Economics and Banking – Page 440 – Digital Finance Analytics (DFA) Blog

Housing Finance Up In April Is Investment Driven

The ABS released their Housing Finance Statistics to April 2015 today. The trend estimate for the total value of dwelling finance commitments excluding alterations and additions rose 1.4% to $32,109 m.

Investment housing commitments rose 1.4% and owner occupied housing commitments rose 1.3%. This is a strong result, and ahead of expectations. We suspect investors are bringing purchase decisions forwards ahead of possible anticipated lending tightening later. Further evidence that the dial needs to be turned back.

Looking at the trends, more than half of new loans (excluding refinance were for investment purposes, and the value of refinancing continued to track higher as borrowers move on to the new lower rate offers.

In trend terms, the number of commitments for owner occupied housing finance rose 0.7% in April 2015. In trend terms, the number of commitments for the purchase of new dwellings rose 1.1% and the number of commitments for the purchase of established dwellings rose 0.8%, while the number of commitments for the construction of dwellings fell 0.2%

In original terms, the number of first home buyer commitments as a percentage of total owner occupied housing finance commitments rose to 15.2% in April 2015 from 15.1% in March 2015. However, in NSW it was lower, at 11%, in an environment where investment lending is hot.

However, the true first time buyer picture is more complex with a continued lift in FTB investors, as shown in the DFA adjusted picture. More than 4,000 FTB investors joined the ranks this month, a record, compared with about 7,000 OO FTB. If this continues, we expect investors to overtake OO FTB by the end of the year.

Restoring Trust in Basel IRB Models Will Take Time – Fitch

Greater comparability in capital requirements across EU banks is likely to take time, Fitch Ratings says. Meanwhile, doubts surrounding internal ratings-based (IRB) models are likely to continue to undermine trust in regulatory capital ratios.

The European Banking Authority’s (EBA) consultation on the future of the IRB approach, which closed last month, included proposals for detailed changes to IRB models. Fostering supervisory convergence lies within the EBA’s remit, but to address some of the consistency and comparability issues, legislative changes, particularly to the EU’s Capital Requirements Regulation, will be required. This is likely to take considerable time.

Greater consistency in the way capital ratios are calculated is especially important because almost all the world’s 30 global systemically important banks use IRB models, as do most of the EU’s systemically important banks. Market participants mistrust capital ratios generated using IRB models to calculate risk-weighted assets (RWA) in part because model input variation and definition inconsistencies make meaningful comparison of ratios across banks and countries very difficult.

The Basel Committee on Banking Supervision’s Regulatory Consistency Assessment Programme (RCAP) initiative is making slow progress in reducing RWA variability and there is limited transparency on which banks’ ratios might be overstated. For example, in April 2015, the Committee announced it had agreed to remove just six of around 30 national discretions from Basel II’s capital framework.

The Committee’s reluctance or inability to name the banks whose capital ratios are overstated undermines confidence in the IRB models generally. The Committee’s EU Assessment of Basel III regulations report, published last December under the RCAP, highlighted that the exclusion of sovereigns and other public-sector exposures from the IRB framework, plus liberal risk weights for SME exposures, as permitted in the EU, positively affected the capital ratios of five EU banks. It did not name any banks. We understand that disclosure may be difficult because banks often participate in initiatives voluntarily and the Committee has no legal means to force disclosure.

Unwillingness to name names is not new. In July 2013 the Committee reported on a hypothetical portfolio benchmarking exercise across 32 major international banking groups and found material differences in IRB-calculated RWAs. The names of the outlier banks were not made public. This was also the case in the EBA’s reports, which analysed the consistency of RWA across banks, published in December 2013. A benchmarking exercise of SME and residential mortgages highlighted substantial variations. Naming the banks would be useful for market participants as it could shed some light on the banks’ estimated default probabilities and loss expectations, allowing analysts to adjust reported capital ratios if required.

The Committee’s November 2014 G20 presentation outlined five policy proposals to reduce excessive variability in the IRB approach. We think the most significant initiative is the proposal to introduce some fixed loss given default (LGD) parameters. LGDs, which measure the losses a bank would incur if a borrower defaulted, taking into account mitigating factors such as collateral, are a key input into the IRB models.

The EBA’s discussions on the IRB approach appear to be gaining momentum but its proposed timeline for defining technical standards is set at end-2016. Harmonisation of the definitions of default, LGD, conversion factors, probability of default estimates and the treatment of defaulted assets is essential as a first step towards achieving capital ratio comparability. We think delays to the EBA’s proposed timetable are likely.

What The UK Regulators Are Focussing On Next

Donald Kohn, External Member of the Financial Policy Committee, Bank of England, addressed the Society of Business Economists giving views on some broad priorities for the FPC in coming years. First, how the FPC can continue to build a systematic and disciplined approach to macroprudential policy – to identifying risks and using our powers of direction and recommendation to address them; and second, how the FPC can contribute to fostering safe and resilient market alternatives to bank finance in the UK.

I have been a member of the Committee since its inception as the interim FPC in the spring of 2011. In that time I believe we have accomplished much to make the UK financial system safer and put in place the foundations for continuing that work in the future. We have worked with the Prudential Regulation Authority (PRA) to build the resilience of the UK banking system – especially to build its capital cushion against future shocks – so that it can continue to deliver financial services to the real economy in the face of adverse economic and financial developments, and without requiring further taxpayer support. To this end, we phased in the Basel 3 capital risk-weighted capital requirements as quickly as possible for UK banks and instituted a minimum leverage ratio; there is still some work to be done, but major UK banks are now comfortably ahead of the Basel 3 transition timetable. Greater capital supports growth not only by making crises less likely and less severe, but also because well-capitalized banks have been shown to be more willing to lend.

Last year the FPC and the PRA initiated concurrent capital stress tests across large UK banks and are making these tests a regular part of the capital framework. This was a major innovation and strengthens our ability to be explicit about what we see as the important risks to financial stability in the UK and to test the banks’ resilience to those risks. Last year we tested banks’ resilience against the effects of a substantial rise in UK interest rates and a fall in property prices; this year our stress scenario originates in a major shortfall in growth in the rest of the world. The horizontal comparisons across banks from these tests can be particularly revealing about the relative capital positions, modelling characteristics, and risk management capabilities of each major UK bank.

These tests also importantly increase transparency to the public about the FPC’s view of risks to financial stability, the individual bank’s ability to withstand those risks, and the actions the FPC and PRA are taking in response to the results. In that regard the stress tests are an important new element in the accountability of the FPC and the PRA. I expect the stress test to play a major role in our execution of macroprudential policy in the future and I expect us to continue to develop our ability to use the information we collect to identify threats to financial stability, such as procyclicality of bank risk models, interconnections among banks that may not be evident on the surface, and crowded and correlated positions that make the system vulnerable to particular asset price movements.

The FPC has also identified various risks to financial stability beyond those posed by potential bank credit losses and made recommendations to deal with them. For example, we highlighted the dangers of cyber attack, and the potential for rising house prices to cause borrowers to become so indebted for the purchase of houses such that they would need to cut back sharply on spending should interest rates spike unexpectedly or income be temporarily depressed. In both cases we made recommendations that were implemented to counter the perceived risks. And we worked with the banks to enhance their disclosures and thereby strengthen the ability of their private sector counterparties to monitor and price the riskiness of banks through greater bank transparency – especially around capital risk calculations.

Finally we have put in place much of the basic framework required to operate macroprudential policy on an ongoing basis. We worked with HM Treasury and Parliament to get authority for the tools we need – including powers of direction over capital, leverage and key terms of lending against residential real estate. And we issued policy statements outlining how we might use these powers of direction to sustain financial stability.

As a Committee, we have established good working relationships with the PRA, the Financial Conduct Authority (FCA) and the Monetary Policy Committee (MPC). Macroprudential policy is implemented mostly through the PRA and FCA and they and we need to have a good understanding of what each authority is trying to accomplish and how our actions affect the objectives of the others. The chief executives of the PRA and FCA are both members of the FPC and have provided guidance on how to shape our recommendations to accomplish our objectives. Both macroprudential and monetary policy seek to accomplish their separate objectives by affecting aspects of financial conditions, so it is critical that each committee understand what and how the other intends to operate and can weigh the implications for meeting its objectives. The FPC has been asked to provide an independent voice on financial stability – by the MPC and by Treasury (in help-to-buy) to assess the financial stability implications of their policies. We are not completely finished with establishing the macroprudential framework: we need to complete the capital framework; we have requested powers of direction for buy-to-let lending; and the FPC will always need to be alert to the possibility that preserving financial stability in an evolving financial landscape could require new tools in new areas. But I believe the basic structure is largely in place.

Going forward we will be placing more emphasis on how we use the structure; it is a time of transition for the FPC. Having just begun a new three-year term with the FPC, I would like to use this occasion to look forward, to reflect now on what I hope we can accomplish in the next three years, building on the approach already in place. I will concentrate on two broad challenges: first, how the FPC can continue to build a systematic and disciplined approach to macroprudential policy – to identifying risks and using our powers of direction and recommendation to address them; and second, how the FPC can contribute to fostering safe and resilient market alternatives to bank finance in the UK.

RBA Caused The Bubble – AFR

Strong piece from Chris Joye in the AFR today.

There’s only one party to blame for Australia’s unprecedented house price bubble. And it’s not buyers, vendors, developers, immigrants or local councils restricting new approvals. While they have all contributed to the underlying demand and supply dynamics, the unsustainable price growth across Sydney and Melbourne since January 2013 is squarely the responsibility of the monetary policy mandarins residing in the Reserve Bank of Australia’s Martin Place headquarters.

It is these folks who dismissed our repeated warnings that they were blowing the mother of all bubbles and instead decided that the cheapest mortgage rates in history—enabled by cutting the cash rate a full 100 basis points below its global financial crisis nadir – is the elixir required to maintain “trend” growth. Never mind that this might actually be bad, productivity-destroying growth based on distorted savings and investment decisions that will have to be reversed when the price of money normalises.

And let there be no doubt this bubble is without peer. The dollar value of our homes, mortgage debt and house prices measured relative to incomes, and the share of speculative investors purchasing properties, have never been higher. So as far as valuations and interest rates are concerned, we might as well be exploring the surface of the Sun.

Slashing the cash rate to 2 per cent in May – or about 50 basis points below Australia’s core inflation rate – in the name of centrally planning economic activity is having other deleterious consequences. Setting aside the adverse effects of the absurdly cheap 3.49 per cent fixed and 3.98 per cent variable loan rates now offered, we have banks like Macquarie claiming that the 1.9 per cent interest paid on its market-leading at-call deposit product is “healthy”. Every day I meet retail and institutional savers struggling to figure out how to earn a decent return without assuming unacceptable risks that could decimate their wealth. With the Australian sharemarket down more than 8 per cent from its April highs and major bank stocks off more than 16 per cent, chasing dividend yields is patently not the answer for the defensive part of your portfolio.

Pushing to Build Asia’s Biggest Bank

CEO Budi Gunadi Sadikin wants Indonesia’s Bank Mandiri to be the region’s largest. In this McKinsey interview, he discusses the consumer-banking explosion, the impact of digitization, and the grooming of future leaders.

Indonesia’s Bank Mandiri was formed in the late 1990s in response to the financial crisis that had gripped much of East Asia. Today, the 60 percent government-owned institution is Indonesia’s biggest bank, with much of that growth attributable to chief executive officer Budi Gunadi Sadikin, who joined Bank Mandiri in 2006 to head its retail-banking operations. Since becoming CEO, in 2013, he has continued to focus on digital consumer transactions, spearheading, among other things, efforts to make peer-to-peer money transfers as easy as sending a text message. In this interview, conducted by McKinsey’s Rik Kirkland, Sadikin explains how he’s preparing the next generation of banking leaders to manage the industry’s evolution.

Link to Video

Link to Transcript

RBNZ Issues Consultation On LVR Rules For Auckland Residential Property Investors

The NZ Reserve Bank has published a consultation paper about proposed changes to the rules that banks must follow for high-LVR mortgage loans.

The proposals were announced in the Reserve Bank’s Financial Stability Report released on 13 May 2015. They would mean investors in Auckland property would generally need a 30 percent deposit if they’re borrowing for a property, while home buyers outside Auckland would see increased availability of high-LVR mortgages.

The specific proposals are to:

Restrict property investment residential mortgage loans in the Auckland region at LVRs of greater than 70 percent to 2 percent of total property investment residential mortgage commitments in Auckland.
Retain the existing speed limit of 10 percent for other residential mortgage lending, as a proportion of total non-property investment residential mortgage commitments, in the Auckland region at LVRs above 80 percent.
Increase the speed limit on residential mortgage lending at LVRs above 80 percent outside of Auckland to 15 percent of residential mortgage commitments outside Auckland.

A number of loan categories are exempted from LVR speed limits, and these exemptions will be retained under the proposed policy changes. Specifically, loans that are made as part of Housing New Zealand’s Welcome Home Loan scheme, and loans that are made for the purpose of refinancing an existing mortgage loan, moving house (without increasing borrowing amount), bridging finance or constructing a new dwelling will continue to be exempt from the policy.

The paper also offers further evidence on the different risk profiles of investment versus owner occupied loans in a down turn, including data from experiences in Ireland.

“Residential property investment loans appear to have relatively low default rates during normal economic circumstances. However, the Reserve Bank has looked at evidence from extreme housing downturns during the GFC, and this clearly indicates that default rates can be higher for investor loans than for owner occupiers in severe downturns. For example, as shown in table 1, forecast loss rates on Irish mortgages were nearly twice as high for investors as for owner-occupiers. Similarly, actual arrears rates were about twice as high for investor loans (29.4 percent) than for owner occupied loans (14.8 percent) as at December 2014. Furthermore, studies which have separately estimated default rates by LVR for investor loans and owner occupier loans suggest that investor loans are substantially riskier at any given LVR. The data shows an estimate of default rate based on current LVR. For example, if a loan was initially written at a 70 percent LVR and then prices fell 30 percent, the loan would appear in the chart below as LTV=100. This would have a mildly increased rate of default compared to a low-LVR loan for an owner occupier. But for an investor, the rate of default would be higher, and would have increased more sharply as a result of a given decline in house prices.”

Note: PDH is principal dwelling house, BTL is buy to let. LTV (loan to value ratio) is conceptually the same as LVR, but this dataset uses the current LTV (after the sharp falls in house prices) rather than origination LTV.

The consultation will run until 13 July. The Reserve Bank expects to publish a summary of submissions and final policy position in August, with revised rules taking effect from 1 October.

The Reserve Bank proposes that the policy changes take effect from 1 October 2015. This relatively long notice period is to allow banks to make the necessary systems changes in order to properly classify new lending. There is a risk that a notice period of this length could lead to some Auckland property investors rushing in to beat the policy changes. However, our expectation is that banks will observe the spirit of the proposed restrictions, and will act to curtail lending at LVRs of above 70 percent to Auckland property investors well in advance of 1 October.

Currently, compliance with the LVR policy is measured over a three-month rolling window for banks with monthly lending of over $100m, and over a six-month rolling window for banks with monthly lending of less than $100m. At the time that LVR restrictions were first introduced, all banks were provided with an initial six-month measurement period. This was done to accommodate outstanding pre-approved loans, and recognised the relatively short notice period provided. A longer first measurement period does not appear to be warranted for this change to the restriction, given more than four months’ notice of an intention to change the restriction. Further, the low speed limit for Auckland property investment mortgage lending does not provide much scope to smooth lending over a longer measurement period.

Credit Risk Management – BIS Recommendations

The Bank for International Settlements has published a report from The Joint Forum “Developments in credit risk management across sectors: current practices and recommendations.” The Joint Forum was established in 1996 under the aegis of the Basel Committee on Banking Supervision (BCBS), the International Organization of Securities Commissions (IOSCO) and the International Association of Insurance Supervisors (IAIS) to deal with issues common to/across the banking, securities and insurance sectors, including the regulation of financial conglomerates.

In 2013 the Joint Forum undertook a survey of supervisors and firms in the banking, securities and insurance sectors globally in order to understand the current state of credit risk (CR) management given the significant market and regulatory changes since the financial crisis of 2008. Credit risk is generally defined as the risk that a counterparty will fail to perform fully its financial obligations, and can arise from multiple activities across sectors. For example, CR could arise from the risk of default on a loan or bond obligation, or from the risk of a guarantor, credit enhancement provider or derivative counterparty failing to meet its obligations.

Fifteen supervisors and 23 firms responded to the survey, representing the banking, securities and insurance sectors in Europe, North America and Asia. The surveys were not meant to be a post-mortem of the events leading up to the financial crisis, but rather a means to provide insight into the current supervisory framework around credit risk and the state of CR management at the firms, as well as implications for the supervisory and regulatory treatments of credit risk. The survey aimed to update previous Joint Forum work, most recently a 2006 paper, and used that date as the benchmark when asking about changes. The survey asked questions regarding:

products posing challenges to CR management
new credit risk transfer tools
market developments and regulatory/statutory changes affecting CR management and the resulting changes in firm CR management practices
changes in key operations, risk management, internal control and governance frameworks with respect to CR management
changes in the use of models to aggregate credit risk
changes in supervision of CR management
changes in collateral risk

Based on the analysis of the responses from the supervisor and firm surveys and subsequent discussions with firms, the following themes emerged. Also detailed below are recommendations for consideration by supervisors.

1. Propelled by the experience of 2008 and by regulators, firms have improved their management of credit risk in areas such as governance and risk reporting. Risk aggregation has also become more sophisticated since the financial crisis. Regulatory requirements such as the Basel framework and stress testing have been one driver of the modelling enhancements. Firms highlighted increased reliance upon stress testing using their internal models. Against this background, some supervisors cautioned that there is a risk that some credit risk management or regulatory capital models may not adequately capture risk-taking.

Recommendation 1: Supervisors should be cautious against over-reliance on internal models for credit risk management and regulatory capital. Where appropriate, simple measures could be evaluated in conjunction with sophisticated modelling to provide a more complete picture.

2. In the current low interest rate environment, there is a “search for yield” by some firms across sectors. This manifests itself in an increase in firms’ risk tolerance in a variety of different products such as auto lending by banks, increasingly risky assets in the investment portfolio for life insurers, and the syndicated leveraged loan market. Lower-quality assets with lower-rated counterparties could generate more credit risk.

Recommendation 2: With the current low interest rate environment possibly generating a “search for yield” through a variety of mechanisms, supervisors should be cognisant of the growth of such risk-taking behaviours and the resulting need for firms to have appropriate risk management processes.

3. Over-the-counter (OTC) derivatives, both cleared and uncleared, are a significant source of credit risk at financial institutions across sectors. As a result of both regulation and firm practices, firms are increasing the amount of initial margin they collect from trading counterparties for uncleared trades, and central counterparties (CCPs) in many jurisdictions are implementing risk management standards intended to ensure that they collect adequate financial resources from their member firms.

Recommendation 3: Supervisors should be aware of the growing need for high-quality liquid collateral to meet margin requirements for OTC derivatives sectors, and if any issues arise in this regard they should respond appropriately. The Parent Committees should consider taking appropriate steps to promote the monitoring and evaluation of the availability of such collateral in their future work while also considering the objective of reducing systemic risk and promoting central clearing through collateralisation of counterparty credit risk exposures that stems from non-centrally cleared OTC derivatives.

4. The increase in central clearing of OTC derivatives has clear benefits by reducing risk to individual counterparties, as articulated by both supervisors and firms. The consequence of this is to shift and concentrate credit risk to CCPs. Many firms have responded by increasing analysis of and reporting on CCPs.

Recommendation 4: Supervisors should consider whether firms are accurately capturing central counterparty exposures as part of their credit risk management.

Bank Profits Were $35.2 billion to March 2015

APRA released their quarterly ADI performance statistics to end March 2015 today. Over the year ending 31 March 2015, ADIs recorded net profit after tax of $35.2 billion. This is an increase of $3.0 billion (9.4 per cent) on the year ending 31 March 2014.

The most telling data relates to the relationship between loans and capital. We look at the big four, who dominate the market. Home loans continue to grow as a proportion of total assets. The major banks have $1.42 trillion of housing, out of total assets of $2.27 trillion – 62.4% of all loans are housing related. Now, because of the generous “risk weighted” calculation, whilst the tier 1 capital ratio has moved higher for the 4 big banks, to 10.8%, if you look at shareholder funds (not risk weight adjusted) we see that the ratio of shareholder funds to total loans is lower now than its been for some time, and is continuing to fall. So the banks are using less of their own funds to grow their balance sheet and hold less in reserve for a rainy day. This is why there is a discussion about the right increases in capital weightings.

More generally, at 31 March 2015, the total assets of ADIs were $4.5 trillion, an increase of $519.9 billion (13.1 per cent) over the year. The total capital base of ADIs was $228.1 billion at 31 March 2015 and risk-weighted assets were $1.8 trillion at that date. The capital adequacy ratio for all ADIs was 12.7 per cent.

major banks had total assets of $3.50 trillion as at 31 March 2015, 78.0 per cent of the industry total;
other domestic banks had total assets of $397.7 billion, 8.9 per cent of the industry total;
foreign subsidiary banks had total assets of $115.1 billion, 2.6 per cent of the industry total; and
foreign branch banks had total assets of $404.1 billion, 9.0 per cent of the industry total.

The remainder of the industry total assets were held by building societies, credit unions and other ADIs, with $68.0 billion, 1.5 per cent of the industry total.

For all ADIs*, as at 31 March 2015:

Gross loans and advances were $2.80 trillion. This is an increase of $71.6 billion (2.6 per cent) on 31 December 2014 and an increase of $227.2 billion (8.8 per cent) on 31 March 2014.
Total liabilities were $4.22 trillion. This is an increase of $137.8 billion (3.4 per cent) on 31 December 2014 and an increase $504.3 billion (13.6 per cent) on 31 March 2014.
Total deposits were $2.46 trillion. This is an increase of $50.9 billion (2.1 per cent) on 31 December 2014 and an increase $196.1 billion (8.7 per cent) on 31 March 2014.
The net loans to deposits ratio was 112.6 per cent for the year ending 31 March 2015, an increase from 111.7 per cent for the year ending 31 March 2014.

Capital adequacy

The Common Equity Tier 1 capital ratio for all ADIs (excluding foreign branch banks and ‘other ADIs’) was 9.2 per cent as at 31 March 2015. This is an increase on 31 December 2014 (9.1 per cent) and 31 March 2014 (9.1 per cent).

The Common Equity Tier 1 capital ratio as at 31 March 2015 for each segment was:

8.8 per cent for major banks (an increase from 8.7 per cent at 31 December 2014);
9.6 per cent for other domestic banks (an increase from 9.3 per cent);
15.1 per cent for foreign subsidiary banks (unchanged 31 December 2014);
16.9 per cent for building societies (a decrease from 17.1 per cent); and
15.7 per cent for credit unions (unchanged 31 December 2014).

The Tier 1 capital ratio for all ADIs (excluding foreign branch banks and ‘other ADIs’) was 11.0 per cent as at 31 March 2015. This is an increase on 31 December 2014 (10.8 per cent) and 31 March 2014 (10.8 per cent). The Tier 1 capital ratio as at 31 March 2015 for each segment was:

10.8 per cent for major banks (an increase from 10.6 per cent at 31 December 2014);
10.9 per cent for other domestic banks (an increase from 10.6 per cent);
15.1 per cent for foreign subsidiary banks (a decrease from 15.1 per cent);
16.9 per cent for building societies (a decrease from 17.1 per cent); and
15.9 per cent for credit unions (an increase from 15.8 per cent).

Impaired assets and past due items were $27.8 billion, a decrease of $5.9 billion (17.5 per cent) over the year. Total provisions were $14.4 billion, a decrease of $5.8 billion (28.9 per cent) over the year.

Impaired facilities were $15.2 billion as at 31 March 2015. This is a decrease of $0.7 billion (4.2 per cent) on 31 December 2014 and a decrease of $6.4 billion (29.7 per cent) on 31 March 2014. Impaired facilities as a proportion of total loans and advances was 0.5 per cent as at 31 March 2015. This is a decrease from 31 December 2014 (0.6 per cent) and a decrease from 31 March 2014 (0.8 per cent).

Past due items were $12.5 billion as at 31 March 2015. This is an increase of $1.1 billion (9.6 per cent) on 31 December 2014 and an increase of $534 million (4.4 per cent) on 31 March 2014. Total provisions held were $14.4 billion as at 31 March 2015. This is a decrease of $0.6 billion (4.0 per cent) on 31 December 2014 and a decrease of $5.8 billion (28.9 per cent) on 31 March 2014.

Cash Rate Unchanged Today

At its meeting today, the Board decided to leave the cash rate unchanged at 2.0 per cent.

The global economy is expanding at a moderate pace, but some key commodity prices are much lower than a year ago. This trend appears largely to reflect increased supply, including from Australia. Australia’s terms of trade are falling nonetheless.

The Federal Reserve is expected to start increasing its policy rate later this year, but some other major central banks are continuing to ease policy. Hence, global financial conditions remain very accommodative. Despite some increases in bond yields recently, long-term borrowing rates for sovereigns and creditworthy private borrowers remain remarkably low.

In Australia, the available information suggests the economy has continued to grow, but at a rate somewhat below its longer-term average. Household spending has improved, including a large rise in dwelling construction, and exports are rising. But a key drag on private demand is weakness in business capital expenditure in both the mining and non-mining sectors and this is likely to persist over the coming year. Public spending is also scheduled to be subdued. Overall, the economy is likely to be operating with a degree of spare capacity for some time yet. With very slow growth in labour costs, inflation is forecast to remain consistent with the target over the next one to two years, even with a lower exchange rate.

In such circumstances, monetary policy needs to be accommodative. Low interest rates are acting to support borrowing and spending. Credit is recording moderate growth overall, with stronger lending to businesses and growth in lending to the housing market broadly steady over recent months. Dwelling prices continue to rise strongly in Sydney, though trends have been more varied in a number of other cities. The Bank is working with other regulators to assess and contain risks that may arise from the housing market. In other asset markets, prices for equities and commercial property have been supported by lower long-term interest rates.

The Australian dollar has declined noticeably against a rising US dollar over the past year, though less so against a basket of currencies. Further depreciation seems both likely and necessary, particularly given the significant declines in key commodity prices.

Having eased monetary policy last month, the Board today judged that leaving the cash rate unchanged was appropriate at this meeting. Information on economic and financial conditions to be received over the period ahead will inform the Board’s assessment of the outlook and hence whether the current stance of policy will most effectively foster sustainable growth and inflation consistent with the target.

ASIC Welcomes Improved Credit Card Travel Insurance Disclosure

Following an ASIC review, credit card issuers and insurers have made improvements to disclosure for travel insurance provided through credit cards.

ASIC’s review of 17 credit card brands, issued by a range of credit card issuers, including the big four Australian banks, followed complaints made to ASIC from the general public and disputes data published by the Financial Ombudsman Service (FOS). These complaints included uncertainty around who was covered by the policy, the extent of exclusions and eligibility requirements.

Following the review, the credit card issuers and their insurers have agreed to make the following improvements:

clarify when the insurance cover is ‘activated,’ particularly where a minimum spend threshold needs to be met to activate the insurance cover
clarify if and when the use of reward points to pay for travel costs will activate the insurance cover
clarify whether supplementary cardholders can benefit from the policy
provide clearer and more prominent information about the documentation needed to make a claim.

Credit card issuers have also made improvements to their websites by making it easier to locate the insurance policy terms and conditions, and are now including direct links to the terms and conditions where none were provided previously.

Credit card issuers that also distribute standalone travel insurance have also made changes to their websites to clearly distinguish the standalone travel insurance policy from the credit card policy so that consumers do not mistakenly rely on the wrong policy.

ASIC’s Deputy Chairman Peter Kell, said, ‘As travel insurance may not be at the forefront of the consumer’s mind when obtaining a credit card, improved disclosure will help consumers understand and claim.’

‘Having travel insurance is essential for those heading on an overseas trip, to provide cover for when things go wrong. Credit card issuers and insurers must clearly set out what is and what is not covered by a policy, so that consumers can work out if they are adequately covered.’

Background

The credit card brands reviewed by ASIC included the big four Australian banks, as well as smaller Authorised Deposit-taking Institutions (ADI), and other non-ADI credit card providers. Insurance was provided to the credit card issuers by three major insurers.

Credit card travel insurance is insurance that is available to credit card holders, usually with ‘premium’ credit cards that offer extra benefits with the credit card. It is often described as ‘complimentary’ travel insurance as it is offered as a feature of the credit card with no additional fee, although credit cards that provide ‘complimentary’ travel insurance typically have an annual card fee (ranging from $87 to over $500 per year).

ASIC’s review did not include standalone travel insurance. Standalone and credit card travel insurance can differ, so consumers should consider which product is suitable for their travel needs so that they are adequately covered. Consumers with specific needs (such as pre-existing medical conditions) are especially encouraged to review their insurance coverage.

Standalone travel insurance generally requires the consumer to apply for and pay a premium. Credit card travel insurance requires a minimum spend on the credit card for the cover to be activated. Of the policies reviewed, more than half required the full airfare for travel to be paid on the credit card, while less than half of the policies required a minimum spend of between $250 and $1,000 of prepaid travel costs on the card (such as travel ticket or accommodation costs).