After a three-year cycle of industry comment, review and revision, May 1 marks the adoption of a new National Construction Code (NCC). Overseen by the Australian Building Codes Board
(ABCB), the code is the nation’s defining operational document of
building regulatory provisions, standards and performance levels. Its mission statement
is to provide the minimum necessary requirements for safety and health,
amenity, accessibility and sustainability in the design, construction,
performance and liveability of new buildings.
Widespread use of non-compliant building materials, and specifically
combustible cladding, has been foremost in the minds of regulators.
Three years ago, after the Lacrosse fire in Melbourne Docklands, the ABCB amended the existing code. This crucial revision has been carried forward into the new code.
Investigations into the highly publicised, structurally unsound Opal
tower in Sydney found the design – namely the connections between the
beams and the columns on level 10 and level 4, the two floors with
significant damage — indicated “factors of safety lower than required by standards”.
Just two months ago when the new code was released in preview form,
we learnt that a significant number of approved CodeMarks used to
certify compliance for a range of building materials are under recall.
The Australian Institute of Building Surveyors posted urgent advice:
“We are in the process of making enquiries with the ABCB and Building
Ministers to find out when they were made aware that these certificates
were withdrawn and what the implications for members will be […] and
owners of properties that have been constructed using these products.”
Fire safety concerns are driving changes in the code. The new NCC has
extended the provision of fire sprinklers to lower-rise residential
buildings, generally 4-8 storeys. However, non-sprinkler protection is
still permitted where other fire safety measures meet the deemed minimum
acceptable standard.
Comfort and health
The code includes new heating and cooling load limits. However,
requirements for overall residential energy efficiency have not been
increased. The 6-star minimum introduced in the 2010 NCC remains.
The code has just begun to respond to the problem of dwellings that are being constructed to comply but which perform very poorly in the peaks of summer and winter and against international minimum standards.
The change in the code deals with only the very worst houses – no more
than 5% of designs with the highest heating loads and 5% with the
highest cooling loads.
It’s a concern that the climate files used to assess housing thermal
performance use 40-year-old BOM data. Off the back of record hot and dry
summers, readers in such places as Adelaide and Perth might be
surprised to learn the ABCB designates their climate as “the mildest region”.
A building that is not six stars can be built under the new code. In fact, it may have no stars!
Lamentably, there has been no national evidenced-based evaluation
(let alone international comparison) of the measured effectiveness of
the 6-star standard. CSIRO did carry out a limited evaluation of the older 5-star standard (dating back to 2005). An evaluation for commercial buildings is available from the ABCB website.
Accessibility and liveability
Volume 2 of the NCC covers housing and here it is business as usual, although the ABCB has released an options paper on proposals that might be part of future codes. Accessible housing is treated as a discrete project. Advocates for code changes in this area, such as the Australian Network for Universal Housing Design (ANUHD), have written to the ABCB expressing disappointment.
A Regulation Impact Assessment on the costs and benefits of applying a
minimum accessibility standard to all new housing has yet to see the
light of day.
These proposals or “options” talk of silver and gold levels of design
(there is no third-prize bronze option for liveable housing). Codes of
good practice in accessible design have for decades recommended such
measures.
It’s all about performance
Some argue that deep-seated problems have developed from a code that
favours innovation and cost reduction over consumer protection. There is
a cloud over the industry and over some provisions – or should we say
safeguards and compliance?
Safety should not be a matter of good luck or depend on an accidental
selection of a particular building material or system. New buildings
born of this new code are hardly likely to differ measurably from their
troublesome older siblings. The anxiety for insurers, regulators and
building owners continues.
The National Construction Code adopts a performance-based approach to
building regulation, but don’t expect the sales consultant to know the U-value
of the windows, whether the doors are hung to allow for disabled
access, or if the cleat on your tie beam is to Australian standards.
Anyone can propose changes to the NCC. The form is on the website. Consultants will be hired to model costs and benefits.
Regulatory reforms introduced through the ABCB over the past 20 years have produced an estimated annual national economic benefit of A$1.1 billion.
That’s a lot of money! The owners of failing residential buildings
could do with some of that cash to cover losses and legal fees.
Author: Dr Timothy O’Leary, Lecturer in Construction and Property, University of Melbourne
Harry, the world renowned economist, has an interesting perspective on what’s ahead. I always find his views stimulating (even if sometimes I disagree).
I promised to advise the arrangements for Harry’s visit. Today I can release the schedule.
Auckland: Wednesday, April 24th
Perth: Friday, April 26th
Adelaide: Sunday, April 28th
Melbourne: Tuesday, April 30th
Sydney:
Wednesday, May 1st
Brisbane: Thursday, May 2nd
Normally tickets to these events are on sale for $97, but I am able to offer up to two complimentary tickets each to DFA followers as a thank you for supporting us.
But be warned, I’ve only been given a total of 50 complimentary tickets to give away and once they’re gone, they’re gone.
Simply click here to secure your complimentary tickets:
Want to know more about Harry’s sunspot theory – now’s your chance?
NOTE: DFA is not endorsing the events, or receiving any commercial benefit from mentioning Harry’s visit. Its simply a gift to those who may be interested – act quickly!!
Within its 39 pages, the paper discusses the evolution of the household debt in Australia and finds that while higher-income and higher-wealth households tend to have higher debt, lower-income households may become more vulnerable to rising debt service over time.
Then, the paper analyzes the impact of a monetary policy shock on households’ current consumption and durable expenditures depending on the level of household debt. The results corroborate other work that households’ response to monetary policy shocks depends on their debt and income levels. In particular, households with higher debt tend to reduce their current consumption and durable expenditures more than other households in response to a contractionary monetary policy shocks. However, households with low debt may not respond to monetary policy shocks, as they hold more interest-earning assets.
And we should say at this point that IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.
Household debt in Australia has increased to comparatively high levels over the last three decades, a period during which housing prices also have risen rapidly. By end-September 2018, the ratio of household debt to household gross disposable income reached 189 percent, among the highest in advanced economies. High levels of household debt are widely considered to be risky, as they can amplify the impact of external and domestic shocks and, thereby, increase a country’s economic and financial vulnerabilities and pose risks to financial stability. In addition to amplifying financial and economic vulnerabilities, high household debt can also intensify the ongoing corrections in the housing market in Australia.
The macroeconomic impact of and the risks from household debt depend not only on the average debt level but also its distribution across households. Higher-income households might be at lower risk of debt default than lower-income households, for example. The latter might also be more likely to be finance-constrained in times of debt distress. From a monetary policy perspective, a key consideration is the extent to which household debt levels and distribution affect monetary policy transmission.
Household debt in Australia has been rising faster than household disposable income for the past three decades. As a result, the household debt ratio has risen to one of the highest levels among advanced economies.
The housing boom has also played a significant role in the rapid accumulation of household debt. High housing demand due to income and population growth in conjunction with relatively inelastic supply have pushed up house prices, and expectations of future capital gains has encouraged investment demand for housing.
The interaction between the long-term upswing in housing prices and relatively easy mortgage financing has therefore led to the buildup of a high level of residential mortgage debt.
High household debt also reflects the preference for home ownership and housing investment in Australia. Housing debt at 140 percent of household disposable income accounted for about three-quarters of household debt outstanding as of September 2018, with owner-occupied housing debt accounting for a relatively stable share of about one half.
The rise in the share of investor housing debt since 2000 has also contributed to the fast increase in household debt, while other personal debt has remained broadly stable (one quarter of household debt outstanding) at about 46 percent of household disposable income since 2000.
For financial stability, as well as monetary and macroprudential policies, it is not only the level of household debt that matters but also the speed of debt accumulation or leverage increases, the extent of leverage, and, more importantly, the distribution of debt.
The IMF uses old data, from the HILDA survey, which has been running with annual frequency from 2001 to 2016 to make their assessment – clearly the debt position has deteriorated since then, yet they show that debt has grow across the cohorts and segments. The RBA analysis has the same fundamental flaw.
The paper finds that high debt exposure is more prevalent among higher-income and higher-wealth households. Nevertheless, the debt exposure of lower-income and more vulnerable households has also increased over time, and thereby more exposed to risks from rising debt service. The presence of over-indebted households at both low- and higher-income quintiles suggests that macro-financial risks have increased, suggesting a need for close monitoring.
Despite the high debt level, households’ debt service burden has remained manageable due to historical low mortgage interest rates and given that financial institutions assess mortgage serviceability for new mortgage lending with interest rate buffers above the effective variable rate applied for the term of the loans. However, downside risks on debt service capacity and consumption remain with regards to a sharp tightening of global financial conditions which could spill over to higher domestic interest rates.
The empirical analysis investigates the transmission of monetary policy shocks to the current consumption and durable expenditures of households with different debt-to-wealth ratios. With reasonable assumptions and using the large sample of households available in the HILDA survey for 2001-16, the results corroborate that households’ response to monetary policy shocks will vary, depending on both their debt and income levels.
In particular, the results suggest that households with high debt tend to reduce their current consumption and durable expenditures relatively more than other households in response to a contractionary monetary policy shocks. At the same time, households with low debt may not respond to monetary policy shocks, as they hold more interest-earning assets and thereby can smooth their consumption using the higher interest income, suggesting that for these households, the income effect dominates the intertemporal substitution effect.
The results of the analysis suggest that, with a larger share of high-debt households and given their high responsiveness to a monetary policy shock, it may take a smaller increase in the cash rate for the RBA to achieve its policy objectives, compared to past episodes of policy rate adjustments. It corroborates recent RBA research, which suggests that the level and the distribution of the household debt will likely alter monetary policy transmission, in other words, more bang for the buck. By responding gradually, the RBA can still meet its mandates.
The implications of higher household debt for monetary policy have also required that the RBA addresses this challenges in its communication. The results of the textual analysis show that the RBA’s communication has increasingly focused on the impact of household debt on monetary conditions and financial stability over the past decade, consistent with the rise in debt-to-income ratios. Markets have also started to take into account household debt in their assessment of monetary policy and market expectation analysis. Therefore, continuing with a transparent and strengthened communication strategy on issues related to the household debt and household consumption will further improve predictability and efficiency of monetary policy in Australia.
My take is the household debt burden is larger, and more exposed to potential risks than many accept. Nothing new perhaps, but the IMF highlighting the issues is one more piece of the too-high debt narrative!
And according to the AFR, in an exclusive interview, the International Monetary Fund’s lead economist for Australia, Thomas Helbling said Australia’s housing market contraction is worse than first thought, leaving the economy in what he called a “delicate situation” that boosts the need for faster infrastructure spending and even potential interest rate cuts.
Australia’s housing market contraction is worse than first thought!
The latest amendments passed into law last week extends the capital raising capabilities of mutuls in Australia, via mutual capital instruments (MCIs), which Moody’s rates as “credit positive”.
However, we are concerned by the extension of “financialisation” into the mutual sector, the potential higher risks it introduces as players compete for returns to investors, and the complexity of the financial markets they have to engage in. This could be a disaster.
Frankly, this just continues the journey away from meat and potato banking and is a further illustration of the myopic views of the regulators, especially APRA.
Rather than extending these additional capital channels, we need banking structural reform to contain the over-risky sector. This is the wrong strategy at the wrong time (especially as the housing sector tanks).
Anyhow, this is what Moody said:
On 4 April, Australia’s parliament passed the Treasury Laws Amendment (Mutual Reforms) Bill 2019, which amends the Corporations Act 2001 to allow mutually owned institutions to issue capital instruments. The development is credit positive for mutuals because it will enhance their ability to support growth, invest in technology innovation and, over time, will also strengthen their competitiveness.
In particular, the amended Act introduces a definition of a “mutual entity;” clarifies that demutualisation rules can only be triggered by an intended demutualisation and not by other acts such as capital raising; and creates mutual capital instruments (MCIs) that are specific to the mutual industry to raise equity capital.
MCIs will provide mutuals with an additional capital channel to respond to growth opportunities, supplementing the retained earnings they have relied on to date. This additional capital channel is particularly important for mutual authorised deposit-taking institutions (mutual ADIs, which include mutual banks, building societies and credit unions) at a time when their profitability is under pressure. Pressure on profitability stems from competition for lower-risk owner-occupier mortgages with principal and interest repayments, the mutuals’ core products. This elevated competition stems from a number of factors including reduced overall loan growth; a reduced demand for investor mortgage loans in the face of potential changes to negative gearing and capital gains taxes; and tightened underwriting criteria at the major commercial banks as a result of public scrutiny during Australia’s Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry.
Additional capital options will also help mutual ADIs build the scale and efficiency they need for technology investment, which is particularly important at a time when banking services are rapidly becoming technology-based. Compared with mutual ADIs, the large commercial banks have more resources to develop or acquire innovative products, digitise processes and integrate new technologies into their business models. Technology-driven financial firms (fintechs) are seeking entry to banking, while the Australian Prudential Regulation Authority (APRA) has established a framework that allows new entrants to begin operating at an earlier stage in their licensing process than previously. These new entrants are currently small and subject to regulatory constraints in taking deposits and making loans. In most cases they have not yet built up a retail customer base of meaningful size. However, they could grow to challenge incumbents, particularly small-scale ones like the mutual ADIs, over time.
We do not expect mutual ADIs to swiftly ramp up their issuance of MCIs because their already-strong capitalisation and the current low loan growth environment are likely to reduce their need for additional capital. Mutual ADIs’ average Common Equity Tier 1 (CET1) capital ratio is well above that of the major commercial banks, which is itself strong by international standards. Moreover, APRA has set a 25% cap on the inclusion of MCIs in CET1 capital and has also capped the annual distribution of profit to holders of MCIs at 50% of a mutual institution’s net profit after tax for the year in question.
The prospect that the issuance of MCIs will remain limited will reduce the risk that mutual ADIs will significantly increase their risk profiles in an attempt to generate greater dividend returns for MCI holders. Mutuals will need time to amend their constitutions and build market recognition for MCIs. The experience of mutual banking peers in the UK also suggests that the process will be gradual. In the UK, mutuals have been allowed to issue core capital deferred shares, similar to MCIs, under the Building Societies (Core Capital Deferred Shares) Regulations 2013, but few have done so to date. We expect that Australian mutual ADIs that already have a strong investor base in the debt market to be in a better position to issue MCIs.
Industry insiders have revealed why banks are distancing themselves from wealth management and how their actions will reshape the Australian financial services sector; via InvestorDaily.
There
are a number of reasons why the big four have decided, to varying
degrees, to put a ‘for sale’ sign on their wealth management
businesses.
Some major bank chief executives have run a ruler
over their advice businesses and seen poorly performing divisions that
just don’t provide enough margin for the group’s bottom line.
Others,
like Westpac CEO Brian Hartzer, have seen the “writing on the wall” and
the mountain of increasing compliance that must be scaled to make
advice operational, let alone turn a profit.
But it may also have
been a strategic play based on negative sentiment, bad press and the
misguided belief that commissioner Hayne would propose an end to
vertically integrated wealth models.
“What
it looks like the banks have done in most cases, or in some cases, is
they’ve picked up their vertically integrated business, which consist of
advice and other products, and have looked to distance themselves from
that by either demerging or selling the wealth business,” Lifespan
Financial Planning CEO Eugene Ardino said.
Speaking exclusively
on the Investor Daily Live webcast on Wednesday (3 April), the dealer
group boss said the banks aren’t actually dismantling their conflicted
businesses – they’re selling them as bundled, vertically integrated
models where product and distribution sit under the same roof.
“That’s
not dismantling vertical integration. That’s really them trying to
distance themselves from wealth management. Whether that now goes ahead
in some cases remains to be seen,” he said.
“Perhaps what could have happened is some sort of recommendation around how to limit vertical integration or how to control it.
“The
issue you have is when you take a business that’s focused on sales and
that business takes over as the dominant force in a company that also
provides advice, then sales wins. I think that’s natural. Perhaps if
they had started there, that could have led to some moderation of
vertical integration.”
The royal commission hearings, more than
anything, were a targeted attack on the sales culture of large financial
institutions, many of which repeatedly defended their models as
profit-making businesses, often beholden to shareholders.
“In
product businesses, their job is to sell. That’s fine. There’s nothing
wrong with that. But if you’re putting an adviser hat on, there needs to
be some separation. That’s an issue of culture,” Mr Ardino said.
I
haven’t seen some of the employment contracts of the advisers from some
of the groups that got into trouble, but I would venture a guess that a
lot of their KPIs talk about new business rather than retaining
business and servicing clients.”
Fellow panellist and Thomson
Reuters APAC bureau chief Nathan Lynch said that despite Hayne’s failure
to propose banning vertical integration in wealth management, the model
will ultimately be dismantled by market forces.
“Hayne points
out that a lot of the dismantling of the vertically integrated model
comes down to the fact that it’s just not profitable. You have an
environment where vertical integration will be dismantled to some extent
by competitive forces and by technology,” he said.
“Servicing
the vast majority of client is going to become very difficult. Most
businesses are starting to pivot to the high end. I think we need to
view technology in advice as a positive, as an enabler.”
Deposit Bail-In is something which we have been discussing in recent times, not least because of the overt example now active in New Zealand under the Open Banking Resolution, the mandate from the G20 and the Financial Stability board and the implementation in several other countries in response to this.
In Australia, the situation has been unclear, since the 2018 bill was passed on the voice.
Treasury and politicians keep denying there is any intent to bail-in deposits to rescue a failing bank, but then divert to a discussion of the $250k deposit insurance scheme which first would need to be activated by the Government, and second only once a bank has failed. It is irrelevant to bail-in.
Bail-in is where certain instruments could be converted to shares in a bank to buttress its capital in times of pressure to attempt to stop a bank failing, and so would reduce the risk of a Government bail-out using tax payer funds. They will use private funds (potentially including deposits, which are unsecured loans to a bank), instead.
So, today we release an opinion from Robert H. Butler, Solicitor. This was addressed to the Citizens Electoral Council of Australia, and is published with their permission. The key finding is simply that:
Whilst not beyond doubt, it is my opinion that the provisions of the Act do provide for a power of bail-in of bank deposits which did not exist prior to the passing of the Act.
This means that unless the law is changed to specifically exclude deposits (any side of politics going to volunteer to drive this?), bank deposits are not unquestionably free from the risk of bail-in. And we have the view that the vagueness is quite deliberate, and shameful.
Time to pressure our members of Parliament, and raise this issue during the expected election ahead.
Here is the full opinion:
I have been asked to provide an opinion as to whether the Financial
Sector Legislation Amendment (Crisis Resolution Powers and Other Measures) Act
2018 (“the Act”) creates a power of bail-in by Australia’s banks of
customers’ deposits.
At a minimum, the Act empowers APRA to bail in so-called
Hybrid Securities – special high-interest bonds evidenced by instruments which
by their terms can be written off or converted into potentially worthless
shares in a crisis.
However, the Act also includes write-off and conversion
powers in respect of “any other
instrument”. The Government has contended that these words do not extend to
deposits, on the basis that the power only applies to instruments that have
conversion or write-off provisions in their terms, which deposit accounts do
not. However, the reference to “any other
instrument” would be unnecessary if the power only applied to instruments
with conversion or write-off provisions; moreover, banks are able to change the
terms and conditions of deposit accounts at any time and for any reason,
including on directions from APRA to insert conversion or write-off provisions,
which would thereby bring them within the specific terms of the write-off or
conversion provisions of the Act.
The issue could now be simply resolved by Government
passing a simple amendment to the Act to explicitly exclude deposits from being
bailed in.
Bail-in is one of the 3 alternative actions which can be
taken in respect of a distressed bank.
The alternatives are:-
Bankruptcy and liquidation of the bank;
Bail-out, which is the injection into the bank
of the necessary capital to meet the bank’s liabilities. This is the action
which was undertaken after the 2008 GFC by governments through their Treasuries
and Central Banks bailing out the banks with taxpayers’ funds;
Bail-in, which is the injection into the bank of
the necessary capital to meet the bank’s liabilities either by the bank writing
off its liabilities to creditors or depositors or converting creditors’ loans
or deposits into shares whereby creditors and depositors take a loss on their
holdings. A bail-in is the opposite of a bail-out which involves the rescue of
a financial institution by external parties, typically governments that use
taxpayers’ money.
Liability
limited by a scheme, approved under Professional Standards Legislation
The provisions of the Act as they affect bail-in require a consideration
of the issue in 3 different sets of circumstances, and the provisions of the
Act need to be considered separately in relation to each such set of
circumstances.
Those 3 sets of circumstances are:-
Hybrid Securities issued by banks;
Customer deposit accounts with banks;
Bank documentation implementing deposit
accounts.
(i) Hybrid securities
The ASX describes Hybrid Securities as “a generic term used to describe a security
that combines elements of debt securities and equity securities.” Whilst there
are a variety of such securities, in short they are securities issued by banks
which permit the amounts secured by the security to be converted into shares or
written off at the option of the bank in certain circumstances.
The Act provides specifically for Hybrid Securities.
Section 31 adds “Subdivision
B-Conversion and write off provisions” to the Banking Act 1959 and inserts
a definition Section 11CAA which provides that “conversion and write off
provisions means the provisions
of the prudential standards that relate to the conversion or writing off of:
Additional
Tier 1 and Tier 2 capital; or
any
other instrument.”
The Act also inserts Section 11CAB which provides:
“(1)
This section applies in relation to an instrument that contains terms that are
for the purposes of the conversion and write off provisions and that is issued
by, or to which any of the following is a party:
(a) an ADI;
……
The
instrument may be converted in accordance with the terms of the instrument despite:
any
Australian law or any law of a foreign country or a part of a foreign country,
other than a specified law; and
…..
The
instrument may be written off in accordance with the terms of the instrument
despite:
any
Australian law or any law of a foreign country or a part of a foreign country;
…..
Under the Basel Accord, a bank’s capital consists of Tier 1
capital and Tier 2 capital which includes Hybrid Securities.
The Section 11CAB provisions mean that any law which would
otherwise prevent the conversion or write-off of Hybrid Securities does not apply
unless a particular legislative provision specifically provides that it does
apply. One of the principle types of legislation that this provision would be
directed towards is consumer legislation, particularly those provisions which
allow a Court to set aside or vary agreements if a party has been guilty of
false or misleading conduct – this is precisely the sort of argument which
could be raised in the circumstances referred to by outgoing Australian
Securities and Investments Commission (ASIC) Chairman Greg Medcraft in an
exchange with Senator Peter Whish-Wilson in the hearings of the Senate
Economics Legislation Committee on 26 October 2017: Mr Medcraft said: “There are two reasons we believe a lot of
the retail investors buy these securities. One is they don’t understand the
risks that are in over 100-page prospectuses and, secondly – and this is
probably for a lot of investors – they do not believe that the government would
allow APRA to exercise the option to wipe them out in the event that APRA did
choose to wipe them out.“
When Senator Whish-Wilson raised the spectre of
“bail-in”, Mr Medcraft confirmed: “Yes, they’ll be bailed in. The big issue with these securities is the
idiosyncratic risk. Basically, they can be wiped out – there’s no default; just
through the stroke of a pen they can be written off. For retail investors in
the tier 1 securities – they’re principally retail investors, some investing as
little as $50,000 – these are very worrying. They are banned in the United
Kingdom for sale to retail. I am very concerned that people don’t understand,
when you get paid 400 basis points over the benchmark [4 per cent more than
normal rates], that is extremely high
risk. And I think that, because they are issued by banks, people feel that they
are as safe as banks. Well, you are not paid 400 basis points for not taking
risks…” He emphasised: “I
do think this is, frankly, a ticking time bomb.“
The over-riding intention behind Sections 11CAB(2) and
11CAB(3) is to deal with issues arising from the examples in the comments of
Graeme Thompson of APRA in an address on 10 May 1999 when he said: “… APRA will have powers under proposed
Commonwealth legislation to mandate a transfer of assets and liabilities from a
weak institution to a healthier one. This is a prudential supervision tool that
the State supervisory authorities have had in the past, and it has proved very
useful for resolving difficult situations quickly. We expect the law will
require APRA to take into account relevant provisions of the Trade Practices
Act before exercising this power, and to consult with the ACCC whenever it
might have an interest in the implications of a transfer of business.”
The new Sections 11CAB(2) & (3) mean that APRA does not need to consider
those issues (or any other) in relation to conversion and write-off of Hybrid
Securities.
(ii) Deposits
Whether or not bail-in of other than Hybrid Securities is
implemented by the Act has been the subject of debate and concern since the
Bill which led to the Act became public. The principal area of concern is
whether or not the bail-in regime was extended by the Act to deposits made by
customers with banks.
The central issue is the wording of the definition in
Section 11CAA quoted above and what “any
other instrument” means. “Instrument”
is not defined in the Act but a “financial
instrument” is defined by Australian Accounting Standard AASB132 as “any contract that gives rise to a
financial asset of one entity and a financial liability or equity instrument of
another entity.” As confirmed by the Reserve Bank, a deposit with an
ADI bank comes under such a definition – it is a contract with terms and
conditions as to the deposit being set by a bank, accepted by a depositor on
making a deposit and creating a financial asset (a right of repayment) and a
financial liability in the bank (the obligation to repay).
Deposits are created by “instruments” and are governed by the terms and conditions of
those instruments.
The intent of the reference to “any other instrument” in Section 11CAAAA is assisted by the
Explanatory memorandum which accompanied the Exposure Draft and which states:
“5.14
Presently, the provisions in the prudential standards that set these
requirements are referred to as the ‘loss absorption requirements’ and
requirements for ‘loss absorption at the point of non-viability’. The concept
of ‘conversion and write-off provisions’ is intended to refer to these, while
also leaving room for future changes to APRA’s prudential standards, including
changes that might refer to instruments that are not currently considered
capital under the prudential standards.”
Section 11AF of the Banking Act provides that APRA can
determine Prudential Standards which are binding on all ADIs. These standards
are in effect regulations which have the force of legislation by virtue of the
authorisation in the Banking Act. That Section provides, inter alia:
“(1)
APRA may, in writing, determine standards in relation to prudential matters to
be complied with by: (a) all ADIs; …..”
Banks are ADIs.
The various Prudential Standards issued by APRA are
accordingly headed with the phrase: “This
Prudential Standard is made under section 11AF of the Banking Act 1959 (the
Banking Act).”
That power then leads into the issue of APRA using this
authority to expand the meaning of “capital”
the subject of conversion or write-off, to encompass deposits if deposits are
not already covered by the reference to “any
other instrument”.
That these provisions as to conversion and write-off are
not limited to Hybrid Securities is confirmed in Section 11CAA itself as quoted
above. The provisions extend to “any
other instrument” by sub-section (b) of that Section and must relate
to instruments other than those referred to in sub-section (a), i.e. other than
“Additional Tier 1 and Tier 2 capital”
(being instruments which themselves contain an explicit provision for
conversion or write-off). All instruments that the Act refers to as to being
able to be converted or written off “in
accordance with the terms of the instruments” come under the
definition of “Additional Tier 1 and Tier
2 capital” – “any other
instruments” is not only an entirely unnecessary addition if the Act
is intended to apply only to instruments with conversion or write-off terms,
its very broad language must be intended to encompass some other instruments (“which are not currently considered capital”
as stated in the Explanatory memorandum) and that could extend to instruments
relating to deposits.
If Section 11CAA thus extends to instruments relating to deposits then APRA
can as the Prudential Regulator issue a Prudential Requirement Regulation or a
Prudential Standard for the writing-off
or conversion of deposits.
APRA already has a power to prohibit the repayment of
deposits by ADIs, a power which already verges on the writing off of those
deposits. The Banking Act Section 11CA provides:
“(1)
… APRA may give a body corporate that is an ADI … a direction of a kind
specified in subsection (2) if APRA has reason to believe that:
…..
the body
corporate has contravened a prudential requirement regulation or a prudential
standard; or
the
body corporate is likely to contravene this Act, a prudential requirement
regulation, a prudential standard or the Financial Sector (Collection of Data)
Act 2001, and such a contravention is likely to give rise to a prudential risk;
or
the
body corporate has contravened a condition or direction under this Act or the
Financial Sector (Collection of Data) Act 2001 ; or
….
(h)
there has been, or there might be, a material deterioration in the body
corporate’s financial condition; or
….
(k)
the body corporate is conducting its affairs in a way that may cause or promote
instability in the Australian financial system.
…..
(2)
The kinds of direction that the body corporate may be given are directions to
do, or to cause a body corporate that is its subsidiary to do, any one or more
of the following:
….
not to repay any money on deposit or
advance;
not to
pay or transfer any amount or asset to any person, or create an obligation
(contingent or otherwise) to do so;
…..”
This provision was inserted into the Banking Act in 2003 by
the Financial Sector Legislation Amendment Act (No 1).
It is not known whether this power has been exercised by
APRA. Relevantly Graeme Thompson in the address referred to above said: ”
… Particularly in the case of banks and
other deposit-takers that are vulnerable to a loss of public confidence, APRA
may prefer to work behind the scenes with the institution to resolve its
difficulties. (Such action can include arranging a merger with a stronger
party, otherwise securing an injection of capital or limiting its activities
for a time.)“
It is a relatively small step to then convert or write-off
what the ADI has been prohibited from repaying or paying out.
It might be argued that APRA’s powers in existing Sections
of the Act are not absolute and are subject to various qualifications and
limitations arising out of their context within the Act or the balance of the
Section or Sections of the Act in which they appear. To avoid such an
interpretation, Section 38 of the Act inserts 2 new sub-sections to Section
11CA in the Banking Act:
“(2AAA)
The kinds of direction that may be given as mentioned in subsection (2) are not
limited by any other provision in this Part (apart from subsection (2AA)).
(2AAB)
The kinds of direction that may be given as mentioned in a particular paragraph
of subsection (2) are not limited by any other paragraph of that subsection.”
APRA has already adopted the need for certain capital to be
capable of conversion or write-off, regardless of laws, constitutions or
contracts which may affect such decisions, the Explanatory Statement for
Banking (Prudential Standard) Determination No. 1 of 2014 stating:
“The Basel Committee on
Banking Supervision (BCBS) has developed a series of frameworks for measuring
the capital adequacy of internationally active banks. Following the financial
crisis of 2007-2009, the BCBS amended its capital framework so that banks hold
more and higher quality capital (Basel III). For this purpose, the BCBS
established in Basel III more detailed criteria for the forms of eligible
capital, Common Equity Tier 1 (CET1), Additional Tier 1(AT1) and Tier 2 (T2),
which banks would need to hold in order to meet required minimum capital
holdings.
Basel III provides that
AT1 and T2 capital instruments must be written-off or converted to ordinary
shares if relevant loss absorption or non-viability provisions are triggered.
Banking (prudential
standard) determination No. 4 of 2012 incorporated the Basel III developments
into APS 111 with effect from 1 January 2013. …”
(iii) Bank documentation implementing deposit accounts
Even if the words “any
other instrument” in Section 11CAA do not encompass deposits, there is a
further issue in relation to the implementation of bail-in of deposits
revolving around the issue of the documents/instruments issued by banks in opening
accounts and accepting deposits from customers.
The documentation issued by each Australian bank when
opening such an account, has a provision which enables the Bank to change the
terms and conditions from time to time without the consent of the customer. The
specifics of the power vary from bank to bank but each fundamentally contain
such a power. Some examples of various clauses are set out in Appendix 1.
If APRA as the Prudential Regulator issued a Prudential
Requirement Regulation or a Prudential Standard requiring a bank to insert a
provision into its documentation/instruments relating to deposit-taking
accounts providing for the bail-in of those deposits – their write-off or
conversion – then those provisions would then clearly come within the specific
provisions of conversion or write-off within the Act and the deposit the
subject of the account could be bailed-in immediately.
Such a directive could be issued by APRA in accordance with
the secrecy provisions in the Australian Prudential Regulation Authority
Act1998 and be implemented with little or no notice to the account holder.
Whilst not directly relevant to an interpretation of the provisions of the Act, there are a number of unusual and concerning aspects to its introduction, passing and intentions.
As noted above, the issue could now be simply resolved by
Government passing a simple amendment to the Act to explicitly exclude deposits
from being bailed in i.e. written off or converted into shares.
Whilst not beyond doubt, it is my opinion that the provisions of the Act do provide for a power of bail-in of bank deposits which did not exist prior to the passing of the Act.
As both the interim and final report from your Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry
has confirmed, the good, decent, hardworking people of Australia are
under attack from their own banking system in a manner reminiscent of an
attack from a foreign invader that wants to destroy the will and
financial resources of the citizens in order to gain absolute control of
the country.
Americans, more than any other people in the world, can understand
and relate to the precarious predicament in which you now find
yourselves. The devious vices and devices of your banksters to transfer
the meager savings of the common man and woman to their own greedy
pockets have been laid bare by your Royal Commission. But just as
happened here in the United States following the report of the Financial Crisis Inquiry Commission, no concrete measures to end the domination of the banks has occurred.
Australians, like Americans, remain on the road to financial ruin at
the hands of predatory banking behemoths that are using their
concentrated money and political power to attack each and every
democratic principle that we cherish as citizens – from repealing
consumer-protection legislation to installing their own shills in
government to regulatory capture of their watchdogs to corrupting the
overall financial system that underpins the stability of our two
countries. Sadly, citizens at large do not understand that their own deposits at these mega banks are being used to accomplish these anti-democratic goals.
What has now occurred in Australia is precisely what has occurred in
America. Last year Bob Katter, MP in your House of Representatives,
introduced the Banking System Reform (Separation of Banks) Bill 2018 in
the Australian Parliament. This year, Senator Pauline Hanson introduced a
bill of the same name in the Australian Senate. The legislation is
tailored after the 1933 legislation that was passed in the United
States, the Glass-Steagall Act, to defang the banking monster that
brought on the 1929 stock market crash and ensuing depression by
separating commercial banks, which take in the deposits of risk-adverse
savers, from the globe-trotting, risk-taking, derivative-exploding
investment banks. (An unsavory group of bank shills succeeded in
repealing the Glass-Steagall legislation in the U.S. in 1999 and then
enriched themselves from the repeal. One year later the U.S. experienced
the dot.com bust and eight years after that the country experienced the
greatest financial crash since the Great Depression – what you call the
GFC or Global Financial Crisis but U.S. bank lobbyists prefer to dub
The Great Recession.)
U.S. Senator Elizabeth Warren, a Democrat, and the late Senator John McCain, a Republican, had been introducing the 21st Century Glass-Steagall Act
for the past five years in the U.S. Congress. Just like the legislation
proposed in Australia, it would have restored integrity to
deposit-taking commercial banks by separating them from the predatory
investment banks that financially incentivize their employees to fleece
unsuspecting customers while using the deposits to engage in high-risk gambles
that regularly implode. The powerful mega banks in the U.S. and their
legions of lobbyists have worked hard to prevent this legislation from
gaining momentum.
Despite the critical need for this legislation in both countries,
mainstream media has not done its share to inform and educate the public
about the pending legislation. We know this to be true in Australia
because the Royal Commission received more than 10,000 submissions from
the Australian public while the Senate’s request for public comment on
the Glass-Steagall legislation has thus far received just 350 responses.
The Senate Committee has elected to publish just a sliver of those responses.
You can submit your comments on the Australian legislation using an online form; or you can email your submission to economics.sen@aph.gov.au;
or you can mail your submission to Senate Standing Committee on
Economics, PO Box 6100, Parliament House, Canberra ACT 2600, Australia. The deadline for submissions is a week from this Friday, April 12, 2019.
