Category: Banking Culture

Major Banks To Take Another Funding Hit; Thanks To APRA

APRA has released a paper on Loss-Absorbing Capacity of ADI’s.

It shows that currently major Australian banks are at the lower end of Total Capital compared with international peers. As a result of proposed changes, major banks (Domestic systemically important banks in Australia, D-SIBs) will see their funding costs rise – incrementally over four years – by up to five basis points based on current pricing.  This is intended to build in more financial resilience by lifting the capital requirements, centred on tier 2. Other banks may also be impacted to an extent.

If the D-SIBs were to maintain an additional four to five percentage points of Total Capital they would have ratios more in line with their international peers. But not in the top 25%, and the banks overseas are also lifting capital higher… so some tail chasing here! Is this “unquestionably strong”?

Under the proposals, each D-SIB would be required to maintain additional loss absorbency of between four and five percentage points of RWA. It is anticipated that each D-SIB’s Total Capital requirement would be adjusted by the same amount.

By way of background, the Australian Government’s 2014 Financial System Inquiry (FSI) recommended APRA implement a framework for loss absorbing and recapitalisation capacity in line with emerging international practice, sufficient to facilitate the orderly resolution of Australian ADIs and minimise taxpayer support (FSI Rec 3). The Government supported this recommendation in its response to the FSI.

APRA’s role is not to eliminate failure altogether, but to reduce its probability and impact. This role is set out in APRA’s statutory objectives under the Australian Prudential Regulation Authority Act 1998 and the Banking Act 1959, which require APRA to protect depositors and pursue financial system stability. In performing its functions, APRA will balance those objectives with the need for efficiency, competition, contestability and competitive neutrality in the financial system.

Disorderly failures are inconsistent with APRA’s objectives, as they are highly disruptive to depositors and have an adverse impact on financial system stability. Australia has not experienced a disorderly ADI failure in recent history, though the failure of HIH Insurance Limited (HIH) in 2001 provides an example of the adverse consequences of a disorderly failure of an APRA-regulated institution. In that instance, policyholders were severely affected and essential insurance services to the broader community became unavailable for a period of time.

Conversely, orderly resolution of an ADI would occur when a problem is identified and escalated early enough to allow APRA and other financial regulators to manage and respond in a manner that protects the interests of depositors, stabilises the ADI’s critical functions and promotes financial stability. Achieving an orderly resolution does not necessarily mean a crisis is averted, rather the manner in which an ADI’s failure is managed would result in better outcomes given the circumstances.

APRA’s statutory powers were recently strengthened by the passage of the Financial Sector Legislation Amendment (Crisis Resolution Powers and Other Measures) Act 2018.

The effectiveness of resolution planning will be a focus for APRA over the coming years. APRA is in the process of developing a formalised framework for resolution planning and will consult further on this in 2019.

The proposals in this discussion paper focus on the availability of financial resources to support orderly resolution.

These proposals would ensure ADIs have adequate financial resources available to support orderly resolution in the highly unlikely event of failure. This will be achieved by adjusting, where appropriate, an ADI’s Total Capital requirement.

These proposals are distinct from APRA’s work on ensuring ADI capital levels are ‘unquestionably strong’, which relates to the ongoing resilience of institutions and is in response to a separate FSI recommendation (FSI Rec 1).

APRA is proposing an approach on loss-absorbing capacity that is simple, flexible and designed with the distinctive features of the Australian financial system in mind, and has been developed in collaboration with the other members of the Council of Financial Regulators. The key features of the proposals include:

  • for the four major banks – increasing Total Capital requirements by four to five percentage points of risk-weighted assets

  • for other ADIs – likely no adjustment, although a small number may be required to maintain additional Total Capital depending on the outcome of resolution planning, which would inform the appropriate amount of additional loss absorbency required to achieve orderly resolution. This assessment would occur on an institution-by-institution basis.

Tier 2 capital instruments are designed to convert to ordinary shares or be written off at the point of non-viability, which means they will be available to absorb losses and can be used to facilitate resolution actions. Tier 2 capital instruments have been a feature of ADI capital structures in various forms since being introduced as part of the 1988 Basel Accord. These instruments have been used as part of resolution actions in other jurisdictions, supporting orderly outcomes.

It is also important that holders of instruments which are intended to be converted or written off in resolution understand the distinctive risks of these investments. In the context of AT1 instruments, APRA has noted that it is inadvisable for investors to view such instruments as higher-yielding fixed-interest investments, without understanding the loss-absorbing role they play in a resolution.15 In the case of the Australian ADIs’ Tier 2 capital instruments, these are mostly issued to institutional investors, who are likely to understand the risks involved.

As ADIs will be able to use any form of capital to meet increased Total Capital requirements, APRA anticipates the bulk of additional capital raised will be in the form of Tier 2 capital. The proposed changes are expected to marginally increase each major bank’s cost of funding – incrementally over four years – by up to five basis points based on current pricing. This is not expected to have an immediate or material effect on lending rates.

APRA proposes that the increased requirements will take full effect from 2023, following relevant ADIs being notified of adjustments to Total Capital requirements from 2019.

In addition to the proposals outlined in this discussion paper, APRA intends to consult on a framework for recovery and resolution in 2019, which will include further details on resolution planning.

APRA Chairman Wayne Byres said one of APRA’s core functions as Australia’s prudential regulator is to plan for, and if required, execute the orderly resolution of the financial institutions it regulates.

“The resilience of the Australian banking system continues to improve, underpinned by the build-up of capital over the last decade.

“However, no matter how resilient financial institutions are, the possibility of failure cannot be entirely removed. Therefore, in addition to strengthening the resilience of the financial system, it is prudent to plan for the unlikely event of failure.

“The events of the global financial crisis demonstrated the impact that failures can have on the broader financial system and the subsequent social and economic consequences.

“The aim of these proposals and resolution planning more broadly is to ensure that the failure of a financial institutions can be resolved in an orderly fashion, which protects the interests of beneficiaries and minimises disruption to the financial system,” Mr Byres said.

Written submissions are open to 8 February 2019.

CBA Takes A Margin Hit

CBA released their 1Q19 trading update today. Their unaudited statutory net profit was approximately $2.45bn in the quarter and unaudited cash net profit was approximately $2.50bn in the quarter, both rounded to the nearest $50 million. The cash basis is used by management to present a clear view of the Group’s operating results. CBA did not include any further customer remediation charges in the quarter.

Their operating Income up 1%, with higher other banking income offsetting flat net interest income. But the Group Net Interest Margin was lower in the quarter due to higher funding costs (including basis risk which arises from the spread between the 3 month bank bill swap rate and 3 month overnight index swap rate; and replicating portfolio) and home loan price competition.

Volume growth included 8.9% quarter annualised growth in household deposits. Home lending growth of 3.1% was below system growth of 3.6% (both quarter annualised). Business lending reflected continued portfolio optimisation in the institutional book.

Operating Expenses ex one-off items were down 1% due to timing of investment spend and software impairments in the comparative period.

Loan Impairment Expense (LIE) were $216 million in the quarter or 11bpts of GLAA and equated to 11 basis points of Gross Loans and Acceptances, compared to 15 basis points in FY18. Low corporate LIE reflected some single name improvements, sound portfolio credit quality and continued IB&M portfolio optimisation.

Consumer arrears were seasonally lower in the quarter. Whilst there was a moderate improvement in home loan arrears, some households continued to experience difficulties with rising essential costs and limited income growth.

Troublesome and impaired assets increased from $6.5 billion at June 2018 to $6.6 billion in September, driven by an increase in home loan impaired assets and a small number of individual corporate impairments.

Troublesome exposures were broadly stable in the quarter.

The Group adopted AASB 9 from 1 July 2018 resulting in a $1.06 billion increase to collective provisions and a 28 bpt increase in collective provision coverage to 1.03% (collective provisions to credit risk weighted assets).

Total Provisions were broadly stable in the quarter.

Customer deposit funding remained at 68%.

The average tenor of the long term wholesale funding portfolio at 5.0 years.

The Group issued $8.8 billion of long term funding in the quarter.

The Liquidity Coverage Ratio (LCR) was 133% at September 2018, up from 131% at June 2018.

The Net Stable Funding Ratio (NSFR) was 113% at September 2018, up from 112% at June 2018.

The Group’s Leverage Ratio remained relatively stable across the quarter at 5.5% on an APRA basis and 6.2% on an internationally comparable basis.

The Common Equity Tier 1 (CET1) APRA ratio was 10.0% as at 30 September 2018. After allowing for the impact of the implementation of AASB 9 and 15 on 1 July 2018, and the 2018 final dividend (which included the issuance of shares in respect of the Dividend Reinvestment Plan), CET1 increased 82 bptsin the quarter. This was driven by a combination of capital generated from earnings and the benefit from the sale of the Group’s New Zealand life insurance operations.

CBA has previously announced the divestment of a number of businesses as part of its strategy to build a simpler, better bank. These divestments are subject to various conditions, regulatory approvals and timings, and include the sale of the bank’s global asset management business, Colonial First State Global Asset Management (CFSGAM, expected completion mid calendar year 2019) and the sales of its Australian life insurance business (“CommInsureLife”), its non-controlling investment in BoCommLife and its 80% interest in the Indonesian life insurance business, PT Commonwealth Life (all expected to complete in the first half of calendar year 2019). Collectively, these divestments will provide an uplift to CET1 of approximately 120 bpts, resulting in a 30 September 2018 pro-forma CET1 ratio of 11.2%.

In June 2018, CBA announced its commitment to the demerger of NewCo, which includes Colonial First State, Count Financial, Financial Wisdom, Aussie Home Loans and CBA’s minority shareholdings in ASX-listed companies CountPlusand Mortgage Choice. The demerger process is expected to be completed by late calendar year 2019, subject to shareholder and regulatory approvals. CFSGAM will no longer form part of NewCo, following the recent announcement of an agreement to sell this business to Mitsubishi UFJ Trust and Banking Corporation.

 

KPMG’s take on ‘simple banks’

The end of year analysis by KPMG has shown the need for the major Australian banks to become leaner and simpler to benefit customers, via InvestorDaily.

The KPMG 2018 financial year results analysis showed that in 2018 major banks cash profit after tax decreased by 5.5 per cent to $29.5 billion.

One element that caused loss was the increase in compliance and remediation costs as a result of a challenging and changing operating environment for the majors.

The report found that regulatory, compliance and customer remediation costs had increased the cost to income ratios across the majors from 43.1 per cent to 46.6 per cent.

KPMG predicted that banks would become leaner and simpler in the 2019 financial year as a response to these rise of costs.

KPMG Strategy banking partner Hessel Verbeek said banks needed to simplify their approach as complexity was keeping them from meeting expectations.

“The Australian banking industry is facing a confluence of factors, making simplification vital, but also complex. Without change, incumbent banks will struggle to meet shareholder, customer and regulatory expectations,” he said.

Mr Verbeek said simplifications would be different for each bank depending on its strategic objectives but all of them would have same overall goal.

“The target state for bank simplifications is a ‘connected enterprise’, which is entirely organised around customer needs and is omni-channel, but with a digital focus.

“The bank is streamlined from front-to-back, with every process putting the customer at the core,” he said.

Mr Verbeek gave five steps towards bank simplification:

  • Clarify the bank’s strategic focus and make clear choice around competitive positioning
  • Choose a director for the bank’s business architecture
  • Determine which activities are strategic and provide a competitive advantage, given the bank’s agreed focus in the first step
  • Assess the simplification options for the bank’s activities, in line with its strategic focus
  • Develop the simplification roadmap, taking into account various dependencies

Mr Verbeek said there were three potential journeys for banks to follow; one such journey was to operate a full-service bank with a focus on affluent customers and small business.

“The full-service bank in its simplification journey is likely to focus on extending existing centres of excellence, as well as transformation of existing capabilities,” he said.

Another option was for a mainstream bank to be value-focused bank with a focus on efficiency.

“A value-focused bank is more likely to develop-to-replace (including through a neobank) or adopt third-party solutions,” he said.

The final journey said Mr Verbeek would be for a major bank to reposition itself as an embedded finance institution.

“The embedded finance bank will open itself to an eco-system of partners and partnering will be a strategic activity. It is likely to replace rather than transform many of its banking modules,” he said.

Mr Verbeek said that banks needed to plan for simplification immediately as it required management and board focus to achieve.

“It starts with agreeing on the bank’s long-term strategic focus. This could be done concurrently with a maturity assessment of the bank’s existing activities,” he said.

The KPMG end of year analysis found that of the big four banks the worse performer was NAB who came last in the rankings on all but one measure and the top performer was CBA, followed by Westpac with ANZ close behind.

In the 2018 financial year CBA made over $9.2 million in cash profit after tax, while NAB made just over half of that with $5.7 million.

The report said it was clear that the royal commission and the APRA and AUSTRAC inquiries into CBA were felt by all the banks with various compliance and remediation costs all increasing.

The report said that, looking forward, competition was predicted to remain robust as non-bank players and challenger banks were entering the market.

However, business and corporate banking could not expect to pick up all the mortgage market slack and, as a result, total net interest income will be subdued.

Shock Announcement Collapses Confidence And Trust In Australia’s Financial System

Economist John Adams and I discuss the renewal of Wayne Byres’ tenure at APRA. What does it signal via-a-vis The Royal Commission?


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RBA Sits On Hands Again

The latest minutes from the RBA continues the steady-as-we-go story, once again and so the cash rate remains on hold.

At its meeting today, the Board decided to leave the cash rate unchanged at 1.50 per cent.

The global economic expansion is continuing. A number of advanced economies are growing at an above-trend rate and unemployment rates are low. Growth in China has slowed a little, with the authorities easing policy while continuing to pay close attention to the risks in the financial sector. Globally, inflation remains low, although it has increased due to both higher oil prices and some lift in wages growth. A further pick-up in inflation is expected given the tight labour markets and, in the United States, the sizeable fiscal stimulus. One ongoing uncertainty regarding the global outlook stems from the direction of international trade policy in the United States.

Financial conditions in the advanced economies remain expansionary but have tightened somewhat recently. Equity prices have declined and yields on government bonds in some economies have increased, although they remain low. There has also been a broad-based appreciation of the US dollar this year. In Australia, money-market interest rates have declined recently, after increasing earlier in the year. Standard variable mortgage rates are a little higher than a few months ago and the rates charged to new borrowers for housing are generally lower than for outstanding loans.

The Australian economy is performing well. Over the past year, GDP increased by 3.4 per cent and the unemployment rate declined to 5 per cent, the lowest in six years. The forecasts for economic growth in 2018 and 2019 have been revised up a little. The central scenario is for GDP growth to average around 3½ per cent over these two years, before slowing in 2020 due to slower growth in exports of resources. Business conditions are positive and non-mining business investment is expected to increase. Higher levels of public infrastructure investment are also supporting the economy, as is growth in resource exports. One continuing source of uncertainty is the outlook for household consumption. Growth in household income remains low, debt levels are high and some asset prices have declined. The drought has led to difficult conditions in parts of the farm sector.

Australia’s terms of trade have increased over the past couple of years and have been stronger than earlier expected. This has helped boost national income. While the terms of trade are expected to decline over time, they are likely to stay at a relatively high level. The Australian dollar remains within the range that it has been in over the past two years on a trade-weighted basis, although it is currently in the lower part of that range.

The outlook for the labour market remains positive. With the economy growing above trend, a further reduction in the unemployment rate is expected to around 4¾ per cent in 2020. The vacancy rate is high and there are reports of skills shortages in some areas. Wages growth remains low, although it has picked up a little. The improvement in the economy should see some further lift in wages growth over time, although this is still expected to be a gradual process.

Inflation remains low and stable. Over the past year, CPI inflation was 1.9 per cent and, in underlying terms, inflation was 1¾ per cent. These outcomes were in line with the Bank’s expectations and were influenced by declines in some administered prices due to changes in government policies. Inflation is expected to pick up over the next couple of years, with the pick-up likely to be gradual. The central scenario is for inflation to be 2¼ per cent in 2019 and a bit higher in the following year.

Conditions in the Sydney and Melbourne housing markets have continued to ease and nationwide measures of rent inflation remain low. Growth in credit extended to owner-occupiers has eased but remains robust, while demand by investors has slowed noticeably as the dynamics of the housing market have changed. Credit conditions are tighter than they have been for some time, although mortgage rates remain low and there is strong competition for borrowers of high credit quality.

The low level of interest rates is continuing to support the Australian economy. Further progress in reducing unemployment and having inflation return to target is expected, although this progress is likely to be gradual. Taking account of the available information, the Board judged that holding the stance of monetary policy unchanged at this meeting would be consistent with sustainable growth in the economy and achieving the inflation target over time.

RC Hearings to Look at Regulatory Reform

The upcoming round of public hearings for the financial services royal commission will focus on misconduct and conduct falling below community expectations as well as possible regulatory reform, via The Adviser.

The seventh round of hearings for the final round of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (RC) will be held at the Lionel Bowen Building in Sydney from 19 to 23 November and at the Commonwealth Law Courts Building in Melbourne from 26 to 30 November.

Following on from the six previous rounds (which focused on consumer lending practices; financial advice; SME loans; issues affecting Australians who live in remote and regional communities; and insurance, respectively), it has now been revealed that the seventh round of hearings will focus on “causes of misconduct and conduct falling below community standards and expectations by financial services entities (including culture, governance, remuneration and risk management practices), and on possible responses, including regulatory reform”.

The royal commission had previously stated that the seventh round would focus on “policy questions arising from the first six rounds”.

In an update, the royal commission revealed that the purpose of round seven is “to provide the commissioner with an opportunity to explore with senior executives from certain financial services entities, and the regulators of those entities, some of the policy issues identified in the interim report, and following rounds five and six of the public hearings”.

The hearings will also consider the role of the Australian Securities and investments Commission (ASIC) and the Australian Prudential Regulation Authority (APRA) in “supervising the actions of financial services entities, deterring misconduct by those entities, and taking action when misconduct may have occurred”.

According to an update from the RC, the hearings will include all four major banks (Australia and New Zealand Banking Group Limited, the Commonwealth Bank of Australia, National Australia Bank Limited and Westpac Banking Corporation) as well as AMP Ltd, Bendigo and Adelaide Bank Ltd, Macquarie Group Ltd, and ASIC and APRA.

However, the commission has said that further entities may be included before the hearings commence.

Due to the “different nature” of this next round of hearings, the RC has said that there will be no process for applications for leave to appear for this round of hearings.

Instead, a person who is summoned to give evidence before the commission may be represented by a legal representative at the hearing without the need for that representative to obtain separate authorisation, the commission revealed.

It is expected that the procedure for the next round of hearings will see the counsel assisting the commission lead and ask questions of all witnesses, after which the legal representative for the witness may ask questions of the witness (limited to matters arising out of the questions asked by counsel assisting, unless given leave to ask questions beyond those matters). The counsel assisting the commission may then re-examine the witness. Cross-examination of witnesses by other persons or entities will not be permitted.

The commission has further revealed that the commission is now “considering” the public submissions received relating to the interim report and rounds five and six, adding that “they will inform the matters that the commissioner seeks to explore during round seven”.

There will be no process for further submissions to be lodged following the conclusion of round seven.

It is expected that the seventh round will be the final round of the financial services royal commission, unless Commissioner Hayne requests, and is granted, an extension.

Commissioner Kenneth Hayne is expected to release his final report, which will include the topics of the fifth, sixth and seventh rounds of hearings (focusing on superannuation, insurance and “policy questions arising from the first six rounds”, respectively) by 1 February 2019.

CBA announces joint PEXA acquisition

PEXA, Australia’s online property exchange, which assists members such as lawyer, conveyancers and financial institutions to lodge documents with Land Registries and complete financial settlements electronically, has been acquired by via a joint bid from Link Administration Holdings Limited, Morgan Stanley Infrastructure Partners and  Commonwealth Bank (who is already a key stakeholder in the venture).

States across Australia have been moving across to the platform as the country aims for loans to become 100% digital.

CBA chief executive officer Matt Comyn said, “Having been a key stakeholder in PEXA since its inception in 2011, today’s announcement represents our continued commitment to support the property industry as it transitions towards an innovative, fully digital, settlements process that aims to provide improved experiences for customers.”

CBA also said the transaction aligns with its strategy to focus on its core banking businesses and to create a simpler, better bank for our customers. As part of the transaction, which is subject to a number of conditions precedent, CBA will invest a further $50 million, totalling approximately $100 million invested in PEXA to date. This will result in an increase in our ownership stake from 13.1% to approximately 16%.

No one seems to have noticed that one of the largest mortgage lenders is now also has a significant interest in the property settlement and transfer system – what could possibly go wrong?

APRA gets $58m funding boost to enhance supervision

The government has announced that it will boost APRA’s funding by $58.7m and extend the appointment of its chair Wayne Byres despite the criticism the regulator copped from the royal commission, via MPA.

“The new funding will allow APRA to reinforce the resilience and soundness of our financial system at a time of significant reform,” Treasurer Josh Frydenberg said in a statement.

Besides supervising several industries, APRA’s current agenda includes the implementation of the new Banking Executive Accountability Regime (BEAR) and monitoring and targeting issues in the housing market to retain stability, which it previously dealt with by introducing speedbumps on interest-only and investor lending.

The new funding will be provided over four years to enhance APRA’s supervision across regulated industries and its ability to identify and address new and emerging risk areas, such as cyber, fintech and culture. It will also allow APRA improve its data collection capabilities and provide for a review of its enforcement strategy.

Frydenberg said Byres’ reappointment as chair for another five years was “important for stability during this time of significant reform in Australia’s financial system”.

In the royal commission’s interim report, however, it asked whether the regulatory architecture needed to be changed, and questioned whether APRA’s regulatory and enforcement practices were satisfactory.

“APRA is obliged to look at issues of governance and risk culture through the lens of financial system stability. Understood in that light, APRA’s lack of action in response to the widespread occurrence of the conduct described in this report may, perhaps, be more readily understood,” the report said.

But, the commission said that didn’t excuse APRA from not taking any steps to identify the major banks’ deficiencies in governance and culture as they became increasingly apparent.

“Regulatory complexity increases pressure on the regulator’s resources and may allow entities to develop cultures and practices that are unfavourable to compliance,” the commission wrote.

Prior to this latest funding injection, APRA’s estimated budget for 2018-19 was $682m, according to the royal commission

Basel III Implementation, Slow But Sure: BIS

The Basel Committee released their status update of progress in implementation the requirements under Basel III.  While some progress is being made, there are still gaps.  The Australian implementation still has gaps, especially around aspects of disclosure.

Here is their summary.

In 2012, the Committee started the Regulatory Consistency Assessment Programme (RCAP) to monitor progress in introducing domestic regulations, assessing their consistency and analysing regulatory outcomes.

As part of this programme, the Committee periodically monitors the adoption of Basel standards. The monitoring initially focused on the Basel risk-based capital requirements, and has since expanded to cover all Basel standards. These include the finalised Basel III post-crisis reforms published by the Committee in December 2017, which will take effect from 1 January 2022 and will be phased in over five years. When those reforms were published, the Group of Central Bank Governors and Heads of Supervision, the oversight body of the BCBS, reaffirmed its expectation of full, timely and consistent implementation of all elements of the package.

As of end-September 2018, all 27 member jurisdictions have risk-based capital rules, Liquidity Coverage Ratio (LCR) regulations and capital conservation buffers in force. Twenty-six member jurisdictions also have final rules in force for the countercyclical capital buffer and the domestic systemically important bank (D-SIB) requirement. With regard to the global systemically important bank (G-SIB) requirements published in 2013, all members that are home jurisdictions to G-SIBs have final rules in force.

Since the last report published in April 2018, member jurisdictions have made further progress in implementing standards whose deadline has already passed. These include the leverage ratio based on the existing (2014) exposure definition, which is now partly or fully implemented in 26 member jurisdictions. Moreover, 25 member jurisdictions have issued draft or final rules for the Net Stable Funding Ratio (NSFR), and 20 member jurisdictions have issued draft or final rules for the revised securitisation framework. In case of implementation of the standardised approach for measuring counterparty credit risk exposures (SA-CCR), 24 member jurisdictions have issued draft or final rules. Also, draft or final rules for the capital requirements for bank exposures to central counterparties (CCPs) have been issued by 23 member jurisdictions.

However, in many jurisdictions, rules for these standards are yet to be finalised and come into force. This is notably the case for the NSFR, with only 10 member jurisdictions having final rules in force as of end-September 2018.

There has been also progress in implementation of standards whose deadline is within the next six months. On requirements for total loss-absorbing capacity (TLAC), 15 member jurisdictions have issued draft or final rules. Similarly, 21 member jurisdictions have issued draft or final rules for the large exposure (LEX) framework and for interest rate risk in the banking book (IRRBB).

They publish a country by country assessment, here is the one of Australia.  Still more to do clearly, especially in terms of disclosure.

‘Crisis of trust’: 80% of Aussies think banks are unethical

Deloitte has measured how Australians feel about the banks after their dirty laundry was aired by the Hayne royal commission. The results aren’t pretty, via InvestorDaily.

This week Deloitte launched its Australian Trust Index, which measures levels of customer trust and general trust influence factors. In this Inaugural Index – Banking 2018, the professional services firm surveyed banking customers to identify the way forward to rebuild reputation and trust.

Over 2,000 randomly selected demographically representative Australians were surveyed in August of this year. The vast majority of Australians (80 per cent) believe that banks are unethical. The index found that only 20 per cent believe that banks in general are ethical – that they do what is “good, right and fair”.

“The banking sector has undergone a rigorous and exposing investigation through the Royal Commission into Misconduct in Banking, Superannuation and Financial Services,” Deloitte Trust Index author Willem Punt said. “It highlights the depth of the crisis of trust in the sector in Australia.

“We specifically designed the index to measure levels of customer trust and general trust influence factors so that we could deepen our understanding of the factors influencing trust. This enables us to point to actions banks can take to restore reputation and trust,” he said.

The index also gives a weighted national benchmark to use to compare individual organisational performance. It considered what is most important to the average Australian customer when it comes to trusting their bank and ‘banks in general’.

“The index indicates the greatest driver of perceptions of trustworthiness among bank customers is a mindset of consistently keeping promises,” Mr Punt. “Trust improves when it comes to my own bank as opposed to banks in general.”

Only 36 per cent of the 2,000+ Australian banking customers surveyed believe their bank has their best interests at heart, whereas only 21 per cent believe banks in general have their customers’ best interests at heart. Also, 49 per cent trust their own bank to keep its promises compared with 26 per cent in general.

“These results and those of the full index are particularly valuable given that culture and conduct will both get a very hard edge in the strengthened regulatory environment mooted by Commissioner Hayne, who has signalled a greater role for the judiciary in ensuring accountability for significant and systemic poor conduct,” Mr Punt said.

The way forward to rebuild reputation and trust in today’s business world is far more about communities and relationships and far less about transactions, said Andy Bateman, Monitor Deloitte Strategy Partner and a key author of the Deloitte Trust Management Model.

“The companies that get this, at the deepest level, are exhibiting the kinds of behaviours that genuinely build trust,” he said.