Martin North – Page 1015 – Digital Finance Analytics (DFA) Blog

ASIC enhances Financial Advisers Register

ASIC has now launched the second stage of the Financial Advisers Register (FAR) which now includes information about advisers’ qualifications, training and memberships of professional bodies.

The register, which has been available to the public since the end of March this year, can be searched on ASIC’s MoneySmart website www.moneysmart.gov.au. To date there have been more than 60,000 visits and more than 100,000 searches undertaken on the register.

There are more than 23,000 financial advisers now on the register. It contains details of persons employed or authorised – directly or indirectly – by Australian financial services (AFS) licensees to provide personal financial advice to retail clients on investments, superannuation and life insurance.

ASIC Deputy Chairman, Peter Kell said, ‘From today consumers will be able to see the qualifications and professional memberships in addition to the basic information about advisers already available on the register. We want consumers to be able to make an informed decision in their choice of adviser and the register is a good starting point.’

ASIC has also made available data from the Financial Advisers Register to the Australian Government website www.data.gov.au which can be downloaded free of charge. The data snapshot will enable easy and quick analysis of aspects of the financial advice industry.

The transition phase for the new register will end at the end of September 2015. From 1 October 2015 late fee penalties will apply. ASIC can take action for providing a false or misleading statement to ASIC under the Corporations Act.

Dwelling Values Down 0.9% in May – CoreLogic RP Data

After an increase in dwelling values of 3.8 per cent over the first four months of the year, the May CoreLogic RP Data Home Value Index results out today recorded a drop of 0.9 per cent for the month across the combined capitals index; the first month-on-month fall since November last year.So, is this a temporary reversal, or the start of something more significant? Time will tell.

Building Approvals Down In April – ABS

Australian Bureau of Statistics (ABS) Building Approvals show that the number of dwellings approved fell 0.4 per cent in April 2015, in trend terms, after rising for ten months. Whilst the number of houses approved rose, we still see a hike in the volume of high-rise developments.

Dwelling approvals decreased in April in the Northern Territory (6.2 per cent), South Australia (2.3 per cent), Victoria (0.8 per cent), Queensland (0.8 per cent) and Western Australia (0.6 per cent) but increased in the Australian Capital Territory (8.4 per cent), Tasmania (4.3 per cent) and New South Wales (0.1 per cent) in trend terms.

In trend terms, approvals for private sector houses rose 1.1 per cent in April. Private sector house approvals rose in New South Wales (2.8 per cent), South Australia (2.0 per cent), Victoria (0.8 per cent) and Western Australia (0.8 per cent) but fell in Queensland (0.5 per cent). This was the largest rise since 2010.

However, we continue to see a steady rise in the relative proportion of high-rise dwelling approvals.

The value of total building approved fell 1.0 per cent in April, in trend terms, and has fallen for two months. The value of residential building fell 0.1 per cent while non-residential building fell 3.3 per cent in trend terms.

Payday Lending’s Online Revolution

Payday Lending has been subject to considerable regulation in recent years, but using data from our household survey’s and DFA’s economic modelling, today we look at expected trends, in the light of the rise on convenient online access to this form of funding.

We will focus on analysis of small amount loan – a loan of up to $2,000 that must be repaid between 16 days and 1 year. ‘Short term’ loans of $2,000 or less repayed in 15 days or less have been banned since 1 March 2013. These rules do not apply to loans offered by Authorised Deposit-taking Institutions (ADIs) such as banks, building societies and credit unions, or to continuing credit contracts such as credit cards. More detail are on ASIC’s Smart Money site.

The law requires credit providers to verify the financial situation of applicants, and to ask for evidence from documents like payslips or Centrelink statements, copies of bills, copies of other credit contracts or statements of accounts or property rental statements. The number of documents a lender asks for will depend on whether they have relationship data, credit history or bank statements. If households receive the majority (50% of more) of income from Centrelink, the repayments on the small amount loan (including any other small amount loans held) must not exceed 20% of income. If they do, potential applicants will not qualify for a small amount loan.

From 1 July 2013, the fees and charges on a small amount loan have been capped. While the exact fee will vary depending on the amount of money borrowed, credit providers are only allowed to charge a one-off establishment fee of 20% of the amount loaned, a monthly account keeping fee of 4% of the amount loaned, a government fee or charge,default fees or charges and enforcement expenses. Credit providers are not allowed to charge interest on the loan. This cap on fees does not apply to loans offered by ADIs such as banks, building societies or credit unions.

DFA covered payday lending in a recent post, and ASIC has been highlighting a range of regulatory and compliance issues.

So, we begin our analysis with an estimation of the size of the market, and the proportion of loans originated online. The value of small loans made has been rising, and we now estimate the market to be more than $1bn per annum. We expect this to rise, and in our forward modelling we expect the market to grow to close to $2bn by 2018 in the current economic and regulatory context.

One of the main drivers of this expected lift is the rise in the number of online players, and the rising penetration of online devices used by consumers. Today, we estimate from our surveys about 40% of loans are online originated. We estimate that by 2018, more than 85% of all small loans will be originated online. As we highlighted in our previous post, the concept of instant application, and fast settlement is very compelling for some households.

The DFA segmentation for payday households identifies two discrete segments. The first, which we call disadvantaged are households who are likely to be frequent users of small amount loans, often on Centrelink benefits, are socially disadvantaged, and with poor work history. The second segment is one which we call inconvenienced. These households are more likely to be in employment, but for various reasons are in a short term cash crisis. This may be because of unexpected bills, illness, unemployment, or some other external factor. They may even borrow for a holiday or family event such as wedding or funeral. They are less likely to be serial borrowers.

We see that both segments are tending to use online tools to seek a loan and may also be accessing other credit facilities. Our prediction is that by 2018, of the total of all small loans applied for, more than 35% will be applied for by disadvantaged, and 45% by inconvenienced via online. Together this means that as many as 90% of loans could be be sourced online. More than three quarters of these applications will be via a smart phone or tablet. As a result the average age of a small loan applicant is dropping, and we expect this to continue in coming years. This helps to explain the rise on TV and radio advertising, directing households with financial needs direct to a web site. Phone based origination, as a result is on the decline. We estimate there are more than 100 online credit providers in the market, comprising both local and international players. Online services means the credit providers are able to access the national market, whereas historically, many short terms loans were made locally by local providers, face to face. This is a significant and disruptive transformation.

We finally look at the segment splits in terms of number of households using these loans. We note a significant rise in the number of inconvenienced households, to the point where by 2018, about half will be this segment. This is because the rules have been tightened for disadvantaged households, and online penetration for inconvenienced is higher.

How Banks Really Work

In a working paper, issued by the Bank of England, they explore the fundamentals of how banks work. The traditional model is that banks are driven by deposit taking, and use these deposits to make loans, so there is a direct link between deposits (and their volume and interest rates) and capacity to lend. Indeed, some suggest most monetary policy assumes this, yet many central banks have a different perspective. Last year the Bank of England turned the model on its head by suggesting that actually banks have the capacity to create UNLIMITED amounts of credit, in fact creating money, unrelated to deposits.

Banks that create purchasing power can technically do so instantaneously and discontinuously, because the process does not involve physical goods, but rather the creation of money through the simultaneous expansion of both sides of banks’ balance sheets. While money is essential to facilitating purchases and sales of real resources outside the banking system, it is not itself a physical resource, and can be created at near zero cost. The most important limit, especially during the boom periods of financial cycles when all banks simultaneously decide to lend more, is their own assessment of the implications of new lending for their profitability and solvency, rather than external constraints such as loanable funds, or the availability of
central bank reserves. In fact, the quantity of reserves is therefore a consequence, not a cause, of lending and money creation.

This may explain why banking economics work they way they do. It also raises interesting questions in terms of banking regulation.

This paper, “Banks are not intermediaries of loanable funds – and why this matters” – Zoltan Jakab and Michael Kumhof looks at the two models, in some detail.

In the intermediation of loanable funds model of banking, banks accept deposits of pre-existing real resources from savers and then lend them to borrowers. In the real world, banks provide financing through money creation. That is they create deposits of new money through lending, and in doing so are mainly constrained by profitability and solvency considerations. This paper contrasts simple intermediation and financing models of banking. Compared to otherwise identical intermediation models, and following identical shocks, financing models predict changes in bank lending that are far larger, happen much faster, and have much greater effects on the real economy.

Note that working papers describe research in progress by the author(s) and are published to elicit comments and to further debate. Any views expressed are solely those of the author(s) and so cannot be taken to represent those of the Bank of England or to state Bank of England policy. This paper should therefore not be reported as representing the views of the Bank of England or members of the Monetary Policy Committee or Financial Policy Committee.

Banks Grew Home Loans Again In April to $1.35 Trillion

APRA released their Monthly Banking Statistics for April 2015 today. The total home loans outstanding on the bank’s books reached $1.346 trillion, up from $1.336 trillion last month. Overall growth in the portfolio was 0.74%, with owner occupied loans sitting at 0.6% up, and investment loans 1% higher. This is before the regulatory taps were turned.

We will this month concentrate on the home loan portfolio, because it is of the most significance just now. First, lets look at the APRA “hurdle” of 10% market growth. Now there are a number of different ways to calculate this important number. Some have chosen other methods which understate the true picture in our view. We have chosen to calculate the sum of the monthly moving averages, and the results are displayed below. A number of players are well over the 10% line, and might expect a “please explain” from the regulator. Officially, they have a little time to get into line by the way. Some players of course are subject to non-organic growth, and this will distort some of the figures.

In contrast, the OO portfolio (not subject to the 10% rule) also makes quite interesting reading. In both cases some of the smaller organisations are making hay and expanding quite fast. We hope they have their underwriting and approval processes set right!

Next, a view of the monthly portfolio movements for both OO and INV loans.

Finally, a picture of the relative shares of home loans, both investment and owner occupied loans, by some the the main players (in volume terms).

If you look at the relative distribution of OO and INV loans, you can see which players may have more to worry about is the regulatory tightening on investment lending gets more intense. Recent events from New Zealand are insightful here, with the proposal to lift capital requirements on investment loans. We covered this in an earlier post.

Turning to Deposits, balances rose by $7 billion, to $1.8 trillion, an uplift of 0.38% from last month. Little change in the mix between major players. CBA maintains its pole position, although NAB grew its portfolio the fastest.

In the cards portfolio, total balances fell slightly from $41.6 billion to $41.3 billion. Again little change in the mix between players, although CBA lost more than half of the value drop from its portfolio from March to April.

RBNZ Moves Closer To Changing Capital Rules For Investment Loans

The Reserve Bank of New Zealand published the results of its consultation on the proposal to vary the capital risk weighting of investment versus owner occupied loans. Stakeholders are invited to provide feedback on the proposed wording changes to the Reserve Bank’s capital adequacy requirements by 19 June 2015, with a view to implemention by October.

They cite considerable evidence that investment loans are inherently more risky:

the fact that investment risks are pro-cyclical
that for a given LVR defaults are higher on investment loans
investors were an obvious driver of downturn defaults if they were identified as investors on the basis of being owners of multiple properties
a substantial fall in house prices would leave the investor much more heavily underwater relative to their labour income so diminishing their incentive to continue to service the mortgage (relative to alternatives such as entering bankruptcy)
some investors are likely to not own their own home directly (it may be in a trust and not used as security, or they may rent the home they live in), thus is likely to increase the incentive to stop servicing debt if it exceeds the value of their investment property portfolio
as property investor loans are disproportionately interest-only borrowers, they tend to remain nearer to the origination LVR, whereas owner-occupiers will tend to reduce their LVR through principal repayments. Evidence suggests that delinquency on mortgage loans is highest in the years immediately after the loan is signed. As equity in a property increases through principal repayments, the risk of a particular loan falls. However, this does not occur to the same extent with interest-only loans.
investors may face additional income volatility related to the possibility that the rental market they are operating in weakens in a severe recession (if tenants are in arrears or are hard to replace when they leave, for example). Furthermore, this income volatility is more closely correlated with the valuation of the underlying asset, since it is harder to sell an investment property that can’t find a tenant.

Although the Basel guidelines for IRB banks envisage that loans to residential property investors be treated as non-retail lending, the same is not the case for banks operating on the standardised approach. The Basel guidelines consider all mortgage lending within the standardised approach as retail lending within the same sub-asset class. However, the guidelines also provide regulators with ample flexibility to implement them according to the needs of their respective jurisdictions. There are three reasons why any consideration as to whether to group loans to residential property investors in New Zealand should also include standardised banks.

the different risk profile of property investors applies irrespective of whether the lending bank is a bank operating on the standardised approach or on the internal models approach.
macro-prudential considerations include standardised banks as well as internal models banks. Prepositioning banks for a potential macro-prudential restriction on lending to residential property investors has to involve all locally incorporated banks.
risk weights on housing loans are comparatively high in New Zealand and, more crucially, the gap in mortgage lending risk weights between standardised and IRB banks is not as high as it might be in many other jurisdictions. In order to maintain the relativities between the two groups of banks for residential investment property lending, it would be useful to also include standardised banks in the policy considerations.

So the bank is proposing to impose different risk weightings on investment and owner occupied loans, for both IRB and standard capital models.

The Reserve Bank would expect banks to continue to use their current PD models until such time that new models have been developed or banks have been able to verify that the current models can also be applied to property investment loans. Through the cycle PD rates appear broadly similar to those of owner-occupiers if the evidence from overseas also holds for New Zealand, although it is not clear whether the risk drivers are the same between the two groups of mortgage borrowers. The Reserve Bank would therefore expect banks to assess in due course whether their current PD mortgage models can be used for the new asset class or whether new or amended versions of the current models should be used.

For standardized banks, the Reserve Bank has to prescribe the risk weights as per the relevant capital adequacy requirements. Those requirements currently link a loan’s risk weight to its LVR at origination. Maintaining that link, the Reserve Bank proposed higher risk weights per LVR band

These calibrations would lead to a higher capital outcome for residential property investment mortgages compared to owner-occupier loans. However, the capital outcome would be below that of using the income producing real estate asset class and, in the Reserve Bank’s opinion, reflect the mix of property investment borrowers that the new asset class would entail.

Stakeholders are invited to provide feedback on the proposed wording changes to the Reserve Bank’s capital adequacy requirements by 19 June 2015.

This further tilts the playing field away from property investment loans.

Total Housing At Record $1.46 Trillion in April

The latest data from the RBA, Credit Aggregates to end April 2015, shows that lending for investment property pushed higher again, whilst lending to business went backwards. Looking at the splits, overall housing credit was up 0.54% seasonally adjusted to $1.46 trillion, with owner occupied lending up 0.41% to $954 billion and investment lending up 0.79% to $503 billion. Personal credit fell 0.84% to $141 billion and lending to business fell 0.04% to $790 billion. As a result, the percentage of lending devoted to housing rose to 61% of total (excluding lending to government), up from 56% in 2010.

Tracking the relative monthly movements, highlights the concentration in the housing, and specifically the investment housing sector. We will see if recent moves by APRA and the banks tames the beast in the months ahead.

Looking at the housing data, the proportion of the portfolio in the more risky housing investment sector rose again, to 34.6%.

Further evidence of the unbalanced state of the economy.

Dark Pools Review Out By End October – ASIC

In a wide ranging speech, Greg Medcraft, Chairman, Australian Securities and Investments Commission outlined the role of ASIC, and some of the issues they are focussing on, including “how we influence conduct, our new review of high-frequency trading and dark liquidity, managing confidential information and our new Market Entity Compliance System”. Of specific interest, the findings from the latest review on dark pool trading is due end October 2015.

High-frequency trading and dark liquidity

The next topic I wanted to talk about is our upcoming review of high-frequency trading and dark liquidity. As part of ASIC’s ongoing monitoring of our markets, we are reviewing high-frequency trading and dark liquidity following on from our earlier review in 2013.

While we don’t have any specific concerns about high-frequency trading at present, and are satisfied that the regulatory framework is appropriate, we recognise that this is a dynamic area. In 2012, high-frequency traders were less than 1% of traders but 27% of turnover in the ASX 200. We are launching a new review to assess how high-frequency trading has changed in both the futures and equities markets.

On dark liquidity, our review will consider how dark liquidity – currently 28% of market turnover – and dark trading venues are evolving. It will also re-test whether the balance of lit and dark liquidity is impacting price formation, which is fundamental to trust and confidence in our markets.

Key findings from our reviews will be published towards the end of October 2015, and we will consider if there are any areas where we need to respond by applying the right nudge to change behaviour.