The Australian Prudential Regulation Authority (APRA) has today formally commenced an investigation into possible breaches of the Banking Act 1959 by Westpac Banking Corporation (Westpac).
APRA will focus on the conduct that led to the matters alleged last month by AUSTRAC, as well as the bank’s actions to rectify and remediate the issues after they were identified. The investigation will examine whether Westpac, its directors and/or its senior managers breached the Banking Act – including the Banking Executive Accountability Regime (BEAR) – or contravened APRA’s prudential standards.
Given the magnitude and nature of the issues alleged by AUSTRAC, APRA is aiming to ensure that fundamental deficiencies in Westpac’s risk management framework are identified and addressed and that Westpac and those responsible are held accountable as appropriate.
In addition, APRA will:
impose an immediate increase in Westpac’s capital requirements of $500 million, to reflect the heightened operational risk profile of the bank. This brings the total operational risk capital add-ons that Westpac is required to hold to $1 billion, following the increase announced by APRA in July 2019; and
initiate an extensive review program focused on Westpac’s risk governance. The review program will include risk management, accountability, remuneration and culture. An element of the review will be an examination of the steps Westpac has been taking to strengthen risk governance in recent years, including through its self-assessment.
APRA Deputy Chair Mr John Lonsdale said: “AUSTRAC’s statement of
claim in relation to Westpac contains serious allegations that question the
prudential standing of Australia’s second largest bank.
“While Westpac is financially sound, there are potentially substantial gaps in
risk governance that need to be closed.
“Given the nature of the matters raised by AUSTRAC, the number of alleged
breaches and the period of time over which they occurred, this will necessarily
be an extensive and potentially lengthy investigation.”
The investigation affords APRA the opportunity to exercise legal powers that
have been expanded and strengthened since 2017’s CBA Prudential Inquiry,
including enhanced investigative powers and the implementation of the BEAR in
2018.
APRA will conduct its investigation simultaneously with an investigation by the
Australian Securities and Investments Commission (ASIC), as well as AUSTRAC’s
legal proceedings, with each agency cooperating where appropriate.
The scope of APRA’s investigation is below.
Attachment – Scope of
APRA’s investigation into Westpac
The prudential matters that are the subject of APRA’s investigation are:
Whether Westpac, its directors, and/or its senior managers have contravened the Banking Act 1959 and the prudential standards by engaging in, and in the way they responded to, the conduct set out in and otherwise related to the AUSTRAC proceedings.
In considering possible contraventions of the Act and the prudential standards, the investigation will examine whether:
(a) Westpac’s governance, control and risk management framework was adequate; and appropriately implemented;
(b) Westpac’s accountability and remuneration arrangements were adequate, and appropriately implemented to effectively manage non-financial risks;
(c) there has been a failure to comply with accountability obligations under the Banking Executive Accountability Regime;
(d) there has been a failure to comply with the requirements of the prudential standards including Prudential Standard CPS 510: Governance, Prudential Standard CPS 520: Fit and Proper, and Prudential Standard CPS 220: Risk Management; and
(e) there was a failure to promptly notify APRA of any significant breaches and/or a breach of accountability obligations.
MYEFO has been released, and as expected the Government is still forecasting a surplus, this year down from $7.1 billion to $5 billion, but still a surplus for the first time in 12 years. The surplus for 2020/21 is now seen at $6.1 billion instead of $11 billion as previously estimated. Tax receipts are down 32.6b over 4 years.
Wage growth forecasts were reduced, but are still too optimistic, while the unemployment rate was expected to be higher than hoped at 5.25 per cent, rather than five per cent for this financial year and next.
Treasury still is sticking with a 5% employment threshold below which inflation is expected to rise, while the RBA has this at 4.5%.
The forecast for economic growth has reduced from 2.75 per cent, to 2.25 per cent. The downgrade to growth was blamed on weak momentum in the global economy, as well as domestic challenges such as the effects of drought and bushfires. The drought in Australia that had already taken a quarter of a percentage point off GDP growth and reduced farm output by a significant amount over the last two years. Growth is then expected to strengthen to 2¾ per cent in 2020-21.
They have shrunk the expected surpluses over the next four years due to a downgrade of tax receipt expectations, with total receipts revised down by $3 billion in 2019/20 and by $32.6 billion over the four years to 2022/23. GST to the states is down nearly 2 billion in the next year, due to weaker activity.
Australia’s interest bill on its debt will fall from $19 billion last year to $14.5 billion (thanks to lower interest rates). Over the next four years this amounts to $13.5 billion savings.
While the
mid-year update included a $623.9 million aged care package, there were
no other new major spending measures to lift economic growth. This will
keep the pressure on the Reserve Bank of Australia to reduce the cash
rate even further next year.
In essence, the Treasury is leaving the action to the Reserve Bank, further confirmation we are likely to get more cuts next year.
But they are also counting on stronger house prices leading to a positive wealth effect.
After a recent period of significant falls in housing prices from mid-late 2017 to mid-2019, the established housing market has stabilised. In July 2019, combined capital city housing prices rose for the first time in almost two years, and this has continued in recent months. Although increases have been largest in Sydney and Melbourne, increases have now spread to all cities except Darwin. Overall, combined capital city housing prices are now almost 6 per cent higher than their recent trough in June, although they are still around 5 per cent lower than their peak in September 2017.
This increase in housing prices is expected to support the outlook for household consumption, particularly as corresponding increases in housing turnover should see a pick-up in spending on household goods such as furnishings. More broadly, continued rises in housing prices should provide a boost to confidence and household wealth, as well as increasing borrowing capacity given changes in collateral.
Ownership transfer costs — various fees incurred when fixed assets such as dwellings are sold (including legal and real estate agent fees, stamp duty, and other government charges) — were negatively affected by low rates of housing market turnover in 2018-19 and detracted from real GDP growth. Ownership transfer costs rose by 4.5 per cent in the September quarter 2019 and a further increase supported by stronger housing turnover and prices should contribute to economic growth over the forecast period.
Movements in housing prices impact dwelling investment activity through changes to expected returns to residential construction. However, recent price gains will affect new dwelling investment with a delay. This is because planning and approval processes take time to work their way through into new construction. On average, depending on the type of dwelling, it can take around 2 to 5 months for new dwellings to commence following approval, and a further 6 to 20 months for activity to be completed. High-density dwellings have the longest approval and construction times, and houses the shortest on average.
New dwelling approvals have trended down since late 2017, with the total number of building approvals over the year to October 2019 down by more than 20 per cent from the preceding 12 months and below the 10-year average. The falls in building approvals have been particularly stark in medium-high density dwellings, which also have the longest lag between approval and completion. This means that further moderation in dwelling investment is likely over the forecast period (Chart A). This weakness should be partly offset by a solid pipeline of housing construction work yet to be done.
The other area of sensitivity is the iron ore price and commodity prices in general.
Iron ore spot prices increased sharply in the first half of 2019, mainly due to supply issues in Australia and Brazil, and stronger-than-expected demand from China. Iron ore prices peaked in early July at almost US$120 per tonne free-on-board (FOB). Prices have since fallen, but remain above the price assumed at PEFO. The decline in the price has mainly been due to uncertainty about demand from Chinese steel mills and the recovery in supply. As such, prudent assumptions have been retained and the iron ore spot price is assumed to decline to reach US$55 per tonne FOB by the end of the June quarter 2020. This is one quarter later than was assumed at PEFO.
Coal prices have fallen since PEFO. Metallurgical coal prices have fallen faster and further than had been assumed at PEFO, with the spot price below US$150 per tonne FOB since October 2019. The fall in the spot price is due in large part to uncertainty about demand from Chinese steel mills and policy changes in China. The metallurgical coal price is assumed to remain around recent levels of US$134 per tonne FOB over the forecast period. This is lower than the PEFO assumption, which was for the price to fall to US$150 per tonne FOB by the end of the March quarter 2020.
After reaching a peak of just over US$125 per tonne FOB in mid-2018, thermal coal prices have trended lower, mainly due to increases in seaborne supply and softer global demand. The thermal coal price is assumed to remain around recent levels of US$64 per tonne FOB over the forecast period, below the PEFO assumption of US$91 per tonne FOB.
If the iron ore price were to fall immediately to US$55 per tonne FOB, two quarters earlier than assumed, nominal GDP could be around $7.5 billion lower than forecast in 2019-20 and $0.3 billion lower in 2020-21. This would have a negative flow-on impact to company tax receipts estimated at around $0.8 billion in 2019-20 and $1.1 billion in 2020-21.
By contrast, if the iron ore price remained elevated for two quarters longer than currently assumed, before falling immediately to US$55 per tonne FOB, nominal GDP could be around $6.4 billion higher than forecast in 2019-20 and $1.0 billion higher in 2020-21. This would have a flow-on impact to company tax receipts estimated at around $0.5 billion in 2019-20 and $1.3 billion in 2020-21.
The actual impact on company tax receipts may vary due to timing of tax collections and the availability of tax losses.
Domain released their preliminary results for today. This is the last report from them until end January 2020. In addition, they did not send the detailed breakdown they normally do.
So I generated my own chart to show the results.
The current sold over listed ratio is significantly lower than their calculated clearance rates.
The IMF published their latest preliminary findings at the end of an official IMF staff visit (or ‘mission’) to Australia. They recommend preparing for risk from a rapid housing credit upswing, by introducing loan-to-value and debt-to-income limits, and possibly a sectoral countercyclical capital buffer targeting housing exposures. Plus transitioning from a housing transfer stamp duty to a general land tax to improve efficiency by easing entry into the housing market and promoting labor mobility, while providing a more stable revenue source for the States. Such reforms could be complemented by reducing structural incentives for leveraged investment by households, including in residential real estate.
Economic growth has gradually improved
from the lows in the second half of 2018 but has remained below
potential.
Growth has been supported by public spending, including on infrastructure,
and net exports, which have held up well despite headwinds from global
policy uncertainty and China’s economic slowdown. However, domestic private
demand has remained weak amid subdued confidence, with a widening output
gap. In addition, the ongoing drought has been a drag on economic growth.
Wage growth has remained sluggish, reflecting persistent labor market
slack, and inflation and measures of inflation expectations have dropped to
below Australia’s 2 to 3 percent target range. Following a marked
adjustment over the past two years, housing prices have started to recover,
particularly in Sydney and Melbourne.
Growth should continue to recover at a gradual pace.
Following growth of about 1.8 percent in 2019, the economy is expected to
expand by 2.2 percent in 2020.Private domestic demand is
expected to recover slowly, supported by monetary policy easing and the
personal income tax cuts. An incipient recovery in mining investment is
also expected to contribute to growth. In addition, the house price
recovery will likely reduce the drag on consumption from earlier, negative
wealth effects. That said, residential and non-mining business investment
are expected to take longer to recover. Over the medium term, growth is
expected to reach the mission’s estimate of potential growth of about 2½
percent, supported by infrastructure spending and structural reforms. With
continued labor market slack, underlying inflation will likely stay below
the target range until 2021.
Risks to the outlook remain tilted to the downside.
· On the external side, Australia is especially exposed to a
deeper-than-expected downturn in China through exports of commodities and
services. A renewed escalation of U.S.-China trade tensions could further
impair global business sentiment, discouraging investment in Australia. A
sharp tightening of global financial conditions could squeeze Australian
banks’ wholesale funding and raise borrowing costs in the economy.
· On the domestic side, private consumption could be weaker should a
cooling in labor markets squeeze household income. Adverse weather
conditions, including a more-severe-than-expected drought, could further
disrupt agriculture, dampening growth. On the upside, looser financial
conditions could re-accelerate asset price inflation, boosting private
consumption but also adding to medium-term vulnerabilities given high
household debt levels.
With below-potential growth, weakening inflation expectations, and
continued downside risks, the macroeconomic policy mix should remain
accommodative.
· Monetary policy has been appropriately accommodative, and continued
data-dependent easing will be helpful to support employment growth,
inflation and inflation expectations.
· The consolidated fiscal stance is appropriately expansionary for
FY2019/20. Fiscal policy will be supportive for demand via reductions in
personal income and small business corporate taxes, additional
infrastructure spending, and the government’s announced support measures
for small- and medium-sized enterprises (SMEs). However, fiscal policy
aggregated across all levels of government will be contractionary in
FY2020/21, as state-level infrastructure investment is expected to decline.[1] States should reconsider this and attempt to at least maintain their
current level of infrastructure spending as a share of GDP to continue
addressing infrastructure gaps and supporting aggregate demand.
The authorities should be ready for a coordinated response if downside
risks materialize.
Australia has substantial fiscal space it can use if needed. In addition to
letting automatic stabilizers operate, Commonwealth and state governments
should be prepared to enact temporary measures such as buttressing
infrastructure spending, including maintenance, and introducing tax breaks
for SMEs, bonuses for retraining and education, or cash transfers to
households. In case stimulus is necessary, the implementation of budget
repair should be delayed, as permitted under the Commonwealth government’s
medium-term fiscal strategy. In addition, unconventional monetary policy
measures such as quantitative easing may become necessary in such a
scenario as the cash rate is already close to the effective lower bound.
The macroprudential policy stance remains appropriate but should stand
ready to tighten in case of increasing financial risks.
Australian banks remain adequately capitalized and profitable, but
vulnerable to high exposure to residential mortgage lending and dependent
on wholesale funding. While the risk structure of mortgage loans has been
significantly improved, renewed overheating of housing markets and a fast
pick-up in mortgage lending remain risks in a low-interest-rate
environment. The Australian Prudential Regulation Authority (APRA) should
continue to expand and improve the readiness of the macroprudential
toolkit. This should include preparations, for potential use in the event
of a rapid housing credit upswing, for introducing loan-to-value and
debt-to-income limits, and possibly a sectoral countercyclical capital
buffer targeting housing exposures.
Strong reform efforts to bolster the resilience of the financial sector
should continue.
The mission supports the authorities’ plan to further enhance banks’
capital framework, including strengthening their loss-absorbing capacity
and resilience. In addition, encouraging banks to further lengthen the
maturity structure of their wholesale funding would help mitigate ongoing
structural liquidity risks. The authorities’ commitment to implement the
recommendations made by the Hayne Royal Commission by end-2020 is welcome.
The improvement in lending standards further enhances financial sector
resilience, and reducing the uncertainty in the enforcement of responsible
lending obligations would prevent excessive risk aversion in the provision
of credit. The authorities should implement the APRA Capability Review’s
recommendations to strengthen APRA’s resources and operational flexibility,
enhance its supervisory approach in assessing banks’ governance and risk
culture, and strengthen enforcement efforts. In addition, reinforcing
financial crisis management arrangements and strengthening the AML/CFT
regime should remain priorities, in line with the findings of the 2018
Financial Sector Assessment Program (FSAP).
Housing supply reforms remain critical for restoring affordability.
More efficient long-term planning, zoning, and local government reform that
promote housing supply growth, along with a particular focus on
infrastructure development, including through “City Deals”, should help
meet growing demand for housing.
Efforts to boost private investment and innovation should be stepped
up.
Non-mining business investment, including R&D, has been sluggish,
contributing to lower productivity growth. Reducing domestic policy
uncertainty, supporting SMEs’ access to finance, and accelerating
structural reforms would help to improve the investment environment.
Building on reforms in the 2015 Harper Review, Australia can further
improve product market regulations, including by simplifying business
processes through the work of the Deregulation Taskforce. The ongoing
policy priority on skills and education reforms is welcome to improve the
environment for innovation, and consideration should be given to faster
implementation of the recommended measures in the Australia 2030: Prosperity through Innovation report. Government
initiatives to relieve SME financing constraints are welcome, including the
Australian Business Securitization Fund and the Australian Business Growth
Fund. Incentives for banks to lend more to businesses, including through
reducing the concentration in mortgages, can help support business
investment, as can the promotion of venture capital. Supporting new
investment through tax measures, possibly including targeted investment
allowances, as well as further improving the effectiveness of government
R&D support for younger firms, would also be helpful.
Australia’s continued efforts supporting international cooperation are
welcome.
The mission welcomes the authorities’ support to enhance the effectiveness
of the WTO and pursuit of the Regional Comprehensive Economic Partnership
(RCEP), which aims to liberalize trade and improve quality and
environmental standards and labor mobility throughout the Asia and Pacific
region. Developing a national, integrated approach to energy policy and
climate change mitigation, and clarifying how existing and new instruments
can be employed to meet the Paris Agreement goals, would help reduce policy
uncertainty and catalyze environmentally-friendly investment in the power
sector and the broader economy.
Further reforms can help to promote female labor market participation
and reduce youth underemployment.
There is scope to increase full-time employment for Australian women and
addressing persistently high underemployment particularly among youth. The
2018 Child Care Subsidy program and the forthcoming Mid-Career Checkpoint
program are expected to support women in work. This could lay the
foundation for a broader review of the combination of taxes, transfers, and
childcare support to reduce disincentives for female labor force
participation. Pursuing ongoing reforms in vocational training can help
reduce youth underemployment.
Broad fiscal reforms would help promote efficiency and inclusiveness.
Australia should continue to reduce distortions in its tax system to
promote economic efficiency and in doing so should be mindful of
distributional consequences considering income inequality. Recent reforms
in personal and corporate income taxes have helped to improve the
efficiency of the tax system. A further shift from direct to indirect taxes
could be made by broadening the goods and services tax (GST) base and
reducing the statutory corporate income tax rate for large firms. The
impact of these reforms could be made less regressive for households
through targeted cash transfers. Transitioning from a housing transfer
stamp duty to a general land tax would improve efficiency by easing entry
into the housing market and promoting labor mobility, while providing a
more stable revenue source for the States. Such reforms could be
complemented by reducing structural incentives for leveraged investment by
households, including in residential real estate.
The mission would like to thank the authorities and counterparts in the
private sector, think tanks, and other organizations for frank and
engaging discussions.
The
Conservatives are set to win an overall majority of 86 in the general
election, according to an exit poll for the BBC, ITV and Sky News.
The
survey taken at UK polling stations suggests the Tories will get 368
MPs – 50 more than at the 2017 election – when all the results have been
counted.
Labour would get 191, the Lib Dems 13, the Brexit Party none and the SNP 55.
The Green Party will still have one MP and Plaid Cymru will lose one seat for a total of three, the survey suggests.
The first general election results are due before midnight (UK time), with the final total expected to be known by Friday lunchtime.
In
the exit poll, voters are asked to fill in a mock ballot paper as they
leave the polling station indicating how they have just voted.
The exit poll was conducted by Ipsos Mori at 144 polling stations, with 22,790 interviews.
Exit
polls have proved to be very accurate in recent years. In 2017 it
correctly predicted a hung Parliament, with no overall winner, and in
2015 it predicted the Conservatives would be the largest party.
