Category: Economics and Banking

Sydney Auctions Still Hot

According to CoreLogic RP Data, this week 2,419 auctions were held across the combined capital cities, representing a substantial 26 per cent rise in auction activity compared to the previous week when 1,920 capital city auctions were held. This was the fourth highest number of weekly auctions held over the year to date.  The rise in activity was coupled with a slight fall in preliminary combined capitals clearance rate, from 68.9 per cent last week, to 68.0 per cent this week. Much of the strength in the combined capitals clearance rate can be attributed to the two largest auction markets (Melbourne and Sydney), where clearance rates remained the strongest nationally. One year ago, however, both Sydney and Melbourne recorded a clearance rate in excess of 80 per cent, and the combined capital city clearance rate was 78.5 per cent across 2,792 auctions.

20160530 Capital city

In Australia, All That Glitters Isn’t Gold

From Bloomberg View.

If Australia is an economic miracle — the so-called Lucky Country, beneficiary of more than a quarter century of uninterrupted growth — then its banks are its most visible sign of strength. After a near-death experience in the 1990s, they’ve reformed and bounced back dramatically: Returns on equity now average around 15 percent, compared to single digits in the U.S. Share prices and dividends have risen strongly over the past decade. At around twice book value, market valuations are well above global levels.

In fact, though, this ruddy good health masks some deeply worrying trends. The balance sheets of Australia’s biggest banks are far more vulnerable than they may seem on the surface — and that means Australia is, too.

To most observers, this might sound alarmist. Scared straight after a mountain of bad loans nearly brought them down at the beginning of the 1990s, the banks reformed and minimized their international exposure, which meant they were insulated from the worst effects of the Asian financial crisis and the 2009 crash. Today they face little competition in their home market and have benefited tremendously from Australia’s strong growth, underpinned by China’s seemingly insatiable demand for the country’s gas, coal, iron ore and other raw materials. During the 2012 European debt crisis, Australia’s banks were worth more than all of Europe’s.

But Australian financial institutions have made the same fundamental mistake the rest of the country has, assuming that growth based on “houses and holes” — rising property prices and resources buried underground — can continue indefinitely. In fact, despite a recent rebound in Chinese demand, commodities prices look set to remain weak for the foreseeable future. Banks’ exposure to the slowing natural resources sector has reached nearly $50 billion in loans outstanding — worryingly large relative to their capital resources.

If anything, their exposure to the property sector is even more dangerous. Mortgages make up a much bigger proportion of bank portfolios than before — more than half, double the level in the 1990s. And they’re riskier than they used to be: Many loans are interest-only, while around 80 percent have variable rates. With a downturn likely — everything from price-to-income to price-to-rent ratios suggests houses are massively overvalued — losses are likely to rise, especially if economy activity weakens.

Australian banks are also more vulnerable to outside shocks than they may first appear. Their loan-to-deposit ratio is around 110 percent. Domestic deposits fund only around 60 percent of bank assets; the rest of their financing has to come from overseas. While that hasn’t been a problem recently, Australia’s external position is deteriorating. The current account deficit is expected to grow to 4.75 percent in the current financial year. Weak terms of trade, a rising budget deficit, slower growth and a falling currency are likely to drive up the cost of funds. If Australia’s economy or the financial sector’s performance falters, or international markets are disrupted, banks’ access to external funds could be threatened.

Risks to the financial sector should be getting far more attention than they are in Australia’s ongoing — and terrifically anodyne — parliamentary election campaign. Banks have grown immensely since the 1990s and now make up a much bigger part of the Australian economy. The top four are among the country’s largest listed companies, accounting for more than a third of total market capitalization. Their combined assets are around 130 percent of GDP.

Any pain they feel could thus spread quickly throughout the real economy. Falling bank stocks could well drive down share prices more broadly. Shrinking dividends — which have traditionally been quite high, around three-quarters of earnings — would hammer investors, especially self-funded retirees, and threaten consumption. An economy addicted to a ready supply of cheap credit would struggle to keep growing.

Meanwhile, the government’s options are limited. Cutting interest rates further to spur economic activity would risk worsening the housing bubble and adding to sky-high levels of household debt, already around 130 percent of nominal GDP and nearly 200 percent of household disposable income. Raising rates, on the other hand, could trigger defaults, especially on riskier loans such as those to property developers. Fiscal policy is similarly constrained: Increasing debt beyond certain levels would threaten Australia’s credit rating and thus banks’ access to offshore funding.

Pundits have been saying for years that Australia needs to diversify its economy, boosting services exports — primarily tourism, education and health — rather than continuing to depend on resources and debt-fueled property growth. Banks need to do the same, reducing their exposure to the housing market and the mining industry. At the same time, they should move swiftly to shore up their balance sheets, aggressively increasing bad-debt reserves, raising capital and gradually trimming dividends. Even their otherwise enviable luck can’t last forever.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Author: is a former banker, with more than 35 years of experience, and author of “Traders, Guns & Money” and “Age of Stagnation.” In 2014, Bloomberg named him one of the world’s 50 most influential financial figures.

AMP classifies non-resident borrowers ‘unacceptable’

From Australian Broker.

AMP Bank has classified non-resident borrowers as an “unacceptable borrower type” amongst a myriad of other tougher lending rules regarding foreign income lending.

In the note sent to mortgage brokers last week, AMP said non-resident borrowers will now be deemed an unacceptable borrower type, unless a spouse or defacto is a citizen or permanent resident of Australia or New Zealand and a borrower of the loan.

In addition, the non-major has also cracked down on foreign lending income from nine currencies, in particular the Chinese Yuan.

The changes, applicable to any applications on or after Monday 30 May 2016, see only 50% of income derived from the Chinese Yuan (salary, investment and rental) as acceptable.

Where the Chinese Yuan is used for serviceability, the maximum LVR has also been reduced to 50%.

Eight other foreign currencies have also been subject to tightened conditions, albeit to a lesser extent than the Chinese Yuan.

Only 80% of the further eight currencies – Canadian Dollar, EURO, British Pound, Hong Kong Dollar, Japanese Yen, New Zealand Dollar, Singapore Dollar and U.S. Dollar – will be deemed acceptable. In addition, these currencies will also now have a reduced maximum LVR of 70%.

In the note sent to mortgage brokers, AMP said the restrictions came “due to recent changes in the market in relation to non-resident and foreign income lending”.

FSB Regional Consultative Group for Asia discusses FSB priorities and financial reforms in the region

Bank Negara Malaysia hosted the tenth meeting of the Financial Stability Board (FSB) Regional Consultative Group (RCG) for Asia in Kuala Lumpur.

At their meeting, members of the FSB RCG for Asia began by reviewing the FSB’s work plan and 2016 policy priorities, namely: promoting full, consistent and timely implementation of the international financial reforms; finalising the design of the remaining post-crisis reforms; and addressing new risks and vulnerabilities. They next considered vulnerabilities in the global financial system, their potential impact on Asia and possible policy responses, and regional financial stability issues.

In terms of new risks and vulnerabilities, members discussed the latest developments in financial technology and implications for financial stability. Related to this, they exchanged views on the latest trends and challenges in cybersecurity, supervisory approaches to enhance information technology risk management at financial institutions and market infrastructures, and the need for cooperation in cyber intelligence sharing, both domestically and cross-border. This discussion drew upon a 19 May workshop that took place in Hong Kong organised by the RCG – and involving both the public and private sector – that focused on financial technology and cybersecurity.

Members next turned their attention to corporate governance and steps being taken by regulators to address weaknesses identified during the financial crisis. Members shared experiences on how a robust governance framework can help the allocation of authority and responsibilities in a firm, in particular to its board and senior management; monitor performance; and ensure employees conduct business in a legal and ethical manner. Members also discussed mechanisms for strengthening individual accountability, including the role and responsibilities of the board, management and control functions.

In December 2015, the Basel Committee on Banking Supervision issued a second consultative document on Revisions to the Standardised Approach for credit risk as part of its broader review of the capital framework to balance simplicity and risk sensitivity, and to promote comparability by reducing variability in risk-weighted assets across banks and jurisdictions. Members discussed the revised proposal, including the use of external credit ratings to determine risk weights and the risk weighting methodology for different classes of assets. They also considered how the new proposal will impact banking systems in Asia.

The meeting concluded with a session during which members shared experiences with the implementation of resolution regimes, including requirements for recovery and resolution planning for domestically systemically important financial institutions. As part of the discussion, members explored ways to facilitate cross-border cooperation in the event of resolution actions.

The FSB Regional Consultative Group for Asia is co-chaired by Mr Norman T. L. Chan, Chief Executive, Hong Kong Monetary Authority and Mr Ashraf Mahmood Wathra, Governor, State Bank of Pakistan. Membership includes financial authorities from Australia, Cambodia, China, Hong Kong SAR, India, Indonesia, Japan, Korea, Malaysia, New Zealand, Pakistan, Philippines, Singapore, Sri Lanka, Thailand and Vietnam.

The FSB has six Regional Consultative Groups, established under the FSB Charter, to bring together financial authorities from FSB member and non-member countries to exchange views on vulnerabilities affecting financial systems and on initiatives to promote financial stability.

The FSB has been established to coordinate at the international level the work of national financial authorities and international standard setting bodies and to develop and promote the implementation of effective regulatory, supervisory and other financial sector policies in the interest of financial stability. It brings together national authorities responsible for financial stability in 24 countries and jurisdictions, international financial institutions, sector-specific international groupings of regulators and supervisors, and committees of central bank experts. Through its six Regional Consultative Groups, the FSB conducts outreach with and receives input from an additional approximately 65 jurisdictions.

The FSB is chaired by Mark Carney, Governor of the Bank of England. Its Secretariat is located in Basel, Switzerland, and hosted by the Bank for International Settlements.

 

The ‘imperfect’ consumers shut out of basic financial services

From The UK Conversation.

Imagine not being able to go on holiday because you cannot get travel insurance or it costs more than the trip itself because of your health. Or what about being denied free car insurance with your new car or turned down for a mortgage because you’re too old. Then there are a whole host of banking services that aren’t easy to access – from sorting out your current account to managing your pension and savings – if you’re unsure about the internet or cannot afford to go online.

These are common experiences for millions of people across the UK who are denied access to everyday financial services because of disability, disease, age, lack of digital skills or because of where they live, and are the findings of a paper I co-authored, published by the Financial Conduct Authority, the major UK regulator.

In the course of the research, we came across numerous cases. For example, one man in his 30s and working for the armed forces was refused an extension to his mortgage. The reason was that it would take the term past the age of 60, the compulsory retirement age for the Armed Forces, even though he intended to work longer and his state pension would not start until the age of 67.

In another case, Alison was living with terminal cancer and was given two to five years to live though was in relatively good health. When arranging a holiday, she was turned down flat by many travel insurers while others said they would call her back but never did. In the end she went with the only firm that would cover her, paying £1,300 for insurance for a ten-day cruise in Europe.

Computer says no

Our research suggested that problems like these are only likely to grow as more services shift online and use automated processes that are not set up to deal with non-standard, “imperfect” consumers. This doesn’t even include people who live in rural areas with few bank branches and inadequate broadband and mobile reception, or the 17% of over-55s who have no access to the internet at all.

Many of us will have experienced the frustration of online systems that don’t quite fit our real-world circumstances. For “imperfect” consumers, the problem is far worse. Caught in a maze of impersonal processes, with decisions made by computers instead of people, there are those who are denied credit because their data is “thin” after working abroad for a number of years or on becoming newly widowed or divorced, with no financial products in their name.

In addition, as the population ages, more will bump up against blanket age limits and the proportion of people with health conditions is likely to rise.

Financial Conduct Authority

The numbers above for different groups are stark and measuring the scale of these access to financial services issues is difficult. Many people turned down for a product do not complain, so do not appear in complaints statistics, and firms do not keep data on how many would-be customers they turn away. Other consumers self-exclude, not bothering to apply because they expect to be turned down, often based on bad experiences in the past.

Since the government abolished Consumer Futures (originally the National Consumer Council) in 2014, the UK no longer has a statutory consumer body with a remit to research these kinds of issues and without proof of the scale of a problem, regulators, government and firms are often reluctant to act. The sad irony is that these consumers are shut out of the system and therefore cannot communicate their needs or wants to firms designing and delivering basic products like pensions and mortgages.

Access issues are especially important. The cradle-to-grave welfare state is a thing of the past, if it ever really existed. There was, at least, a belief that social housing, the NHS and state benefits would catch the homeless, the sick, the frail and the elderly, as part of a caring society.

These days, we are all expected to look out for our own financial well-being, sorting out our own safety nets, secure places to live and viable retirement. But being denied access to financial services means being shut out of modern life and put in a very vulnerable situation.

Author: Jonquil Lowe, Lecturer in Personal Finance, The Open University

Bank Profits Under Pressure – Fitch

AAP says Australia’s major banks face soft profit growth amid growing macroeconomic risks linked to low interest rates and government tax policy, according to Fitch. However. the agency has reaffirmed the ratings of all four major Australian banks at AA- with a Stable Outlook.

The credit rating agency believes low interest rates and government tax policies have likely contributed to risks that include rising household debt and diminishing housing affordability related to strong house price growth.

“Pockets of Australia’s property market may encounter potential oversupply of new residential housing and hurt house prices in those areas,” Fitch says.

“However, a stable labour market and historically low interest rates should limit the impact on the banks’ asset-quality.”

Fitch expects housing price rises to moderate to about 2% in 2016 due to tightened mortgage underwriting standards for investors and non-resident borrowers.

It highlighted continued challenges for Commonwealth Bank, Westpac, National Australia Bank and ANZ from the downturn in the resources sector, which has already led to an increase in bad loans in WA and Queensland.

“Fitch expects soft profit growth in 2016, mainly reflecting asset competition, low interest rates, moderate credit growth and rising impairment charges,” Fitch said in a statement on Friday.

ANZ has already cut its interim dividend after its first-half profit slumped by nearly a quarter, Westpac this month lifted first-half cash earnings a below-expectations 3.3 per cent, and Commonwealth Bank lifted first-half cash earnings 3.9 per cent back in February.

NAB posted the best results of the big four, lifting cash earnings 6.5 per cent following the disposal of its unprofitable UK business.

However, Fitch said a stable labour market and historically low interest rates should limit the negative impact on banks’ asset quality should residential property prices decline in some areas due to potential oversupply.

The agency also forecast a continuation of tightened underwriting criteria imposed last year.

“Some portfolios, such as resources, are likely to continue experiencing asset-quality pressure due to weak commodity prices, which Fitch does not expect to improve in the short-term,” Fitch said.

“However, the banks’ exposures to mining and dairy remain manageable relative to total exposures.”

Fitch said a hard landing for the Chinese economy could hit the big Australian banks, but that such a scenario is not its base case.

UK Regulators Finalise SRB Regulations; Shows Low Australian Bank Capital Ratios

The UK’s Financial Policy Committee (FPC) has released the final version of its Systemic Risk Buffer (SRB) framework for banks relating to Domestically  Significantly Important Banks) (D-SIB). It also shows Australian Banks relatively weaker capital position.

The framework highlights again that further risk capital will need to be held so that financial firms will be able to absorb losses while continuing to provide critical financial services. In the UK, depending on the size of the institutions, the buffer will be set between 0 and 3%. The SRB increases the capacity of UK systemic banks to absorb stress, thereby increasing their resilience relative to the system as a whole. The FPC judges that the appropriate Tier 1 capital requirement for the banking system is around 13.5% of Risk Weighted Assets.

Note, separately, an additional capital weight, per the Basel framework will apply for global systemically important banks (G‐SIBs).

Of special interest to Australian Banks is this table which shows that on a comparable basis, local banks here currently are required to hold less capital than peers in many other countries. Is the D-SIB here at 1% correctly calibrated? – especially, given 63% of all bank lending is residential property related?

UK-DSIB

The UK document just released, sets out the framework for the SRB that will be applied by the PRA to ring‐fenced banks, and large building societies that hold more than £25 billion in deposits and shares (excluding deferred shares), jointly, ‘SRB institutions’. The aim of the SRB is to raise the capacity of ring‐fenced banks and large building societies to withstand stress, thereby increasing their resilience. This reflects the additional damage that these firms could cause to the economy if they were close to failure. The FPC intends that the size of a firm’s buffer should reflect the relative costs to the economy if the firm were to fall into distress. The PRA will apply the framework from 1 January 2019 and later this year will consult on elements relating to the implementation of the SRB.

Overall, based on an analysis of the economic costs and benefits of going concern bank equity, the FPC judged the appropriate non‐time‐varying Tier 1 capital requirement for the banking system, in aggregate, should be 11% of RWAs, assuming those RWAs are properly measured. As up to 1.5 percentage points of this can be met with additional Tier 1 contingent capital instruments, the appropriate level of common equity Tier 1 capital is around 9.5% of RWAs. This judgement was made on the expectation that some of the deficiencies in the measurement of risk weights would be corrected over time. Until remedies are put into place to address this, the appropriate level of capital is correspondingly higher. On current measures of risk weighting, the FPC judges that the appropriate Tier 1 capital requirement for the banking system is around 13.5% of RWAs. This assessment refers to the structural equity requirements applied to the aggregate system that do not vary through time. In addition to baseline capital requirements, the FPC intends to make active use of the countercyclical capital buffer that will apply to banks’ UK exposures.

Under the SRB Regulations, the FPC is required to produce a framework for the SRB at rates between 0 and 3% of risk‐weighted assets (RWAs) and to review that framework at least every two years. The legislation implements the recommendation made in 2011 that ring‐fenced banks and large building societies should hold additional capital due to their relative importance to the UK economy. The FPC has considered its equality duty, and has set out its assessment of the costs and benefits of the framework.

Systemic importance is measured and scored using the total assets of ring‐fenced bank sub‐groups and building societies in scope of the SRB, with higher SRB rates applicable as total assets increase through defined buckets.

SRB-UKThose with total assets of less than £175bn are subject to a 0% SRB. The FPC expects the largest SRB institutions, based on current plans, to have a 2.5% SRB initially. Thresholds for the amounts of total assets corresponding to different SRB rates could be adjusted in the future (for example, in line with nominal GDP or inflation) as part of the FPC’s mandated two‐year reviews of the framework.

In July 2015, the FPC issued a Direction and a Recommendation to the PRA to implement the leverage ratio framework for UK G‐SIBs and other major UK banks and building societies on a consolidated basis. The FPC anticipates that the leverage ratio framework will be applied to UK G‐SIBs and other major UK banks and building societies at the level of the ring‐fenced bank sub‐group from 2019 (where applicable), as well as on a consolidated basis.

 

Review of Card Payments Regulation Outcomes

The Reserve Bank has today released the Conclusions Paper and three new standards which they say will contribute to a more efficient and competitive payments system. As expected the review has focussed on reducing excessive payment surcharges, changes to interchange fee bench-marking and the inclusion of the American Express companion card system. The RBA has not designated UnionPay, JCB, Diners Club, or any other systems. Accordingly the RBA’s new standard does not apply to transactions carried out using those systems.

The banks says the new standard is likely to result in some reductions in the generosity of rewards programs on premium and companion cards for consumers. Some adjustment in annual fees on these cards is also possible. Commercial and corporate card products often provide significant benefits free of charge to the company holding the card. It is possible that there will be changes to either the pricing or services provided by these products. These changes are part of the process of improving price signals to cardholders and creating a more efficient and lower-cost payments system.

Note that the new surcharging framework only applies to payment surcharges – that is, to fees that are specifically related to payments or apply to some payment methods but not others. Some merchants apply fees, such as ‘booking’ or ‘service’ fees, which are unrelated to payment costs and apply regardless of the method of payment (this is for instance common in the ticketing industry). The surcharging framework is not intended to apply to these fees but merchants will be required to meet all provisions of the Australian Consumer Law in terms of disclosure of any such fees.

The Review was initiated with the publication of an Issues Paper in March 2015. After extensive consultation with stakeholders, the Bank published some draft standards in December 2015. The Bank received submissions on the draft standards from more than 40 organisations and the staff have had over 50 meetings with stakeholders since their release. There was significant support for the proposed reforms from end users, including major consumer and merchant organisations.

The new surcharging standard will preserve the right of merchants to surcharge for more expensive payment methods. However, consistent with the Government’s recent amendments to the Competition and Consumer Act 2010, the new standard will ensure that consumers using payment cards from designated systems (eftpos, the debit and credit systems of MasterCard and Visa, and the American Express companion card system) cannot be surcharged in excess of a merchant’s cost of acceptance for that card system. Eligible costs are clearly defined in the standard and new transparency requirements will promote compliance with and enforcement under the new framework. With the cost of acceptance defined in percentage terms, merchants will not be able to impose high fixed-amount surcharges on low-value transactions, as has been typical for airlines. The ACCC will have enforcement powers under the new framework, which will take effect for large merchants on 1 September 2016 and for other merchants on 1 September 2017.

The new interchange standards will result in a reduction in payment costs to merchants, which will place downward pressure on the costs of goods and services for all consumers, regardless of the payment method they use. The weighted-average benchmark for credit cards has been maintained at 0.50 per cent, while the benchmark for debit cards has been reduced from 12 cents to 8 cents. The weighted-average benchmarks will be supplemented by ceilings on individual interchange rates which will reduce payment costs for smaller merchants. Commercial cards will continue to be included in the benchmarks, but the Board has decided for the present against making transactions on foreign-issued cards subject to the same regulation as domestic cards. Schemes will be required to comply with the benchmarks on a quarterly frequency, based on weighted-average interchange fees over the most recent four-quarter period. These tighter compliance requirements will ensure that the regulatory benchmarks are an effective cap on average interchange rates. The new interchange standards will largely take effect from 1 July 2017.

To address issues of competitive neutrality, interchange-like payments to issuers in the American Express companion card system will now become subject to equivalent regulation to that applying to the MasterCard and Visa credit card systems. More broadly, to prevent circumvention of the debit and credit interchange standards, there will be limits on any scheme payments to issuers that are not captured within the interchange benchmarks.

These changes to the regulatory framework are consistent with the direction of reforms suggested in the Final Report of the Financial System Inquiry and endorsed in the Government’s October 2015 response to the Report.

UK Regulator Seeks To Lift Banking Competition

The UK’s Competition and Markets Authority (CMA) has outlined a wide-ranging package of proposals to tackle the issues hindering competition in personal current accounts (PCA) and in banking services for small and medium-sized enterprises (SMEs). It includes new protections for overdraft users. They expect the package of remedies, taken together with ongoing technological developments, to result in significant changes to the operation and structure of retail banking markets in the UK.

At present, it is hard for bank customers to work out if they are getting good value. Bank charges are complicated and opaque and many customers think it is difficult and risky to change banks.

As a result, nearly 60% of personal customers have stayed with the same bank for over 10 years and over 90% of SMEs get their business loans from the bank where they have their current account.

This means that competitive pressures are weak, so banks do not need to work hard enough on price or quality of service.

The CMA considered whether the largest banks should be broken up but it came to the view that this would not address the fundamental competition problems. Having more and smaller banks, which customers still couldn’t easily choose between because of lack of transparency on fees and charges, would not significantly improve the market or give customers a better deal.

The CMA also considered whether to get rid of ‘free if in credit’ (FIIC) current accounts. Even though FIIC accounts are not really ‘free’, they do work well for many customers, and banning particular products would simply take away choice and risk the overall cost of accounts rising, not falling.

To transform the market the CMA believes banks instead need to be made to provide their customers with the right information so that they can easily find out which provider and type of account offers best value for them. The CMA also proposes to push the development of new online comparison tools and improve the current account switch service (CASS) to make switching banks more straightforward and give customers more awareness of, and confidence in, the process.

FIIC accounts are certainly not free for overdraft users, who represent nearly half of personal customers. The CMA’s proposals include new measures targeted at overdrafts, with a particular focus on users of unarranged overdrafts; in 2014, £1.2 billion of banks’ revenues came from unarranged overdraft charges.

The CMA proposes requiring banks to set a monthly maximum charge for unarranged overdrafts on personal current accounts. Customers may not even be aware of when they go into unarranged overdraft or realise the costs they are incurring, so the CMA also wants banks to alert people when they are going into unarranged overdraft, and give them time to avoid the charges.

Big technological changes are happening in banking, and the CMA wants to harness them to empower customers to compare and switch accounts. The CMA is proposing to require banks to move swiftly to introduce an Open API (application programming interface) banking standard. This standard will enable personal and SME customers to safely and securely share their unique transaction history with other banks and trusted third parties. This will enable bank customers to click on an app, for instance, and get comparisons tailored to their individual circumstances, directing them to the bank account which offers them the best deal.

The CMA also proposes that banks should be made to regularly prompt their customers to check that they are getting good value from their banking provider. When these prompts direct customers to digital comparison services which give tailored price-comparison and service quality advice, the foundation has been laid for a major change in the retail banking sector.

On these foundations, the CMA proposes to build a strong package of measures to deliver better banking services to SMEs. Making it easier for SMEs to shop around and open a new current account will reduce business owners’ reliance on their personal bank when choosing a bank for their business. By making the prices and availability of lending products more transparent, the majority of SMEs need not, as is the case now, turn directly to their existing bank for finance without considering other offers.

The package of changes could bring benefits to bank customers to the tune of £1 billion over 5 years.

Already, if personal customers switched to a cheaper product for them, annual savings could be on average £116; ranging from £89 on average for customers who do not use an overdraft, to £153 on average for overdraft users.

Alasdair Smith, Chair of the Retail Banking Investigation, said:

For too long, banks have been able to sit back and not work hard enough for their personal and small business customers. We believe the strong and innovative package of measures we are proposing will give customers the information and tools they really need to get a better deal out of the banks. They will also protect those who fall into overdraft from being stung with unexpected fees.

New entrants into a market are an important source of competition and innovation, and we are well aware of the current barriers to challenger banks in UK retail banking. What’s really holding them back is their ability to highlight to customers how new offerings compare with their current deal. Our package of banking reforms will help new competitors get a stronger foothold in a market which is of vital importance to the whole economy.

The CMA invites submissions in writing by 7 June. They will publish the final report in early August.

How Much Benefit Do Major Banks Get From Implicit Government Guarantees?

In a freedom of information request, released by the RBA we get some insights into the discussion around whether the major banks benefit from the implicit assumption that in a time of strife they will be bailed out by Government.

The credit ratings of Australian banks do benefit to some extent from rating agencies’ perceptions that the Government would support them if they got into trouble. The major banks and Macquarie receive a two notch credit rating uplift from S&P as a result of the rating agency’s expectation that these banks will receive support from the government in a crisis. Other Australian banks do not receive any rating uplift, as S&P does not expect government support.

The released documentation discusses the different modelling approaches and also some of the international analysis which has been done on the subject. The real benefit does appear to change over time (depending on the risks in the system) but the net conclusion is the majors do get benefit. It is hard to put a value in it, but a figure between $1.9 and $3.8 billion (between 14 and 28 basis points) was suggested in 2013.

One submission to the financial system inquiry applied rates from the same study to the non-deposit liabilities of the major banks to estimate the dollar value of the implicit subsidy to these institutions at between $5.9 and $7.9 billion per year.

Systemic risks may be higher as a  result.

An implicit government guarantee creates on incentive for creditors to fund banks at rates below those justified by their financial health, thus providing an implicit subsidy. lf of significant size, this subsidy has the potential to distort competition and increase systemic risk.

However you read it, the majors are supported by the implicit Government guarantee. It does not seem to pass through to borrowers or depositors in better rates.