Month: May 2017

Inquiry into the State of Competition in the Financial System Announced

Following reports over the weekend, the Treasurer has confirmed that the Productivity Commission will examine competition in Australia’s financial system. This includes a consideration of vertical and horizontal integration and access to banking services for small business.

The Government is committed to ensuring that Australia’s financial system is competitive and innovative.

That is why I have tasked the Productivity Commission to hold an inquiry into competition in Australia’s financial system. Competition is central to the Government’s plans to support innovation and economic growth, and deliver better outcomes for consumers and small businesses.

This delivers on the Turnbull Government’s commitment to task the Productivity Commission to review the state of competition in the financial system, made as part of the Government’s response to the Financial System Inquiry.

The Productivity Commission will look at how to improve consumer outcomes, the productivity and international competitiveness of the financial system and economy more broadly, and support financial system innovation, while balancing financial stability objectives.

In doing so it will consider the level of contestability and concentration in key segments of the financial system, including the degree of vertical and horizontal integration. It will also examine competition in the provision of personal deposit accounts and mortgages and services and finance to small and medium businesses.

The Government encourages all parties with an interest in competition in the financial system to consider making a submission to the Commission.

The Inquiry will commence on 1 July 2017 and is due to report to the Government by 1 July 2018.

Further information and the terms of reference will be available on the Commission’s website.

The Customer Owned Banking Association welcomed the news.

The customer owned banking sector welcomes today’s announcement by the Treasurer of a Productivity Commission (PC) inquiry into the state of competition in the financial system.

“The enduring solution to concerns about the banking market is action to promote sustainable competition so that poor conduct is swiftly punished by loss of market share,” said COBA CEO Mark Degotardi.

“Customer owned banking institutions – mutual banks, credit unions and building societies – are eager to build on their 4-million strong customer base, but we need a fairer regulatory framework.

“Fast-tracking this PC inquiry was our top policy priority for the 2017-18 Budget so we are delighted it has been unveiled a day early.

“Consumers stand to gain from a more competitive banking market where all competitors have a fair go.

“Currently, major banks benefit from unfair regulatory capital settings and a free subsidy from taxpayers in the form of an implicit guarantee that significantly lowers their cost of funding.

“These problems can be addressed by the PC as well as measures to empower consumers to more easily find the best deal for them on a savings account, credit card or home loan.

“This PC inquiry was recommended by the Financial System Inquiry because the current regulatory framework suffers from ‘complacency’ about competition.

“COBA believes one way to tackle this problem is to give the powerful banking regulator APRA an explicit ‘secondary competition mandate’ and an obligation to report annually against this mandate.

“We look forward to engaging with the PC inquiry, particularly on removing barriers to innovation and competition.”

Trend Dwelling Approvals Rise 0.8% in March, But…

The number of dwellings approved in Australia rose 0.8 per cent in March 2017, in trend terms, after falling for nine months, according to data released by the Australian Bureau of Statistics (ABS) today. However the more volatile seasonally adjusted series took another fall.

Dwelling approvals increased in March in New South Wales (3.0 per cent), Tasmania (1.6 per cent), Queensland (0.5 per cent) and Victoria (0.3 per cent), but decreased in the Northern Territory (19.1 per cent), Australian Capital Territory (7.1 per cent), Western Australia (1.9 per cent) and South Australia (0.1 per cent) in trend terms.

In trend terms, approvals for private sector houses fell 0.6 per cent in March. Private sector house approvals fell in Queensland (2.0 per cent), South Australia (0.4 per cent) and Victoria (0.3 per cent), but rose in New South Wales (0.3 per cent) and Western Australia (0.1 per cent).

In seasonally adjusted terms, dwelling approvals decreased by 13.4 per cent in March, driven by a fall in total dwellings excluding houses (22.0 per cent) and total house approvals (5.0 per cent).

The value of total buildings approved rose 0.1 per cent in March, in trend terms, after falling for seven months. The value of residential building approved rose 1.0 per cent while non-residential building approved fell 1.9 per cent.

Surge in rate hikes in April as lenders cash in

From Mortgage Professional Australia.

Owner-occupiers targeted as often as investors, data by CANSTAR shows, as banks look to improve margins.

67 owner-occupier variable rates increased in April, data by comparison site CANSTAR demonstrates. Over the same period, 67 variable investment loan rates were increased, going against the idea that investors are being uniquely targeted by banks and regulators.

The average standard variable rate for owner occupiers is 4.50% and the average basic variable stands at 4.25%. Investor rates did increase more steeply in April – by an average of 0.18% compared to 0.08% – and so the standard variable investor loan now has a rate of 4.83%. Both groups only saw very small numbers of rate decreases under 10 in both cases.

The surge in rate increases occurred despite the RBA holding the cash rate steady in April. Nor do many economists expect an imminent rate rise; 81% of Finder’s economists’ panel didn’t expect a rate increase until 2018.

CANTAR group executive Steve Mickenbecker suggested the rate rises had more to do with bank margins than the cash rate. “The big four banks have been required to contribute a greater degree of capital for their home loans than in the past several years,” said Mickenbecker, “capital’s costly, so to maintain their return on equity, they’re in a position where they do have to increase the margin on home loans, and that’s what we’re seeing here.”

Pressure to improve margins was increased by the slowdown of lending, Mickenbecker added, which would slow the growth in bank loan books and hence returns. It’s possible the banks were also making up for very low rates on loans last year, noted Mickenbecker: “there was a lot of discounting going on, with a lot of under-the-table discounting happening, so we were told.” Data for discounting is mainly anecdotal, however.

Mickenbecker doesn’t expect the surge in rate hikes to continue. “The big four have all moved now, over the last couple of months and they’re really the rate setters in the industry,” Mickenbecker told MPA, “I think it would be difficult for them to immediately apply another rate increase: I think they’ll probably have to sit on their hands for another couple of months.”

Job Ads Stronger In April

The ANZ Job Advertisements index rose 1.4% m/m in April in seasonally adjusted terms, following a more modest 0.8% rise the previous month.

Annual growth in job ads jumped to 10.1% this month from 7.1% in March.

Trend growth in job ads rose by a more modest 0.6% m/m in April. The trend m/m growth rate has remained within the 0.6-0.7% range since June last year. In annual terms, the trend rate rose to 7.7% y/y this month from 7.5% y/y in March.

“The improvement in ANZ Job Ads and other leading employment indicators suggests we may be in for a sustained period of strength in the official employment data following the strong lift in jobs in March.

After tracking around 5¾% for most of 2016, unemployment has recently moved higher. Meanwhile, business conditions and confidence remain well above the long run average, and capacity utilisation now sits at its highest level since 2010.

The jump in employment numbers in March, while encouraging, has not fully closed the gap between the official numbers and survey-based methods. In our view, employment is likely to show further strength over the coming months to close this gap. In time this should be reflected in a pick-up in wage growth. Given the spare capacity in the labour market, however, any improvement in wage growth is likely to be gradual, suggesting that labour cost pressures will continue to remain subdued for some time.”

Auction Softening Trend

From CoreLogic

This week, 1,662 capital city auctions were held and preliminary results show that 1,365 auctions have been reported so far, with a preliminary clearance rate of 74.6 per cent, rising from a final clearance rate of 74.0 per cent last week across 2,350 auctions.  While clearance rates remain above the long term average across the largest capital cities, the rolling four week average reveals a softening trend which can be attributed to Sydney’s final clearance rate drifting lower over the past two months while the trend in Melbourne is holding firmer in the high 70.0 per cent range.  Preliminary results show that while Melbourne and Sydney maintain their place as the strongest auction markets, Adelaide and Brisbane have shown a rebound in the downwards clearance rate trend this week.  This week’s combined capital city preliminary clearance rate is stronger than one year ago, when 67.7 per cent of capital city properties cleared, however auction volumes are lower than this time last year when 2,230 homes were taken to auction across the combined capitals.

Westpac 1H17 Result Good, In Parts

Westpac has declared a 1H17 Statutory net profit of $3,907 million, up 6% compared with 1H16, with Cash earnings $4,017 million, up 3%.

Most of the increase in net operating income was due to a higher Institutional Bank contribution from participation in a number of significant customer transactions and from stronger markets income.   This strong markets result relies on non-customer trading, and may be hard to replicate. They were impacted by higher insurance claims mostly associated with Cyclone Debbie, and higher delinquencies with a $44 million rise in impairment charges in the consumer book.

Net interest income increased $136 million or 2% compared to First Half 2016, with total loan growth of 4%, primarily from Australian housing which grew 6%.

However net interest margin is under pressure, and has declined 7 basis points over the past 12 months, of which 4 basis points was in 1H17. The consumer bank fell 6 basis points.  Loan repricing may help in the 2H17.

Group net interest margin was 2.07%, a decrease of 4 basis points from Second Half 2016. Key features included:

  • 4 basis point increase from loan spreads. This reflected loan repricing mostly in Australian mortgages, including repricing of interest-only and investor loans. These increases were partly offset by competition;
  • 4 basis point decrease from customer deposit spreads, driven by the full period impact of increased competition for term deposits in 2016 (3 basis points) and the continuing impact of lower interest rates on the hedging of transaction deposits;
  • 1 basis point decrease from term wholesale funding costs reflecting an increase in Additional Tier 1 and Tier 2 capital balances and the higher costs of these instruments;
  • Capital and other decreased 2 basis points primarily from the impact of lower interest rates; and
  • 1 basis point decrease from liquidity, reflecting the increased holdings of third party liquid assets to meet the LCR requirement. This was partly offset by a lower CLF fee following a $9.5 billion reduction to the CLF from 1 January 2017.

Cash earnings was per share 119.8 cents, up 1% and the cash return on equity (ROE) was 14%, at the upper end of 13-14% range.

Expenses are well controlled (up 1% over the year) and included a productivity saving of $118m with an expense ratio of 41.7%.

Impairments were down (15bps of loans) down 26% over year to $493 million as 1H16 included additional provisions for a small number of larger names. There were workouts of some larger facilities in the Institutional Bank and NZ.

They further strengthened their Common equity Tier 1 capital ratio of 10.0%

Organic capital generation of 29 basis points included:

  • First Half 2017 cash earnings of $4.0 billion (99 basis points increase);
  • The 2016 final dividend payment, net of DRP share issuance (70 basis points decrease);
  • Ordinary RWA was modestly lower (excluding FX movements, RWA initiatives and modelling changes), a 2 basis point increase; and
  • Other movements, decreased the CET1 capital ratio by 2 basis points.

Other items increased the CET1 capital ratio by 20 basis points:

  • RWA initiatives including management of unutilised limits reduced RWA by $1.6 billion (4 basis points increase);
  • Regulatory modelling changes (discussed further below) reduced RWA by $1.0 billion (3 basis points increase);
  • Reduction in the deferred tax asset (6 basis points increase);
  • The impact of foreign currency translation (4 basis points increase), mostly related to NZ$ lending; and
  • A decrease in the accounting obligation for the defined benefit pension plan primarily reflecting higher discount rates used to value defined benefit liabilities (3 basis points increase).

They announced a 94 cents per share interim, fully franked dividend, which is unchanged from last period.

Looking at the divisional splits

Consumer Bank

Cash earnings of $1,511 million was 2% lower than Second Half 2016 with the decline primarily due to a $44 million rise in impairment charges. While asset quality remains sound, higher delinquencies – including from
changes in the reporting of facilities in hardship – led to the increase in impairment charges. Core earnings were relatively flat over the period (up $6 million) as were most of its components, with operating income up $2 million and expenses declining $4 million. The division recorded disciplined growth with mortgages rising 2% and other lending slightly lower.

Customer deposit growth was solid, up 3% supported by a 2% rise in customers and a focus on deepening relationships by growing transaction accounts. Balance sheet growth, however, was largely offset by a 6 basis point decline in net interest margin. The margin decline was mostly due to competition for lending and higher funding costs, particularly across term deposits. As a result of these movements, net interest income was up $12 million. Non-interest income was $10 million lower mostly from reduced cards related income.

Productivity continues to be a significant focus with costs broadly unchanged over the half and the expense to income ratio continuing to fall. A range of initiatives contributed to the improved efficiency including the further digitisation of manual processes such as: changing PINs online, enhancing the origination of personal loans, and improving access to key mobile banking transactions. Improving customers’ digital access contributed to a net reduction of 26 branches over the half.

Australian mortgages accounts for 62% of group loans. They showed a 2 basis point rise in delinquencies, with a rise in WA. The number of consumer properties in possession rose from 261 in Sept 16 to 382 in Mar 17. Investment property 90+ day delinquencies rose from 38 basis points in Mar 16, to 47 basis points in Mar 17.  Loss rates remain at 2 basis points.

They said that interest-only represented 46% of flow in 1H17 and 50% of the total mortgage book. That said, the proportion of current drawdowns that are interest-only has already fallen into the mid-30s of total flow, remembering the APRA target of no more than 30% by September.

They also reported higher delinquency rates in their unsecured consumer books, with 90+ day up from 1.17% in Sept 16 to 1.63% in Mar 17.  28 basis points reflect an adoption of APRA hardship policy adopted across Westpac’s Australian unsecured portfolios.

Business Bank

Cash earnings of $1,008 million was $9 million, or 1% higher than Second Half 2016. The result was supported by higher fee income, targeted loan growth, and efficiency gains from digitisation and simplification initiatives. The division took a disciplined approach to growth in the half choosing to grow in sectors such as services and in SME and reducing exposure to some lower returning sectors including asset finance and commercial property. As a result, lending was up less than $1 billion (1%). Deposits grew 1%, mostly from working capital balances (up 4%) as the division focused on broadening relationships. Fee income was also higher mostly from a rise in line fees.

Expenses were up 1%, mostly from increased technology and investment including expanding the use of the division’s online origination platform and the continued roll out of new payment technologies. These increases
were partially offset by improved efficiencies including from the greater use of digital and refining the banker to customer ratio across segments. Impairment charges were flat, reflecting higher provisions in the auto loan portfolio, mostly related to a rise in delinquencies from changes in hardship reporting, offset by a lower impairment provisions for other business lending.

BT Financial Group

BTFG delivered a sound performance in a challenging environment, with good increases in funds, strong volume growth in lending and deposits and disciplined expense management. FUM and FUA balances were up 14% and 4% respectively while Life in-force premiums were up 6%.

Despite these benefits, the division was impacted by higher insurance claims mostly associated with Cyclone Debbie, and reduced fund margins from product mix changes, including from customers being transitioned from legacy products to lower fee MySuper products. As a result, cash earnings were 5% lower to $397 million for First Half 2017. Expenses were $17 million lower over the half (down 3%) with productivity more than offsetting higher compliance costs and an increase in investment related expenses. The division reached a major milestone over the half with the release of a number of modules on the Panorama platform. The key elements of the platform are now complete resulting in increased activity and flows onto the platform.

Westpac Institutional Bank

WIB delivered a strong result, with a 26% increase in core earnings from a rise in customer transactions, improved markets income and disciplined expense management. Cash earnings increased 20%, supported by the higher core earnings and partially offset by a $65 million rise in impairment charges. WIB has managed the business in a disciplined way over recent periods, including changing its business model in 2016 helping to keep costs flat and reducing exposures with low returns. This active management of the balance sheet contributed to a 3% decline in
lending over the half with margins up 1 basis point. A focus on relationships has supported a 6% increase in deposits and contributed to a rise in non-interest income as the division has been well placed to support customers involved in significant transactions. This was reflected in higher markets income and an improved contribution from foreign exchange and commodities. Impairment charges were $64 million from an increase in IAPs from new impairments which are partially offset by a reduction in CAPs due to a decrease in stressed assets. Overall asset quality remains sound with stressed assets to TCE falling by one third to 0.59% and impaired assets also declining.

Westpac New Zealand

Westpac New Zealand delivered cash earnings of NZ$462 million, up 6% over the half, with most of the rise due to impairments which were a benefit of NZ$36 million in First Half 2017. Core earnings were 7% lower over the half reflecting a 4% decline in net interest income with growth in lending more than offset by a 17 basis point decline in margins. Most of the decline in margins was from higher funding costs, particularly customer deposits and from the ongoing effects of low interest rates.

Non-interest income was little changed over the prior half. Expenses
were 1% higher, as the business continued the investment in its transformation program. Productivity benefits, from this multi-year program partially offset inflationary increases. Asset quality improved over the half with stressed assets to TCE of 2.41% down 13 basis points. The improvement reflects the stronger outlook for the dairy sector and the work-out of one larger facility. These two elements led to the NZ$36 million impairment benefit. In 2016 a drop in the price of milk solids saw a large number of facilities become classified as stressed; with milk prices having significantly improved, the division is beginning to see customers use the higher prices to improve their financial position and migrate out of stress.

NAB in proposed LMI tender with US insurer

From Australian Broker.

US mortgage insurance giant Arch Capital Group is ramping up its Australian presence in a bid to win more business in the country’s lenders’ mortgage insurance (LMI) market. Arch already does business with Westpac, who offloads LMI’s loans above 90% LVR to them (with lower LVR loans held by the banks internal LMI division).

The Australian Financial Review reports that Arch is considering a request for proposal by National Australia Bank to provide its LMI. Currently, the bank’s LMI is provided by Genworth Mortgage Insurance Australia for broker-originated loans and QBE Insurance for bank-originated loans.

According to the AFR, the process is still “in the preliminary stages”.

Arch already has a presence in Australia, supporting Westpac’s LMI operations by reinsuring riskier loans, the AFR reported. And now the US giant is said to have been granted a local license and plans to ramp up its business in the country.

There’s one big customer the US company won’t be able to touch for a few years, though. Genworth managed to lock down its relationship with Commonwealth Bank of Australia last year, renewing its contract for a further three years, according to the AFR.

Productivity, Technology, and Demographics

From The IMF Blog

Hal Varian, chief economist at Google, says that if technology cannot boost productivity, then we are in real trouble.

In a podcast interview, Varian says thirty years from now, the global labor force will look very different, as working age populations in many countries, especially in advanced economies, start to shrink. While some workers today worry they will lose their jobs because of technology, economists are wondering if it will boost productivity enough to compensate for the shifting demographics—the so-called productivity paradox.

“I would say there are at least three forces at work,” says Varian. “One of these is the investment hangover from the recession—companies have been slow to reestablish their previous levels of investment. The second has been the diffusion of technology—the increasing gap between some of the more advanced companies and less advanced companies. And third, existing metrics are facing some strains in terms of adapting to the new economy.”

Varian believes demographics is important, particularly now that baby boomers, who made up most of the labor force from the 1970s through 1990s, are now retiring but will continue to be consumers.

“Today, the working labor force is growing at less than half of the rate of population growth, which is a concern in terms of how to make the amount produced equal to the amount that people want to consume,” he said.

Varian’s answer to the concern of older workers who are afraid robots will take over their jobs:

“There’s a saying in Silicon Valley that we overestimate what can happen in two years, and we underestimate what can happen in ten years—this has proven true time and again. What the 40- and 50-year-olds should be doing is continuing to learn. Lifetime learning is the norm now.”

 

How the politics of the budget might play out for a government in trouble

From The Conversation.

Given months of polls that show Labor ahead and damaging internal disunity, the politics of this budget are extremely tricky for the government to manage.

It is not just that Tony Abbott’s sniping is causing political headaches for Prime Minister Malcolm Turnbull. Some of the government’s budget problems go back to the 2013 election.

In that campaign, Abbott suggested the budget deficit problems would be easily fixed by simply getting rid of Labor, and the government could somehow do so painlessly without cutting health, education or pensions.

However, as then-treasurer Wayne Swan had noted, Australian budget deficit problems were very complex and included substantial falls in government revenue due to the global financial crisis and the end of the mining boom. They weren’t just due to government spending.

Opponents criticised the size of the Rudd government’s expenditure, including its economic stimulus package designed to counter the GFC. Nonetheless, Kevin Rudd argued that Australian government debt was in fact relatively small compared with many other Western countries in a post-GFC world.

Once he won office, Abbott had to face the difficult realities involved in reducing the deficit. The substantial 2014 budget cuts, including to areas Abbott said would be protected, infuriated many voters and contributed to his poor polls and political demise.

The Abbott government’s woes went beyond the failure to fix a difficult budget situation. Other than attacking Labor, it wasn’t clear what its positive vision for the Australian economy was in terms of how to transition after the mining boom, and how to develop new jobs and new industries at a time of rapid economic and technological change.

Replacing Abbott with Turnbull was meant to provide us with such a positive economic vision. However, Turnbull’s mantra of living in innovative and “exciting times” failed to convince many voters. As one anonymous Liberal MP noted, it actually made some voters highly nervous about what was going to happen to their jobs.

Hence Turnbull turned to promising “jobs and growth” during the 2016 election campaign.

However, the Coalition’s narrow win suggested many voters still weren’t convinced the government knew how to ensure job security and a good standard of living in challenging times. In particular, many voters remained unconvinced that substantial business tax cuts would drive the economic growth and improved government revenues that were promised.

Given current levels of underemployment, unusually low wages growth and with inequality increasing, they had reason to be concerned. There is also international research suggesting that corporate tax cuts don’t have the beneficial results claimed.

Fast forward to the 2017 budget, and the Liberals are desperately trying to develop a more convincing economic narrative around good economic management, nation-building, and fairness.

Despite their attempts to blame past Labor policy and more recent Labor intransigence at passing budget cuts in the Senate, Liberal ministers are still having trouble explaining how government debt has increased from A$270 billion under Labor to some $480 billion under the Coalition.

Fortunately for them, Treasurer Scott Morrison now argues there is “good debt” and “bad debt”. Good debt covers areas such as infrastructure that assists economic growth. Bad debt apparently covers areas such as welfare.

Morrison is partly belatedly accepting advice on infrastructure-funding debt from bodies such as the International Monetary Fund, while trying to argue that the government’s new debt policies will be very different from past Labor economic stimulus ones.

Needless to say, these areas of “good” and “bad” debt aren’t quite as simple to define as Morrison suggests. Furthermore, so called nation-building infrastructure spending is sometimes more electoral pork barrelling than economic necessity. Doubts have already been raised over the economic, rather than political, benefits of a second Sydney airport and inter-capital city rail links.

The NBN: ‘good debt’ or ‘bad debt’? AAP/Mick Tsikas

Meanwhile, Turnbull struggled to explain whether Labor’s National Broadband Network was good or bad debt in terms of building necessary infrastructure.

Australian businesses that are struggling with Turnbull’s cheaper version, with its continuing use of 19th century derived copper wire technology or 1990s pay-TV-derived hybrid fibre coaxial cable technology may be wondering whether the Coalition should have discovered “good” infrastructure debt earlier and supported Labor’s more expensive fibre-optic to-the-premises model.

After all, under Rudd, the NBN was meant to be the nation-building 21st century equivalent of 19th-century government infrastructural expenditure on building railways.

Consequently, the government faces questions about whether its economic policy positions have been consistent, particularly given past Coalition rhetoric about debts and deficits.

Furthermore, while Morrison apparently characterises it as bad debt, providing temporary welfare benefits for those who lose their jobs because of economic downturns or restructuring helps keep up consumption levels. This in turn means it potentially has flow-on benefits for the private sector, as well as the individuals concerned.

It is a central lesson of the Keynesian economics that Robert Menzies’ Liberal Party embraced at its foundation, but was rejected under John Howard in the 1980s.

Does all of this mean that Turnbull is now acknowledging a lesson of the 2016 election: that neoliberalism is harder to sell than it used to be? Are his backdowns on “small-l” liberal values now being combined with back-downs on some of his long-held free-market values?

That seems to be going too far at present, especially given the government’s continued belief in the “trickle-down” benefits of corporate tax cuts and attacks on welfare expenditure.

However, there is some nuancing taking place as Turnbull tries to throw off the image of “Mr Harbourside Mansion” who loves hobnobbing with bright young technology entrepreneurs, and instead stress he is in touch with the concerns of ordinary voters.

Consequently, and much to Labor’s outrage, the government has now repositioned itself as an advocate of equal opportunity and fairness that supports a Gonski-lite needs-based education funding model.

While the government’s cuts to higher education will still have a negative impact on universities, and particularly students, the measures are less harsh than those in the 2014 budget.

It seems likely there will be some attempt in the budget to assist first home buyers. Various options have been canvassed.

Turnbull has already tried to position himself as taking action on household energy costs by criticising renewable energy costs and ensuring gas reserves. Meanwhile, there are suggestions the government will improve Medicare benefits in an attempt to counter Labor’s controversial “Mediscare” campaign at the last election.

All budgets are about politics, not just economics. But this budget will be even more so. Not all the measures are working out politically. Abbott is already threatening dissension over the impact of the education measures on Catholic schools.

This is a government in trouble. On one side it faces internal disunity and pressure from Labor’s emphasis on reducing inequality and fostering “inclusive growth”. On the other it has One Nation’s mobilisation of race and protectionism to appeal to the economically marginalised.

Then there is Cory Bernardi, the Greens, Nick Xenophon and a host of independents and other groups to consider.

After all, the budget is only the beginning. The next test is getting key measures through the Senate, perhaps even wedging Labor by deals with the Greens, so that the Coalition is in a stronger position to face the next election.

Author: Carol Johnson, Professor of Politics, University of Adelaide

The agile working style started in tech but it could work for banks

From The Conversation.

The purpose of the “agile” working style is to help businesses adapt to turbulent markets by adopting a fast and flexible approach to work. In one sense, it should come as no surprise that ANZ’s chief executive Shayne Elliot recently announced that ANZ will be shifting parts of its workforce to this style.

With the bank’s recent withdrawal from Asia and subsequent lower than expected revenues, this is part of ANZ refocus on its core business. In fact, each of Australia’s big four banks might be looking to become more efficient and responsive in the face of a tightly regulated market and slowly building retail banking competition from newer financial technology companies.

In another sense though, it’s surprising that one of Australia’s largest banks should signal such a profound change in work style. Finance is certainly not where agile got its start.

The origins of agile

The forerunners of agile stretch back as far as the Plan-Do-Study-Act method developed by Walter Shewart at Bell Labs in the 1930s and the Toyota Production System, based, in part, on the quality and systems thinking of Shewart’s student, William Edwards Deming.

However, agile as we understand it today is seen as emerging from software programming communities. It crystallised when 17 software developers gathered at the Snowbird ski resort in Utah in 2001 to share and refine their approaches to software development.

One of the participants had been reading a book on major companies coping with turbulent markets, called Agile Competitors and Virtual Organizations: Strategies for Enriching the Customer. Drawn to the agile’s connotations of speed and responsiveness, the group eventually adopted it as the moniker for their movement.

They published their views in The Manifesto for Agile Software Development, intending to help accelerate developers’ efforts to reliably produce software of the highest quality. Agile has since spread beyond the confines of IT to the other types of work and other organisations.

How to work in an agile style

As academics Rigby, Sutherland, and Takeuchi explain, agile now covers a broad range of methods, each varying according to their guiding principles and work rules. The three most well-known methods are scrum, lean, and kanban.

Scrum focuses on structuring teams to work across functions in a business, using creative and adaptive teamwork, daily stand-up meetings, and project reviews to quickly invent solutions and improve team performance.

Lean focuses on eliminating waste in systems and does not prescribe work rules to achieve this in the same way as scrum.

Kanban aims to shorten the time between the initiation and completion of work by visualising workflows, restricting the work being done at each stage in development, and measuring work cycle times to detect improvement.

ANZ seems to be most interested in the scrum method. ANZ’s Head of Product Katherine Bray stated:

There are vestiges of roles that we recognise, but with the underpinnings of hierarchy totally blown apart…[A scrum coach] is not your boss, that’s a coach, who is a peer. That product owner is not your boss, they’re a product owner who defines the how, and you galvanise around that.

Going back to the origins of agile and system thinking, it seems clear the agile approach is most likely to succeed where the organisation adopting it possesses structural modularity. Modularity proposes that organisations structure themselves in a way that allows teams to produce work that is layered, discrete, and testable.

This is what Bray is talking about – a radically new approach to roles and work styles at ANZ.

We might dismiss this whole reorganisation as marketing theatre, but intensifying competition and rapid change are all too real. This means many Australian businesses will have to come to terms with agile approaches if they are to remain responsive and competitive.

By taking up agile’s shift from top-down management to teams that organise themselves, and from a focus on compliance to a focus on innovation, ANZ is making its intent clear. It wants to achieve different results by doing things differently – surely a sane approach to change.

Yet this idea challenges the conventional structure and ethos of banks and similarly run businesses. These organisations are built to be secure and centralised in service of efficiency; modularity pushes them to be integrated and decentralised in service of innovation.

Modularity and agility are not easy to achieve. But they are fast becoming necessary if large companies, like ANZ, are to move with the times and adapt well to market turbulence.

Authors: Massimo Garbuio, Senior Lecturer, University of Sydney; Dreu Harrison, Research Assistant, University of Sydney