Research suggests bigger banks are worse for customers

From The Conversation.

Yet again this week, the Hayne Royal Commission has brought disturbing news of misconduct toward customers of our largest financial institutions. This time super accounts have been plundered for the benefit of shareholders.

Recent research from economists at the United States Federal Reserve suggests this problem is not unique to Australia. If true, this supports the argument that larger financial institutions should be broken up or face more regulatory scrutiny.

The researchers found that larger banking organisations are more likely than their smaller peers to experience “operational losses”. And by far the most significant category (accounting for a massive 79%) within operational losses was “Clients, Products and Business Practices”.

This category captures losses from “an unintentional or negligent failure to meet a professional obligation to specific clients, or from the nature or design of a product”. When a bank is caught out engaging in misconduct toward customers, it is required to make good to customers – the so-called process of remediation.

It’s a category that perfectly captures the issues under review in the royal commission. Operational losses also include things like fraud, damage to physical assets and system failures.

In recent weeks we have heard a lot about Australian banks having to compensate customers. The cost to the bank is, however, far greater than the dollar value received by customers.

The administrative costs of such programs are significant, and then there are legal costs and regulatory fines.

While no-one feels sorry for banks having to suffer the consequences of their misconduct, regulators monitor these losses due to the possibility that they may increase the chance of bank failure.

Another aspect of the Federal Reserve’s study is the size of the losses. One example is where the five largest mortgage servicers in the United States reached a US$25 billion settlement with the US government relating to improper mortgage loan servicing and foreclosure fraud.

In another example, a major US bank holding company paid out over US$13 billion for mis-selling risky mortgages prior to the 2008 crisis. Settlements of this size have simply not occurred in Australia.

Why larger banks?

One might assume that economies of scale – reduced costs per unit as output increases – also apply to risk management. The larger the organisation, the more likely it has invested in high-quality, robust risk-management systems and staff. If this holds, then a large bank should manage risk more efficiently than a smaller one.

The possibility of unexpected operational losses should then be reduced. Larger financial institutions might also attract greater regulatory scrutiny, which might help to improve risk-management practices and reduce losses.

But the reverse seems to be true, based on the analysis of American banks from 2001-2016.

For every 1% increase in size (as measured by total assets) there is a 1.2% increase in operational losses. In other words, banks experience diseconomies of scale. And this is particularly driven by the category of Clients, Products and Business Practices.

In this category losses accelerate even faster with the size of the bank.

This could be the result of increased complexity in large financial institutions, making risk management more difficult rather than less. As firms grow in size and complexity, it apparently becomes increasingly challenging for senior executives and directors to provide adequate oversight.

This would support the argument that some financial institutions are simply “too big to manage” as well as “too big to fail”. If bigger financial institutions produce worse outcomes for customers, there is an argument for breaking up larger institutions or intensifying regulatory scrutiny.

Is the same thing happening in Australia as in the United States? The case studies presented by the royal commission suggest it could be, but it’s difficult for researchers to know exactly.

Australian banks are not required to publicly disclose comprehensive data on operational losses. APRA may have access to such information, but any analysis the regulator may have done of it is not in the public domain.

Perhaps this issue is something Commissioner Hayne should explore.

Author: Elizabeth Sheedy Associate Professor – Financial Risk Management, Macquarie University

AMP super governance under scrutiny

AMP’s superannuation funds are permitted to underperform for five years before the investment committee is obliged to inform the relevant fund’s board, the royal commission has heard, via InvestorDaily.

The royal commission has been told that a consistently underperforming AMP fund could be underperforming for five years before the board of directors becomes notified.

The royal commission hearings into superannuation continued on Thursday, with AMP Superannuation Limited chairman Richard Allert in the witness box.

Mr Allert faced questioning by counsel assisting Michael Hodge about how AMP management and board addresses poorly performing investment funds.

The royal commission was told that ‘quarterly investment management reports’, which contain information about the performance of AMP’s funds in a given quarter, are put together by AMP’s Group Investment Committee.

However, the board of AMP Superannuation does not receive this report. Instead, it goes to AMP trustee services.

Mr Hodge confirmed with Mr Allert that the report would only be raised with the board if trustee services found an issue with the report, or if there was an “exception”.

“Unless an exception was triggered, then you wouldn’t expect this report to be provided to the board?” Mr Hodge asked.

“Correct,” Mr Allert said.

The royal commission heard that such an ‘exception’ would have three criteria: the first was the ‘identification’ criteria, which meant pinpointing “significant under-performance against peers/benchmarks over rolling 36 month period”.

The second criteria was a period of ‘further investigation’, and the third and final criteria was an exceptions report that was issued “if an investigation remains under investigation … for a period of eight or more quarters”.

“So it would seem as if it would be necessary for an investment to underperform for five years before it would be reported to the board,” Mr Hodge put to Mr Allert.

“No, I couldn’t accept that,” he responded.

After a protest from AMP legal counsel Robert Hollo, who called the question “a little unfair”, Royal Commissioner Kenneth Hayne AC QC interceded and Mr Hodge rearticulated his question.

“Is it possible for an exceptions report to come to the board about investment performance any earlier than where the underperformance has occurred over a five-year period?”

Mr Allert said it was possible. “If there was something that was really bothering the Group Investment Committee and relaying it to the Trustee Services or was bothering our trustee services representative on the GIC, they would alert the board to that fact.”

But this would occur outside of the exceptions framework, the royal commission was told.

One instance where Mr Allert could recall AMP trustee services raising an issue with the board this year was “in relation to products that had a cash element”.

CBA arranges world’s first bond issuance solely using blockchain, a credit positive

On 10 August, the International Bank for Reconstruction and Development said it has mandated the Commonwealth Bank of Australia (CBA) as the exclusive arranger of the world’s first bond issuance solely using blockchain technology, via Moody’s.

This is credit positive for CBA because it shows the bank is making headway with significant fintech initiatives, which can help improve its operating efficiency and fend off new competition.

CBA will use the private Ethereum blockchain platform to create, allocate, transfer and manage a new debt instrument debt, dubbed “bond-i.” The transaction will provide a platform for future debt-security issuance using blockchain technology. The use of blockchain for bond issuance can offer efficiency benefits for both issuers and arrangers by simplifying the settlement processes. The technology can be used for both registry and payment systems, consolidating payments by investors and title transfers by issuers into single, instant transactions.

Prior to this transaction, CBA experimented blockchain-based bond issuance with government entity Queensland Treasury Corporation (State of Queensland, Aa1 stable). In January 2017, the bank arranged the issuance of a so-called cryptobond for Queensland, by utilizing blockchain technology. It was a trial transaction carrying no debt obligation, with Queensland acting as both the issuer and investor to test the process.

As discussed in our Bank of the Future report, fintech innovations such as these will help traditional banks reduce operating costs and also mitigate the risk of disruption by new fintech firms

What if we expected financial services to be more like health services?

From The Conversation.

Earlier this year the chief of a financial planning firm collapsed in the witness stand during Australia’s ongoing royal commission into misconduct in the financial services industry. He had to be taken to hospital in an ambulance – some would say a fitting metaphor for the state of the industry.

Fortunately for him the health care system doesn’t operate like the financial planning industry. If it did he might have been “treated” according to what was most profitable for the ambulance service rather than what was best for his well-being.

The Financial Services Royal Commission is exposing abundant evidence of unethical misconduct. Customers are being charged fees for services they never get or ever need, getting inappropriate advice, being offered irresponsible loans and sold worthless insurance contracts. It shows up an industry riddled with conflicts of interest and obsessed with extracting profits from customers in any way conceivable.

Sound familiar? The 2007-09 Global Financial Crisis was in large part caused by the same “profit at all costs” culture. It fuelled high-risk home lending to ordinary people who couldn’t afford it. Why haven’t things changed?

Despite the lessons of the GFC and a regulatory crackdown, the central problem with the global financial services industry is that, unlike the health industry, it has long stopped caring about its customers’ well-being.

Financial services, such as payments and basic forms of credit and insurance, are now essential for the economy and society to function. For this reason, the large financial services firms often receive privileges such as market protection and implicit government guarantees worth billions of dollars, underwritten by taxpayers. So how has the bar been allowed to sink so low?

The mindset behind the scandals

At the heart of the problem lies the mental model that the finance industry applies to itself and the world around it.

This thinking is dominated by the neoclassical model of economics in which people are “rational actors” who always do what is best for them. And they supposedly interact with each other through perfect markets, leading to the efficient allocation of resources.

While everyone understands this as an idealised abstraction, the impact of this working assumption is profound. It has led to an “input-oriented” model. Banks and other financial services companies are exclusively concerned with providing whatever inputs – financial products and services – their customers demand.

Bewildering arrays of products are sold using state-of-the-art marketing techniques, irrespective of whether the customers actually need them.

Undesired outcomes are often considered to be the customer’s responsibility. If the customer ends up with too much credit card debt, possibly as a result of aggressive marketing, don’t blame the bank.

Regulatory and public policy responses are also premised on this model. The dominant approach in financial regulation focuses on disclosure, requiring firms to provide more and more information about their financial products.

Product disclosure statements are now often hundreds or thousands of pages long. These are littered with legal and financial jargon that is often incomprehensible even to experts. Rather than clarifying the nature of financial products, disclosure requirements have only made them more opaque.

This rationalist approach has led the industry and regulators to promote financial literacy education as a solution to the problem. The idea is to educate consumers about financial products and services to help them navigate the financial system and make good decisions.

The Australian government spends tens of millions of dollars on financial literacy programs such as its MoneySmart program. The Bank of England recently launched econoME, a program with very similar aims.

This approach ignores a core aspect of finance. Many financial problems that consumers face are highly complex. For example, determining a person’s optimal lifetime saving and investment strategy to provide an adequate income in retirement is a formidable problem, even for a finance expert with a supercomputer.

It is beyond the capability of the average person to work out many financial decisions on their own, and we shouldn’t expect people to do so – just as we don’t expect the average person to perform brain surgery.

Focus needs to shift to financial well-being

If we accept that many aspects of finance are hard, we will need to give up on the rationalist model. Instead we need to switch to an outcome-focused model in which, as with the health care system, the primary concern is for people to reach a set of outcomes or goals – a certain level of financial well-being, for example.

Services offered by banks and regulations imposed by governments would then be evaluated on the extent to which they offer to improve people’s financial well-being. Banks would only offer services that have been shown to improve one or more dimensions of their customers’ financial well-being, aligning their interests more closely with those of their customers.

Financial services and their regulation would look radically different. For example, fewer decision options and simpler products would be more effective in improving financial well-being. New technologies such as artificial intelligence could likely play an important role in this new world of finance.

Importantly, both the development of services and their regulation should be based on evidence and delivered under a set of professional standards monitored by an independent standards-setting body. This would be similar to the processes and institutions used in the health system. Providers of financial services would then be subject to both a fiduciary duty and product liability.

The future of finance doesn’t lie in ever more regulation, or ever more sophisticated technology to squeeze higher margins out of legacy products. The future of finance lies in the rediscovery of what finance is for – to improve the financial and economic well-being of society.

Authors: Paul Kofman Professor of Finance, University of Melbourne;
Carsten Murawski Associate Professor in the Department of Finance and co-director of the Brain, Mind & Markets Laboratory, University of Melbourne.

CBA put aligned advisers before customers

CBA defied a request from APRA to accelerate the transfer of 60,000 members to MySuper in order to placate the bank’s aligned advisers, the royal commission has heard, via InvestorDaily.

Appearing before the royal commission hearings into superannuation yesterday, Colonial First State (CFS) executive general manager Linda Elkins was questioned about CBA’s handling of the MySuper transition.

From 1 January 2014, employers could only make default contributions to a registrable superannuation entity (RSE) offering a MySuper product.

Counsel assisting Michael Hodge established in his questions to Ms Elkins that CBA had breached the law 15,000 times by receiving default contributions into high-fee-paying accounts after 1 January 2014.

RSEs were also given a deadline of 1 July 2017 to transfer existing accrued default accounts (ADAs) to an approved MySuper product.

In June 2014, Mr Hodge established, the board of CFS was told by management that “APRA has requested that you accelerate the transition for 60,000 [ADA] members”.

“This suggestion has significant business implications as the original transition date is 2016,” the CFS board was told in June 2014.

Mr Hodge asked Ms Elkins: “Was one of the issues of which you were aware that immediately moving these ADAs over to MySuper would affect the relationship between Colonial and its advisers?”

“I was aware that advisers were impacted by this, yes,” Ms Elkins replied. “I don’t know that it follows it would affect our relationship with the advisers but we were aware that advisers were – were concerned, yes.”

Moving the 60,000 into lower-fee MySuper products would have the effect of turning off grandfathered commissions for advisers, the royal commission has heard.

CFS, like other retail super providers, was eager to have ADA clients make an “investment decision” so that they would be considered a ‘Choice’ member and therefore ineligible for transfer to a MySuper product.

“And that was why you were taking active steps for the benefit of advisers to obtain investment directions from members?” asked Mr Hodge.

“We were taking active steps to ensure the members had information to – to assist them with the choices they had,” replied Ms Elkins.

Hodge continued: “The purpose of obtaining those investment directions, or a purpose, I’m sorry, for obtaining those investment directions was to benefit advisers?

“That wasn’t the purpose,” replied Ms Elkins.

“That was a purpose?” Mr Hodge asked.

“It’s – it – well, yes,” she said.

The hearings continue.

Wages rise 0.6% in the June quarter 2018

The seasonally adjusted Wage Price Index (WPI) rose 0.6 per cent in June quarter 2018 and 2.1 per cent through the year, according to figures released today by the Australian Bureau of Statistics (ABS).

Seasonally adjusted, private sector wages rose 2.0 per cent and public sector wages grew 2.4 per cent through the year to June quarter 2018.

The trend data tracks a similar path, with public sector wages growth consistently stronger than the private sector.

ABS Chief Economist Bruce Hockman said “Wage growth in Australia has grown at an annual rate of 2.1 per cent, continuing to stabilise between 2.0 and 2.1 per cent over the past four quarters. Annual growth across industries is varied with diverse wage pressure across the labour market.”

In original terms, through the year wage growth to the June quarter 2018 ranged from 1.3 per cent for the Mining industry to 2.7 per cent for the Health care and social assistance industry.

Western Australia and the Northern Territory both recorded the lowest through the year wage growth of 1.3 and 1.4 per cent respectively while Victoria and Tasmania recorded the highest of 2.3 per cent. New South Wales was 2.1 per cent.

 

Record Supply of Homes Eases Affordability – HIA

The Housing Industry Association continues to discuss a simply demand supply equation for  property prices, when in fact our analysis suggests it is credit supply which is the real lever of price growth. As credit is tightening, and supply of property is booming, which ever lever you look at, it suggests prices will continue to fall, and further than many are predicting….

Here is the HIA release:

“Housing affordability is about ‘supply and demand’ and for most of this century there have been constraints on new home building that have limited supply and forced up prices.

“Since 2014, Australia has built an unprecedented volume of new homes and we are starting to see affordability indicators improve,” stated HIA’s Principal Economist, Tim Reardon.

Mr Reardon was speaking at HIA’s Industry Outlook event in Canberra today marking the release of HIA’s latest forecasts for residential building activity in the State and National Outlook reports. The reports include updated forecasts for new home building and renovations activity for each of the eight states and territories.

“The fall in house prices in Sydney and Melbourne is one indicator that affordability is improving, but the stalling of rental price inflation in the June quarter this year is the most important indicator as it tells us that the pent-up demand for new housing in Sydney and Melbourne is beginning to be met with a record volume of new housing,” added Mr Reardon.

“The fall in house prices will dampen demand for new housing over the next 12 months. Add to this, the proliferation of punitive taxes on investors in the housing market, disincentives to overseas buyers and tighter oversight of mortgage lending for home purchases and the environment for residential building is facing significant challenges.

“For these reasons we expect that the housing market will cool over the next couple of years, but the down-cycle that has emerged, in certain segments of the market and locations, will be moderate.

“Detached house starts in March 2018 were the strongest quarterly result in 18 years. Leading indicators suggest that we should expect another strong result for the June 2018 quarter. On this basis, it now looks like we will round out the 2017/18 year with over 120,000 detached house starts. This would be the strongest four quarter performance for the sector since the mid-1990s.

“The market for apartments in metropolitan areas will be the most significantly affected by the improvement in affordability and by the regulatory imposts.

“In the March 2018 quarter Victoria posted a record high of 12,000 multi-unit starts, which accounted for nearly half of the 26,300 units that were commenced across the entire country. The slowdown in apartments is also likely to be focused on metropolitan Melbourne and Sydney.

“The slowdown in Sydney and Melbourne is not consistent across the rest of their respective states. Strong activity in major regional centres has offset some of the decline in metropolitan areas. Queensland, Tasmania and South Australia are also on different trajectories and Western Australia is no longer in decline,” concluded Mr Reardon.

Brisbane market continues slump amid lack of attractions

From MPA.

Brisbane is no longer the leading property investment choice as it used to be, according to property market research firm Propertyology.

The latest market data shows that despite being the top choice of experts for a few years now, the city shows underwhelming results, with its dwelling prices increasing by just 1.2% over the year until July. And there are several reasons for this slow market performance.

According to Propertyology head of research Simon Pressley, the Sunshine State capital continued “to post less than stellar results because the wider economy is not doing enough of the heavy lifting”.

“Brisbane has some good property market fundamentals, but we have to go way back to 2007 to find the last time that its property market produced double-digit price growth – coincidentally that’s also the year that Peter Beattie retired from his post as State Premier,” Pressley said in a statement.

Brisbane’s long-running problem with its property market is a reflection of the city’s enormous potential but lack of boldness and clear direction, he said. And it doesn’t help that Queensland had four premiers in just 10 years.

Lack of attraction

Pressley said the core of Brisbane’s property problem is its lack of significant attractions to draw national and international visitors, who generally go straight to the Gold or Sunshine Coasts when they arrive. Brisbane has been attracting fewer new international visitors compared to Sydney and Melbourne since 2012.

Brisbane gravely needs an iconic landmark to energise its economy, according to Pressley. “The Brisbane River is no Sydney Harbour and the Story Bridge is no Golden Gate,” he said. “Brisbane is fast losing its relevance, so industry, community, and political leaders all need to put their big-boy pants on, get bold, and begin behaving like Brisbane is a world-class city, not a big country town!”

“Like every other city, Brisbane has its liquorice allsorts urban renewal projects, but the last

ground-breaking transformation completed was South Bank in 1992,” Pressley said. However, he added that there are projects coming in next decade, such as Queen’s Wharf, the Brisbane Metro, and a number of hotels and commercial office towers.

“The question is, will these be enough to kick-start the Brisbane property market?” Pressley said.

“Risk on” for LMI sector, as delinquencies rise

From Australian Broker.

S&P Global Ratings has maintained its low risk insurance industry and country risk assessment (IICRA) for Australia’s mortgage insurance sector, awarding the second strongest rating on a six point scale.

According to a release from the ratings agency, “In our opinion, product risks for mortgage insurers remain elevated, reflecting the recent history of sustained house price appreciation across the Australian housing market.

“House prices in Australia’s major cities of Melbourne and Sydney have declined in the past 12 months, easing some risk attributes. We expect the house price declines in Australia’s largest cities to be orderly, while risks associated with slow wage growth and relatively high debt to income levels remain,” the statement continued.

Responding to the results, QBE chief executive officer Phil White says the low risk is due to the Australian market’s high diversification.

Speaking to Australian Broker, he said the diversification in borrower profiles, geographic distribution of mortgages, and the range of banks with LMI in the marketplace enhances strength.

“Diversification is one of the fundamental things that underpins Australia. The second part is how LMI was designed to meet the needs of our market. The regulatory regime here is extremely good and that is underpinned also by a very disciplined underwriting environment.

“I’m not too worried about some of the scare mongering there might be around the forecast for house prices or the economy more broadly. LMI has been designed to suit the Australian market and the future for it right now is quite positive,” he continued.

However, Martin North, principal of Digital Finance Analytics, says the current environment is “risk on” and, noting rising delinquencies in WA and other areas, those risks are set to rise.

“Generally it is risk on for the insurers and the majors. The banks that have released their financial results this reporting season are showing slightly higher 90 day plus delinquency rates and that was also true in the most recent Moody’s report. It’s not a huge increase but the trend is definitely up.”

Drawing on independently collated data, North says 30.4% of owner occupied borrowing households are finding it difficult to manage repayments currently. This equates to 970,000 households, of which more than 23,000 are in severe stress.

“They’re making the payments but it’s difficult and this is the highest that number has ever been,” he commented.

In contrast to S&P’s outlook, North concluded, “Mortgage rates will rise slightly because of international funding pressures. Of course the US will put its rate up once or twice more this year and that will flow through. It’s risk on rather than risk off and I think we need to watch this very closely.”

Household Financial Confidence Still Under Pressure In July 2018

The latest edition of the DFA Household Financial Confidence Index to end July 2018 remains in below average territory, coming in at 89.6, compared with 89.7 last month.  We had expected a bounce this month, in fact the rate of decline did slow, thanks to small pay rises for some in the new financial year, and refinancing of some mortgage loans to the “special” rates on offer currently.  However, the index at this level is associated with households keeping their discretionary spending firmly under control. And the property grind is still impacting severely.

Looking at the results by our property segmentation, owner occupied households overall remain around the neutral reading, while property investor confidence continues to fall, into territory normally associated with those who are renting or living with family.  This signals significant risks in the property investment sector ahead.

 

Owner occupied property owners who have been able to refinance (lower LVR loans) have been able to shave their monthly repayments, while for some in rented accommodation they have found it easier to find a rental at a lower rent. Investment property holders reported continued concerns about servicing their loans, and of potentially higher interest rates ahead. Those on interest only loans were particularly concerned about their next reset review, given the tighter underwriting standards now in play. The peak of the resets however is well more than a year away.

The spread of scores across the states continues to bunch, as NSW and VIC households react to lower home prices.  WA continues to show little real recovery in household finance (despite the hype) although there was a small rise in Queensland, thanks to recent pay lifts for some.

Across the age bands, younger households remain the least confident, while those aged 50-60 were more bullish, thanks to recent stock market lifts, and access to lower rate refinance mortgages.  The inter-generational dynamic is in full force, with younger households not in the property market seemingly unable to access the market (despite the recent incentives in NSW and VIC) and those with a property, and mortgage wrestling with the repayments.

Looking in more detail at the index components, job security improved a little this month, with 12.5% feeling more secure, up 0.67%, 27% less secure, down 0.92% and those about the same at 58.8%, up 2%. However, we see many households in multiple part-time jobs, and around 20% of households are actively seeking more work/hours.

There was a small rise in those reporting an income improvement, thanks to changes which kicked in from July. 2.3% said their income has improved, up 1.5% from last month, while 43.7% stayed the same, and there was a drop of 2.2% of those reporting a fall in income, to 50.5%.

Households continue to see the costs of living rising, with 82.3% reporting higher costs, up 1%, 13% reporting no change, and 2.5% falling.  The usual suspects included power bills, child care costs, the price of fuel, plus health care costs and the latest rounds of council rate demands.  The reported CPI appears to continue to under report the real experience of many households. Many continue to dip into savings to pay the bills.

In terms of debts outstanding, there was a small fall in those reporting they were less comfortable, with 42% reporting compared with 44% last month. This is attributable to changes in interest rates, and refinancing, especially for owner occupied households with a lower Loan to Income ratio.  Many with large mortgages also have other debts, including credit cards and personal loans which also require servicing. Around 52% reported no change in their debt, up 3.5%.  Property Investors were more concerned overall.

Looking at savings, those with stocks and shares have enjoyed significant gains (at least on paper) and recent dividends, so tended to be more confident. Some were able to benefit from higher savings rates on selected term deposits, though rates attached to on-call accounts continue to languish as lenders manage their margins. Around a quarter of households have less than one months spending in savings, so many are facing a hand to month situation with regards to their finances. Many of these households are in the younger age bands and have no savings to protect them should their personal situations change.

We noted in the survey that a number of households were actively seeking alternative savings vehicles as property and bank deposits look less interesting. We will have to see whether these alternatives are as attractive (in terms of risk-return) as some are claiming. We have our doubts.  But then risk is relative.

So finally, putting this all together, the proportion of households who reported their new worth was higher than a year ago continues to slide as property price falls continue to hit home, and as savings are raided to maintain lifestyle. 42% said their net worth had improved, down 3.75% from last month. 25.6% said their net worth had fallen, up 2.5% and 28% reported no real change.

We had expected to see a small bounce in the index this month as some incomes rise in the new tax year and other changes take effect. But the impact of the fading property sector, and cash flow constraints are likely to dwarf this impact. The only “get out of jail card” will be income growth above inflation, and as yet there is little evidence of this occurring.  Thus we expect the long grind to continue.

Finally, the spate of attractor rates from the banks continues, in an attempt to keep mortgage volumes up. However, our research shows that many households cannot access them in the new tighter lending environment.

By way of background, these results are derived from our household surveys, averaged across Australia. We have 52,000 households in our sample at any one time. We include detailed questions covering various aspects of a household’s financial footprint. The index measures how households are feeling about their financial health. To calculate the index we ask questions which cover a number of different dimensions. We start by asking households how confident they are feeling about their job security, whether their real income has risen or fallen in the past year, their view on their costs of living over the same period, whether they have increased their loans and other outstanding debts including credit cards and whether they are saving more than last year. Finally we ask about their overall change in net worth over the past 12 months – by net worth we mean net assets less outstanding debts.

We will update the index next month.