markets and consumers of financial services. The levy will flow through the banks’ funds transfer pricing systems to affect loan pricing.

In this regard it is somewhat silly to simultaneously suggest that the big banks shouldn’t increase loan interest rates, as the Treasurer has, but that the measure will improve the competitive position of smaller banks. The latter will only happen if the large banks do respond in that way!

The large banks will have incentives to fund loans differently. In particular, by originating and then securitising loans (pooling various types of contractual debt, to get them off-balance sheet and funded by the capital market) they will avoid the levy on that part of their activities.

However, that benefit won’t apply if they use “covered bond” securitisation. This is when debt securities are issued by a bank and collateralised against a pool of assets, giving the investor a claim against both those assets and the bank in general. The levy is thus likely to give a kick to traditional securitisation over on-balance-sheet lending, but stymie the growth of covered bond funding.

The levy will also affect the structure of bank deposit interest rates. Because retail deposits are exempt from the levy, the large banks can be expected to bid for these deposits – pushing up the interest rates offered relative to the cost of borrowing in wholesale and large deposit markets.

That’s going to compound the already apparent effect on relative interest rates due to recent and forthcoming liquidity regulations being applied by APRA. But it will worsen the relative returns that superannuation funds can get on (their large) bank deposits and possibly induce them to look towards investing more in securitised products.

It’s also worth noting that the budget involves changes which will increase competition for retail deposits. One example is the measure allowing individuals to make limited, tax advantaged, contributions to superannuation which can be subsequently withdrawn for a house deposit.

A further likely effect is to encourage banks to make more use of equity capital and additional Tier 1 (AT1) capital funding (that preferences share structures listed on the ASX and held by many retail investors), relative to Tier 2 capital funding (provided by the wholesale and institutional markets), or other wholesale funding. While more capital funding is still required to meet the “unquestionably strong” criteria proposed by the Murray inquiry, and accepted by the government, it’s far from clear that increased reliance on the complex AT1 is a desirable outcome.

The revenue to be raised is large in absolute dollar amount – but is relatively small as a percentage of current bank profits (in the order of 4-5%).

It could be expected that some part of the levy will be passed on to customers, or avoided by the banks shifting to other forms of funding which do not incur the levy, such that the short run direct impact on after tax profits and shareholders is somewhat less than that 4-5% figure.

But the big unknown is how the change, in conjunction with a plethora of other ongoing regulatory changes affecting the financial sector, affects the competitive balance between the big banks, smaller bank competitors and capital markets and their prospects in the long run.


This piece was co-published with Pursuit.

Kevin Davis, Research Director of Australian Centre for FInancial Studies and Professor of Finance at Melbourne and Monash Universities, Australian Centre for Financial Studies

This article was originally published on The Conversation. Read the original article.

Budget 2017: Medicare levy rise finances NDIS and banks hit for budget repair


Michelle Grattan, University of Canberra

Taxpayers will be hit with a rise in the Medicare levy and the big banks face a new tax in a budget that pitches to win back disillusioned voters and to reassure the rating agencies. The Conversation

The government will fully plug the funding hole in the National Disability Insurance Scheme (NDIS) with an increase of 0.5% in the Medicare levy from July 2019, taking it to 2.5%. The increase will raise A$8.2 billion over the budget period.

In the other major tax hike in the budget delivered by Treasurer Scott Morrison on Tuesday night, the five major banks will pay a levy raising $6.2 billion over the forward estimates “to support budget repair”.

Morrison cast the budget as based on the principles of “fairness, security, and opportunity”. It commits to more and better paying jobs, guaranteeing essential services, putting downward pressure on the cost of living, and Australia living within its means.

It is squarely directed at trying to undo continuing damage from the harsh Abbott government 2014 budget. Morrison confirmed a raft of so-called “zombie measures” that have failed to pass parliament have been dropped, at a cost of $13 billion. Morrison called the extra revenue raising needed to cover these measures “a Senate tax for things not going through”.

Among its initiatives directed to avoiding a future “Mediscare” campaign, the budget promises to “guarantee” Medicare, progressively unfreeze the Medicare rebate, and maintain the bulk-billing incentives for pathology and diagnostic imaging services.

A Medicare Guarantee Fund will be established to pay for all expenses of the Medicare Benefits Schedule and the Pharmaceutical Benefits Scheme (PBS). Revenue from the Medicare levy will be put into this fund plus the amount from general income tax that’s needed to cover the total cost. Morrison said this would “provide transparency about what it really costs to run Medicare and the PBS and a clear guarantee on how we pay for it”.

The government is also restoring the pensioner concession card to people that were hit by the pension assets test change this year.

A housing affordability package includes a “first home super savers scheme” that will provide a tax cut for those trying to get a deposit together. They will be able from July 1 to salary sacrifice into their superannuation account, separate from their compulsory superannuation contributions.

The contributions will receive the tax advantages of superannuation, with contributions and earnings taxed at 15% rather than marginal rates. Withdrawals will be taxed at the marginal rates, less 30 percentage points. Contributions will be limited to $30,000 per person and $15,000 per year.

Morrison said this plan would mean “most first-home savers would be able to accelerate their savings by at least 30%”.

Older Australians will be encouraged to downsize by being able to make a non-concessional contribution of up to $300,000 into their superannuation fund from the sale of their home.

While the general provisions of negative gearing are untouched, the government will disallow deductions for travel expenses related to the properties. For properties bought from now it will limit plant and equipment depreciation deductions.

There will be tougher rules for foreign investors in the housing market.

Morrison painted an optimistic picture of the economic outlook, while acknowledging the pain Australians have been feeling, saying that not all people had shared the country’s economic growth and “many remain frustrated at not getting ahead”.

He said there were signs of an improving global economy and “there is clearly the potential for better days ahead”.

The budget forecasts wages growth – which has been around 2% – will increase to as much as 3.75% by the end of the budget period. This is regarded by many economists as very optimistic.

For the coming 2017-18 year, growth is forecast at 2.75% and unemployment at 5.75%.

Morrison said the budget had a “fair and responsible path” back to balance, which is due to be reached in 2020-21, with a projected surplus of $7.4 billion, somewhat higher than previously estimated. The forecast deficit for 2017-18 is $29.4 billion.

The budget contains an extensive infrastructure program, pledging to deliver $75 billion in infrastructure funding and financing over a decade.

The government will inject up to $5.3 billion into the construction of the second Sydney airport. It will provide $8.4 billion in equity into the planned Melbourne-Brisbane inland rail project.

Morrison also said that as well as the intention to further develop the Snowy Hydro, “the Commonwealth is open to acquiring a larger share or outright ownership” of the scheme from the Victorian and New South Wales governments.

The levy on the banks will be 0.06% on their liabilities, starting on July 1. Morrison said it was similar to measures in other advanced countries and “will even up the playing field for smaller banks”.

He indicated that the banks should not pass the levy onto customers, said the Australian Competition and Consumer Commission would monitor the situation, and advised people to switch to one of the smaller banks if they thought they were being shortchanged.

A Financial Complaints Authority will be set up as a one-stop-shop to deal with grievances customers have with banks and other financial institutions.

The chief executive of the Australian Bankers’ Association, Anna Bligh, slammed the plan, saying it was policy on the run, and “reckless”. “They have done it because they think banks are an easy target,” she said.

Welfare recipients have again been in the government’s sights. There will be a drug testing trial for 5,000 new welfare recipients. JobSeeker recipients testing positive would be placed on the Cashless Debit Card.

“We will no longer accept, as an excuse from repeat offenders, that the reason they could not meet their mutual obligation requirements was because they were drunk or drug-affected,” Morrison said.

The disability support pension will be denied for a disability caused solely by a person’s substance abuse.

Shadow Treasurer Chris Bowen said the government had “tried to catch up with Labor but they have failed miserably”. But Labor signalled its agreement with the bank tax.

Business Council president Jennifer Westacott said it was a budget for “a reality world”. It was “practical and workable”.

“We welcome the government’s discipline in restricting real spending growth to 1.9% over the forward estimates,” she said.

But she said “the banking levy effectively represents double-taxation of some of Australia’s most successful companies, which already pay $11 billion in company tax each year”.

The Greens attacked the planned drug testing trial for some new welfare recipients was “a violation” and a “very dangerous precedent”. They would seek advice about its legality.

https://www.podbean.com/media/player/yahw4-6a9eae?from=yiiadmin

Michelle Grattan, Professorial Fellow, University of Canberra

This article was originally published on The Conversation. Read the original article.

Budget 2017: bank populism will be paid for by Australians


Richard Holden, UNSW

Treasurer Scott Morrison used to like to say Australia “doesn’t have a revenue problem, we have a spending problem”. It turns out this sentiment was true in 2016. The Conversation

Now this year’s federal budget is a big-taxing, populist, and nakedly political one. It’s not all bad news, or even all bad policy, but it marks a break from the rhetoric and policy attempts of the past.

The treasurer referred to the A$13 billion “zombie” measures the Senate has failed to pass as a “Senate tax”, in justifying the tax increases in this budget.

The first major tax increase is a 0.5% increase in the Medicare levy from 2.0% to 2.5%. This raises over A$4 billion a year on a run-rate basis. It’s also a major slug on the bulk of Australian taxpayers.

The treasurer has a point that both major parties agree the NDIS should be fully funded, but two other points remain. First, the government previously wanted to do it without raising taxes. They have raised a white flag on that. Second, it’s unclear that it really will cover the full costs. Treasury is flying blind trying to forecast the take-up rates and eventual cost of the NDIS. The estimates look low to me.

If it does end up costing a lot more, what then? Another 50 basis point tax hike? Based on Morrison’s logic today that it’s an “insurance scheme” that a decent society has to fund, there is no alternative.

The most extreme measure is the new “bank levy”. This is painted as a “modest” six basis point tax on banks with liabilities of more than A$100 billion. In reality, it’s a A$1.6 billion per annum slug paid for by the big four banks, plus Macquarie. The treasurer made a big deal of how it’s “not a tax on deposits”, but this is nonsense. It’s a tax on 70% of the funding structure of the big banks; it amounts to roughly 4% of their annual profits being yanked away.

Worse still, given the lack of competition in the sector, it won’t be the banks’ shareholders who pay. It will be mortgage holders and other customers. It’s ironic that this nakedly populist bank-bashing attack will end up slugging average Australians.

Last year I was highly critical of the almost absurdly optimistic growth assumptions—particularly nominal GDP. This year’s budget is a little better, but still involves a fair amount of heroics.

Nominal GDP is forecast to grow at 6% this year, and then between 4.0% and 4.75% in the latter years of the forward estimates. If the iron ore price doesn’t hold up, then that 6% number might be missed, perhaps by a lot.

This year the treasurer is putting the rabbit back into the hat with wage price growth. This has been stuck at around (or below) 2% for years, yet the budget has this going from 2.5% to 3.0%, then to 3.5%, and then 3.75%. There is no real reason to believe this will happen.

And the overall faith in global economic recovery that’s mentioned in the treasurer’s speech certainly could come about, and there are some positive signs. But it’s a lot to bet on so heavily. The US Federal Reserve is clearly nervous, China is still heavily indebted. There’s a lot that can still go wrong with global growth.

A welcome change to the way the budget is presented is the distinction between “good debt and bad debt”. This is something I have argued in favour of for some time. The treasurer has clearly distinguished between recurrent expenditure—such as for Medicare, welfare payments, and schools — and spending that is more capital in nature, such as infrastructure.

Many commentators, myself included, have rightly pointed out in recent days that investments come in many forms, including in human capital. In other words, good debt is not just for bridges, but includes better teachers, more educational resources, preventative medicine, and other things the treasurer left out. Still, the move away from a mantra of “all debt bad” is certainly a welcome one.

Another forward-looking measure is to not “raid” the Future Fund, but preserve it for another 10 years. This will allow, on current projections, it to fully fund the pension liabilities it was designed to, past the year 2100. Raiding it early would have, by way of reverse compound interest, left a huge unfunded liability. As the treasurer said, if you can borrow at 3% but earn 7% (as the Future Fund has), why pull money out? Quite so.

The general reaction in the budget lockup today was that this was a “ho hum” budget. I disagree.

The budget was extraordinary in many ways. It is an abandonment of restraint on taxes by a liberal government. It is nakedly populist. It also acknowledges that government debt can be productive, and that raiding the Future Fund for short-term reasons would be a terrible idea.

There is a little bit to like, quite a bit to dislike, and some heroic assumptions about the future. But boring this budget is not.

Richard Holden, Professor of Economics and PLuS Alliance Fellow, UNSW

This article was originally published on The Conversation. Read the original article.

Cyprus: Banks are Open with Limitations


The link below is to an article that reports on the latest news from Cypress and the financial crisis there.

For more visit:
http://www.guardian.co.uk/world/2013/mar/28/cyprus-crisis-limits-bank-withdrawals