Economics and Banking – Page 425 – Digital Finance Analytics (DFA) Blog

RBA Dovish In Latest Statement

The statement delivered today by the Governor, Glenn Stevens, to the House of Representatives Standing Committee on Economics in Canberra takes a dovish tone. We note especially the relatively optimistic note struck on employment.

The Australian economy continues to progress through a major adjustment, in the midst of testing international circumstances. The terms of trade have been falling for four years and have declined by a third since their peak – though that was a very, very high peak. They are now back to about the same level as in 2006 – still about 30 per cent above their 20th century average level.

Resources sector capital spending has been following the terms of trade with a lag. From an extraordinarily high peak – at about 8 per cent of GDP, nearly three times the peaks seen in most previous upswings – this investment has been falling for about two and a half years. By the time it is finished, this decline will probably total something like 5 per cent of GDP. We are probably now about halfway through the decline. It is having a predictable impact on those industries and regions that had earlier experienced the effects of the boom.

Resources sector exports have risen strongly as the greater capacity resulting from all the investment has been put to use. Australia now exports around three times the volume of iron ore that it did a decade ago, and around twice as much coal. A very large rise in exports of natural gas is in prospect over the next few years.

Outside the mining sector and parts of the economy most directly exposed to it, there are signs that conditions have been very gradually improving. Survey-based measures of business conditions have been a bit above their longer-run average levels for some time now, and the most recent readings are about where they were in 2010. A few of the non-mining sectors have shown quite marked improvements over the past twelve months.

To this we can add that the overall number of job vacancies in the economy has been increasing, even as employment opportunities in mining and some other areas diminish. The increase has not been rapid, but nonetheless the trend has clearly been upward for about two years. Since this time last year, moreover, we have seen a rise of about 200 000, or about 2 per cent, in employment. The labour force participation rate and the ratio of employment to population have both started to increase. The rate of unemployment, though variable from month to month, seems to have stopped rising, and it is at a level a bit lower than we had thought, six months ago, it might reach.

Of course, this performance is not uniform geographically or by industry. The two large south-eastern states show the largest increases in demand and employment, and dwelling prices, while conditions elsewhere are more subdued. By industry, the rise in employment has been strongest in services, especially those types of services delivered to households, though business services activities have also added to employment over the past year.

Monetary policy is seeking to support this transition, something it can do because inflation remains low. Very low interest rates, coupled with financial institutions wanting to lend, have played a part in the improvement in conditions in some sectors. Residential construction is running at very high levels, households are adding a little less of their incomes to savings and savers have been searching for higher returns. These are all indications of easy money at work. Cognisant of the risk that very low interest rates may foster a worrying debt build-up, regulatory initiatives are in place to maintain sound lending standards and capital adequacy. I hasten to add that the objective of such tools is not to control dwelling prices, but to contain leverage. The evidence is emerging that they are doing their job.

More recently, the significant decline in the exchange rate is starting to have more discernible effects on the pattern of spending and production. The decline over the past two years amounts to about 25 per cent against a rising US dollar and 18 per cent against the trade-weighted basket. We are hearing about the effects of this in our liaison and also seeing it in the data on such things as tourism flows as well as exports of business services. This is to be expected as the exchange rate adjusts to the change in the terms of trade.

Over the year to June, real GDP grew by 2 per cent. This was in line with our forecast of three months ago and at the lower end of our forecast range from a year ago. The effect of unusual weather conditions on exports meant that GDP as measured exaggerates both the strength in the March quarter and the weakness in the June quarter.

There are still some puzzles in reconciling what has happened to real GDP with what has happened to employment and indications from business surveys. Hopefully, those puzzles will be resolved over time.

Nonetheless, what is pretty clear is that the economy is growing, albeit not as fast as we would like, the adjustment to the decline in the terms of trade is well advanced, and non-mining activity is improving rather than deteriorating. If the latter trend continues, it is credible to think that we can achieve better output growth, particularly as we reach the later phases of the decline in mining investment. This is what is needed to bring down the unemployment rate.

As always, global factors will be important and the international setting continues to be a rather complex one. Since the last hearing, growth in the Chinese economy has continued to moderate. Growth in other parts of Asia was also weaker around the middle of the year. Reflecting these outcomes, forecasts for global growth over the period ahead are a little lower than they were six months ago.

That was the backdrop for a period of volatility in some financial markets. The unwinding of an equity market bubble in China appears to have served as the proximate trigger for a revision of equity valuations around the world. Risk appetite diminished somewhat and the currencies of many emerging market economies came under downward pressure.

Whether that financial volatility itself will serve further to dampen global growth prospects remains to be seen. Sometimes such events portend a wider set of economic events, but just as often, they don’t.

In the present instance, it is important to stress that long-term debt markets and core funding markets for financial institutions have not been impaired. These markets remain open and it is still the case that highly rated private borrowers and most sovereigns can borrow at remarkably low cost. Things could change, but at present we do not see anything approaching the dislocation of funding channels seen in serious crises.

To be sure, emerging market countries are under some pressure and some of them have specific problems that are being recognised by markets. At the same time, though, many emerging market countries have done quite a bit to improve their resilience over the years.

It’s also worth noting that performance in the Unites States continues to improve. Everyone knows that, eventually, this will have to be reflected in less accommodative US monetary policy. Some fretting about the first increase in US interest rates for nine years is to be expected, no matter how well telegraphed it has been. The more important factor, though, will be the pace of subsequent increases. The Federal Reserve has indicated this is expected to be very gradual, but of course that will depend on what happens with the US economy. There is a degree of irreducible uncertainty here and hence the possibility of further financial market volatility at some point. Overall though, it seems very likely that global interest rates will still be quite low for quite some time yet.

For Australia, we cannot, of course, determine our terms of trade or other forces in the global economy. We can only adjust to them. The record of adjustment in recent years is good. We negotiated the financial crisis without a major financial crisis of our own or a big downturn in economic activity. We negotiated the first two phases of the resources boom without major inflationary problems, and are part way through our adjustment to the third phase – so far without a major slump in overall economic activity. There is still a pretty good chance that we will come out of this episode fairly well, and much better than we came out of previous episodes of this type.

I now turn briefly to another area of the Bank’s responsibilities, namely the payments system. The New Payments Platform (NPP) will enable real-time, data-rich payments on a 24/7 basis for households, businesses and government agencies. The Payments System Board, having worked to facilitate the process of the private sector coming together to drive this project, supports the industry’s efforts. The Reserve Bank itself is making good progress in its own part in this project.

In the card payments area, the Bank has announced a review and we released an Issues Paper in early March. Among other things, the review contemplates the potential for changes to the regulation of card surcharges and interchange fees. It provides an opportunity to consider some of the issues raised in the Financial System Inquiry. As usual, the Bank has been consulting widely, including via a roundtable in June that included representatives from over 30 interested organisations.

The Payments System Board has asked the staff to liaise with industry participants on the possible ‘designation’ of certain card systems. A decision to designate a system is the first of a number of steps the Bank must take to exercise any of its regulatory powers in respect of a payment system, but does not commit it to a regulatory course of action. The Payments System Board will have further discussions on the case for changes to the regulatory framework at future meetings. In the event that the Board were to propose changes to the regulatory framework, the Bank would, as usual, undertake a thorough consultation process on any draft standards.

In our financial stability role, a focus has been on central counterparties, which facilitate efficient and safe clearing of some types of financial transactions. These entities are increasingly important given the way global regulatory standards have been moving. The Bank has focused on ensuring their risk management meets the highest standards and that they have the capacity to recover from financial shocks. We have also done a lot of work to ensure that our regulatory framework is appropriately recognised by regulators in other jurisdictions, which is important if we are to keep the Australian financial system connected with the global system.

ACCC not to oppose Macquarie’s bid for Esanda

The Australian Competition and Consumer Commission has announced that it will not oppose Macquarie Group Limited’s (ASX:MQG) (Macquarie) bid for the Esanda Dealer Finance business (Esanda) from the Australian and New Zealand Banking Group (ASX: ANZ). Both Macquarie and Esanda provide motor vehicle finance to motor vehicle dealerships and consumers throughout Australia.

The ACCC concluded that the possible acquisition was not likely to substantially lessen competition in the market for the supply of bailment finance and point-of-sale (POS) finance facilities to motor vehicle dealerships.

“The ACCC had some concerns that the proposed acquisition may lead to increased bailment interest rates (or lower commissions to dealers on POS finance), particularly for dealerships that do not have access to an aligned or in-house finance provider,” ACCC Chairman Rod Sims said.

“However, the ACCC concluded that on balance the combination of existing and potential competitive constraints would be sufficient to prevent a substantial lessening of competition as a result of the possible acquisition. The merged entity will face competition from Westpac/St George and manufacturer-aligned financiers as well as the possibility of new entry, and pressure from vehicle manufacturers (OEMs) to ensure that their dealers’ finance offers remain competitive with those of other dealers.”

Several vehicle manufacturers in Australia have an aligned finance arm, including Toyota Finance, Nissan Finance, BMW Finance, VW Finance and Mercedes Finance. Although aligned financiers generally only offer wholesale finance to dealerships which sell vehicles of their manufacturer, the ACCC understands that most dealerships in Australia sell multiple brands of vehicles. Accordingly the proportion of dealerships without access to an aligned financier is small. Further, one of the aligned financiers, Alphera, competes for non-BMW dealerships despite being owned by BMW.

“The ACCC also noted that if the merged entity were to increase bailment rates and/or decrease POS commissions, this would provide an incentive for other providers, including manufacturer aligned financiers such as Toyota Finance and Nissan Finance, to begin to compete for the business of unaffiliated dealerships,” Mr Sims said.

The ACCC also considered that the competitive nature of car retailing may impose a further indirect competitive constraint on Macquarie. OEMs without their own finance arms (such as GM Holden, Ford and Mazda) need to ensure that their dealers remain competitive with other OEMs’ dealers. If they perceived that increased finance costs were affecting sales of their vehicles they would have an incentive to respond. OEMs already seek to ensure competitive finance options are available to their dealers by running tenders and appointing financiers to be the ‘white label’ finance provider to their dealerships. OEMs may also be able to use these tender processes to introduce another financier into the market.

Bailment finance is acquired by dealerships to finance the vehicles held in their showrooms before they are sold to customers. Dealerships also acquire POS finance facilities to enable them to offer finance to customers purchasing vehicles, and earn commissions on the customer finance contracts they arrange.

The Fed Holds Rates

Just released by the FED, rates are on hold, because of concerns about global growth and current levels of employment and inflation. In addition they hint at lower rates for longer.

Information received since the Federal Open Market Committee met in July suggests that economic activity is expanding at a moderate pace. Household spending and business fixed investment have been increasing moderately, and the housing sector has improved further; however, net exports have been soft. The labor market continued to improve, with solid job gains and declining unemployment. On balance, labor market indicators show that underutilization of labor resources has diminished since early this year. Inflation has continued to run below the Committee’s longer-run objective, partly reflecting declines in energy prices and in prices of non-energy imports. Market-based measures of inflation compensation moved lower; survey-based measures of longer-term inflation expectations have remained stable.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. Recent global economic and financial developments may restrain economic activity somewhat and are likely to put further downward pressure on inflation in the near term. Nonetheless, the Committee expects that, with appropriate policy accommodation, economic activity will expand at a moderate pace, with labor market indicators continuing to move toward levels the Committee judges consistent with its dual mandate. The Committee continues to see the risks to the outlook for economic activity and the labor market as nearly balanced but is monitoring developments abroad. Inflation is anticipated to remain near its recent low level in the near term but the Committee expects inflation to rise gradually toward 2 percent over the medium term as the labor market improves further and the transitory effects of declines in energy and import prices dissipate. The Committee continues to monitor inflation developments closely.

To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that the current 0 to 1/4 percent target range for the federal funds rate remains appropriate. In determining how long to maintain this target range, the Committee will assess progress–both realized and expected–toward its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. The Committee anticipates that it will be appropriate to raise the target range for the federal funds rate when it has seen some further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium term.

The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. This policy, by keeping the Committee’s holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions.

When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent. The Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run.

Voting for the FOMC monetary policy action were: Janet L. Yellen, Chair; William C. Dudley, Vice Chairman; Lael Brainard; Charles L. Evans; Stanley Fischer; Dennis P. Lockhart; Jerome H. Powell; Daniel K. Tarullo; and John C. Williams. Voting against the action was Jeffrey M. Lacker, who preferred to raise the target range for the federal funds rate by 25 basis points at this meeting.

The released economic data included a chart on members future expectations.Each shaded circle indicates the value (rounded to the nearest 1/8 percentage point) of an individual
participant’s judgment of the midpoint of the appropriate target range for the federal funds rate or the appropriate target level for the federal funds rate at the end of the specified calendar year or over the longer run.

Why the Fed is no longer center of the financial universe

From The Conversation.

Markets have been speculating for months about whether the US Federal Reserve would raise interest rates in September. The day has finally arrived, and interestingly, there’s much less certainty now about which way it will go than there was just a few weeks earlier.

In August, more than three-quarters of economists surveyed by Bloomberg expected a rate hike this month. Now, only about half do. Traders were also more certain back then, putting the odds at about 50-50. Now the likelihood of a rate hike based on Fed Funds Futures is about one in four.

The Federal Reserve may be on the verge of lifting rates for the first time in more than nine years because unemployment has dropped to pre-crisis levels, the housing market is the healthiest it’s been in 15 years and the economic recovery, while tepid, has continued.

Investors’ and economists’ uncertainty, meanwhile, has been fueled by weak growth in China, Europe and Latin America, giving the Fed pause about whether now’s the right time to start the return to normal.

There is growing alarm that a rate hike will make things even worse for the rest of the world. The Fed risks creating “panic and turmoil” across emerging markets such as China and India and triggering a “global debt crisis.”

The reality, however, will likely be very different. For one, the Fed lacks the power it once did, meaning the actual impact of a rate hike will be more muted than people think. Second, the effect of uncertainty and speculation may be far worse than an actual change in rates, which is why central bankers in emerging markets are pushing their American counterparts to hurry up and raise them already.

The Fed’s waning influence

The Fed, and more accurately the rate-setting Federal Open Market Committee (FOMC), is simply no longer the center of the universe it once was, because the central banks of China, India and the eurozone have all become monetary policy hubs in their own right.

The US central bank may still be preeminent, but the People’s Bank of China, the Reserve Bank of India, and the European Central Bank are all growing more influential all the time. That’s particularly true of China’s central bank, which boasts the world’s largest stash of foreign currency reserves (about US$3.8 trillion) and increasingly hopes to make its influence felt beyond its borders.

Some argue that central banks in general, not just the Fed, are losing their ability to affect financial markets as they intend, especially since the financial crisis depleted their arsenal of tools. Those emergency measures resulted in more than a half-decade of near-zero interest rates and a world awash in US dollars. And that poses another problem.

All eyes will be on Fed Chair Janet Yellen. Reuters

Can the Fed even lift rates anymore?

The old toolkit of market leverage that the Fed used is losing relevance since the FOMC has not raised rates since 2006. And it has rather frantically been trying to experiment with new methods to affect markets.

The Fed and the market (including companies and customers) are beginning to understand that it’s not a given that the Fed can even practically raise rates any more, at least not without resorting to rarely or never-tried policies. That’s because its primary way to do so, removing dollars from the financial system, has become a lot harder to do.

Normally, one way the Fed affects short-term interest rates is by buying or selling government securities, which decreases or increases the amount of cash in circulation. The more cash in the system, the easier (and cheaper) it becomes to borrow, thus reducing interest rates, and vice versa.

And since the crisis, the Fed has added an enormous quantity of cash into the system to keep rates low. Removing enough of that to discourage lending and drive up rates won’t be easy. To get around that problem, it plans to essentially pay lenders to make loans, but that’s an unconventional approach that may not work and on some level involves adding more cash into the equation.

Uncertainty and speculation

In addition, the uncertainty and speculation about when the Fed will finally start the inevitable move toward normalization may be worse than the move itself.

As Mirza Adityaswara, senior deputy governor at Indonesia’s central bank, put it:

We think US monetary policymakers have got confused about what to do. The uncertainty has created the turmoil. The situation will recover the sooner the Fed makes a decision and then gives expectation to the market that they [will] increase [rates] one or two times and then stop.

While the timing of its first hike is important – and the sooner the better – the timing of the second is more so. This will signal the Fed’s path to normalization for the market (that is, the end of an era of ultra-low interest rates).

Right now, US companies appear ready for a rate hike because the impact on them will be negligible, and some investors are also betting on it.

That’s no surprise. Companies have borrowed heavily in recent years, allowing them to lock in record-low rates and causing their balance sheets to bulge. This year, corporate bond sales are on pace to have a third-straight record year, and currently tally about $1 trillion. Most of that’s fixed, so even if rates go up, their borrowing costs won’t change all that much for some time.

At the end of 2014, non-financial companies held a record $1.73 trillion in cash, double the tally a decade ago, according to Moody’s Investors Service.

Beyond the US, there are reports that Chinese and Indian companies are ready for a rate hike as well.

Foregone conclusion

So for much of the world, a hike in rates is already a foregone conclusion – the risk being only that the Fed doesn’t see it. The important question, then, is how quickly, or slowly, should the pace of normalization be. While the Fed may find it difficult to make much of an impact with one move, the pace and totality of the changes in rates will likely make some difference.

But the time to start that process is now. It will end the uncertainty that has embroiled world markets, strengthen the dollar relative to other currencies, add more flexibility to the Fed’s future policy-making and, importantly, mark a return to normality.

Author: Tomas Hult, Byington Endowed Chair and Professor of International Business, Michigan State University

Regulation of small amount credit contracts and comparable consumer leases

The Treasury has announced that the small amount credit contract (SACC) laws review panel is seeking views on the effectiveness of the laws relating to SACCs and whether a SACC database should be established. The panel are also calling for submissions on whether the provisions that apply to SACCs should be extended to consumer leases that are comparable to SACCs and, if so, how this would be achieved.

Closing date for submissions: Thursday, 15 October 2015

The review of small amount credit contract (SACC) laws and related provisions in the National Consumer Credit Protection Act 2009 was established on 7 August 2015 to consider the laws applying to SACCs and consumer leases which are comparable to SACCs.

The independent panel is undertaking a period of consultation to seek views on the effectiveness of the laws relating to SACCs and whether a SACC database should be established. The panel are also calling for submissions on whether the provisions that apply to SACCs should be extended to consumer leases that are comparable to SACCs and, if so, how this would be achieved.

The consultation paper can be found here.

Australian Bank Capital Journey Is Far From Over

‘In Search Of …. Unquestionably Strong’ was the title of a speech given by APRA Chairman Wayne Byres. It is he highlights that there is an ongoing journey towards building greater capital ratios for the banks.

He makes two points of note. First banks around the world are on the same journey, so it must continue, and second, what ‘unquestionably strong’ meant precisely was largely left for APRA to determine. Its not a matter of mechanically moving in step with international benchmarks to maintain top quartile position.

He went ahead to reinforce the point that top quartile positioning is just one means of looking at the issue, and certainly not the only one to use; highlighted that there are many unknowns about the way capital adequacy will be measured in future, so it is not the end of the story; and that capital is just one measure of the strength of an ADI, and ideally we should think about ‘unquestionably strong’ with a broader perspective.

Using the data from the quarterly performance statistics he compared the capital ratios again CET1 and other measures. We have highlighted the fact that the ratio of loans to shareholder capital has not improved and concluded “We also see the capital adequacy ratio and tier 1 ratios rising. However, the ratio of loans to shareholder equity is just 4.7% now. This should rise a bit in the next quarter reflecting recent capital raisings, but this ratio is LOWER than in 2009. This is a reflection of the greater proportion of home lending, and the more generous risk weightings which are applied under APRA’s regulatory framework. It also shows how leveraged the majors are, and that the bulk of the risk in the system sits with borrowers, including mortgage holders. No surprise then that capital ratios are being tweaked by the regulator, better late then never”.

He concluded that APRA was still thinking about how to define ‘unquestionably strong’ and the role of top quartile positioning and made five closing points.

we have a soundly capitalised banking system overall in Australia;
with the aid of recent capital raisings, the initial 70 basis point CET1 gap to the top quartile that we identified is likely to have been substantially closed;
higher capital ratios are likely to be needed if current relative positioning is to be retained and enhanced, particularly if measures beyond CET1 are examined;
by quickly moving on the FSI recommendation regarding mortgage risk weights, APRA has created time to consider international developments emerging over the next year or so; and
given where we are today, APRA and the banking industry have time to manage any transition to higher capital requirements in an orderly fashion.

We would observe that the first two statements seem contradictory – if we are so well capitalised, why the lift in capital by 70 basis points? Why also are regulators all round the world desperately lifting ratio? The short answer is because they let the ratios get too lean and mean – as demonstrated by the GFC. This has to be addressed.

So, in short, the journey lays ahead. Then of course Basel IV is just round the corner. Australian banks are likely to find the costs of doing business will continue to rise. with consequences for loan pricing, loan availability and bank profitability.

Mortgage Discounts Crash

Latest data from the DFA surveys which is going into the forthcoming edition of the Property Imperative, shows that the era of very large mortgage discounts is passing. The average discount has now fallen from above 100 basis points to around 60 basis points and it will continue to fall further. This means a windfall for lenders who can pocket the extra margin, or use it to attract owner occupied new business.

The range of discounts between the upper and lower bounds is reducing, with the lowest bounds around 20 basis points.

The most insightful data is the split by loan type. Loans for investment loans (both new and refinanced) are much reduced, with the average a little above 20 basis points – some lenders offer no discount at all now. On the other hand, owner occupied borrowers with new or refinanced loans can obtain a larger cut in rates. This reflects the new competitive landscape, where lenders are seeking to swing business away from the investment sector to owner occupied lending.

You can read our earlier analysis on discounts here.

Latest Global Basel III Monitoring Results Announced Today

The Bank for International Settlements has just released its latest Basel III Monitoring Report. This included five banks from Australia, four group one, and one group two bank. This report presents the results of the Basel Committee’s latest Basel III monitoring exercise. The study is based on the rigorous reporting process set up by the Committee to periodically review the implications of the Basel III standards for banks. The results of previous exercises in this series were published in March 2015, September 2014, March 2014, September 2013, March 2013, September 2012 and April 2012.

Data have been provided for a total of 221 banks, comprising 100 large internationally active banks (“Group 1 banks”, defined as internationally active banks that have Tier 1 capital of more than €3 billion) and 121 Group 2 banks (ie representative of all other banks).

The results of the monitoring exercise assume that the final Basel III package is fully in force, based on data as of 31 December 2014. That is, they do not take account of the transitional arrangements set out in the Basel III framework, such as the gradual phase-in of deductions from regulatory capital. No assumptions were made about bank profitability or behavioural responses, such as changes in bank capital or balance sheet composition. For that reason, the results of the study are not comparable to industry estimates.

Data as of 31 December 2014 show that all large internationally active banks meet the Basel III risk-based capital minimum requirements as well as the Common Equity Tier 1 (CET1) target level of 7.0% (plus the surcharges on global systemically important banks – G-SIBs – as applicable). Between 30 June and 31 December 2014, Group 1 banks reduced their capital shortfalls relative to the higher Tier 1 and total capital target levels; the additional Tier 1 capital shortfall has decreased from €18.6 billion to €6.5 billion and the Tier 2 capital shortfall has decreased from €78.6 billion to €40.6 billion. As a point of reference, the sum of after-tax profits prior to distributions across the same sample of Group 1 banks for the six-month period ending 31 December 2014 was €228.1 billion.

Under the same assumptions, there is no capital shortfall for Group 2 banks included in the sample for the CET1 minimum of 4.5%. For a CET1 target level of 7.0%, the shortfall narrowed from €1.8 billion to €1.5 billion since the previous period.

The average CET1 capital ratios under the Basel III framework across the same sample of banks are 11.1% for Group 1 banks and 12.3% for Group 2 banks.

Basel III’s Liquidity Coverage Ratio (LCR) came into effect on 1 January 2015. The minimum requirement is set initially at 60% and will then rise in equal annual steps to reach 100% in 2019. The weighted average LCR for the Group 1 bank sample was 125% on 30 June 2014, up from 121% six months earlier. For Group 2 banks, the weighted average LCR was 144%, up from 140% six months earlier. For banks in the sample, 85% reported an LCR that met or exceeded 100%, while 98% reported an LCR at or above 60%.

Basel III also includes a longer-term structural liquidity standard – the Net Stable Funding Ratio (NSFR) – which was finalised by the Basel Committee in October 2014. The weighted average NSFR for the Group 1 bank sample was 111% while for Group 2 banks the average NSFR was 114%. As of December 2014, 75% of the Group 1 banks and 85% of the Group 2 banks in the NSFR sample reported a ratio that met or exceeded 100%, while 92% of the Group 1 banks and 93% of the Group 2 banks reported an NSFR at or above 90%.

Why personality tests for bank loans are a bad idea

From The Conversation.

Lending money is a risky business. Since 2010, Bank of England figures reveal that lenders have written off an average of £13.2 billion a year in bad loans. You can never be 100% sure that you will ever get your money back.

One way of mitigating that risk is to know as much as possible about the person you are lending to. Indeed, some financial managers reportedly are now considering the use of personality tests to assess the suitability of borrowers seeking loans or credit agreements.

A new model developed by the University of Edinburgh’s Business School, for example, asks borrowers questions designed to reveal their trustworthiness. But could such tests, already used in various forms by some businesses to assess the suitability of potential employees, really work for lenders?

Predicting the future

The conventional way to assess the likelihood that someone might default is to look at their income and expenditure, their assets and their commitments, and make predictions on the basis of their financial circumstances. We also know that a person’s “credit history” is important – it is useful to know if a person has defaulted on loans before, or has other credit problems in their past.

This is all psychologically valid. It’s a well-known principle that the best predictor of future behaviour is past behaviour. But how do you make predictions where someone has little or no credit history?

Lenders are looking at new ways to assess potential borrowers www.gotcredit.com, CC BY

This is where psychological tests could come in, and there is some superficial attractiveness here. If – and the word “if” is important – a person’s likelihood to default on a loan was related to their “personality”, and if (again) that was a measurable trait, and if (yet again) that trait could be measured in a way that was impervious to fraud or manipulation, and if – finally – such a questionnaire was asking questions that were something other than the obvious (or the spurious), then they could indeed be a useful tool.

Gaming the system

But there are problems. We learned recently that psychological science is good, but it’s a long way from infallible. In an attempt to replicate key psychological experiments, scientists found that they could substantiate the findings in only about half the studies examined. That may not mean we should lose faith in all psychologists, but it does mean that we should be a little sceptical when we’re told that a particular set of questions can predict loan defaulters.

Indeed, looking at the reported questionnaires, there seem to be a curious mix of questions, including: “I believe others try to do the right thing”, “I believe in human goodness” and “I pay attention to small details”. There may well be links between people’s typical responses to these questions and financial soundness, but the evidence would have to be convincing.

It’s much more likely that, if people want a loan, they will try and game the system. There is a strong chance they would give the answers that they think reflect a better credit trustworthiness: “I definitely pay attention to financial details. I am perhaps, if anything, too cautious.” As opposed to: “Oh, I don’t care, just give me the cash.” Any psychological assessment scheme would have to be robust to such game-playing, perhaps by asking more opaque questions.

Real data

But there’s a more insidious problem. According to the proponents of this approach, the idea is to protect a lender’s assets by assessing “how trustworthy, reliable, emotionally stable and conscientious a customer might be”. First, there is the very real difficulty of assessing these things, as pointed out by, among others, James Daley, of the consumer group Fairer Finance: “If banks think they can psychologically screen bad debt risks, they are deluding themselves.” But, more than this, very many trustworthy, reliable, emotionally stable and conscientious customers find themselves in financial difficulties, often as a result of economic forces entirely outside their control.

Past behaviour is the best predictor of future behaviour. Where there is very little data to go on, it’s then usually the case that people’s behaviour is best explained by looking at the circumstances of their lives. Doing this through personality tests, however, is clearly very tricky.

I am a professional psychologist, and proud to be one. I believe that my profession has much to offer, in the world of mental health and even in the world of politics.

But I also believe that very little of the potential of psychological science is revealed by “personality tests” that purport to address problems that, in truth, are better addressed through other means.

Author: Peter Kinderman, Professor of Clinical Psychology at University of Liverpool

RBA Minutes for September Suggests Slowing Investment Housing

The RBA minutes for the September “no change” decision do not add much to the sum of human knowledge other than they do believe momentum in investment housing may be slowing following the regulatory interventions.

Members noted that the key news internationally over the past month had been developments in the Asian region. The weakening in Chinese economic activity combined with developments in Chinese financial markets had led to sharp declines in global equity prices. So far, this volatility had not impaired the functioning of other financial markets and funding remained readily available to creditworthy borrowers. Moreover, several recent policy measures designed to support activity in China had not yet had their full effect. Economic conditions in the United States and euro area had continued to improve, monetary policies globally remained very stimulatory and lower oil prices would support economic activity in most of Australia’s trading partners. Overall, international economic developments had increased the downside risks to the outlook, but it was too early to assess the extent to which this would materially alter the forecast for GDP growth in Australia’s trading partners to be around average over the next couple of years.

Domestically, the national accounts were expected to show that output growth had been weak in the June quarter, following a strong outcome in the March quarter partly as a result of temporarily lower resource exports. Over the past year, resource exports had grown strongly and further growth was in prospect as the production of liquefied natural gas ramped up. The depreciation of the Australian dollar in response to the significant declines in key commodity prices was also expected to support growth, particularly through a larger contribution from net service exports.

Recent data on investment intentions suggested that mining investment would continue to decline and non-mining business investment would remain subdued in the near term, despite survey measures of aggregate business conditions being above average. However, non-mining business investment was still expected to pick-up over time as a result of the depreciation of the exchange rate over the past year and a further gradual rise in household expenditure.

Members noted that very low interest rates would continue to support growth in dwelling investment and household consumption. There were indications that the measures implemented by APRA had slowed the growth in lending for investment housing. Dwelling prices continued to rise strongly in Sydney, though trends had been more varied across other cities. The Bank was continuing to work with other regulators to assess and contain risks that may arise from the housing market. Prices in most other asset markets had been supported by lower long-term interest rates, while equity prices had moved lower and been more volatile recently, in parallel with developments in global markets.

Although the demand for labour had improved, particularly in service sectors, members noted that spare capacity remained and wage pressures continued to be weak. As a result, domestic cost pressures were likely to remain well contained and offset the expected rise in the prices of tradable items over the next couple of years. Inflation was forecast to remain consistent with the target over the next one to two years.

Given these considerations, the Board judged that it was appropriate to leave the cash rate unchanged. Information about economic and financial conditions would continue to inform the Board’s assessment of the outlook and whether the current stance of policy remained appropriate to foster sustainable growth and inflation consistent with the target.