Tag: Senate

Corrupt Canberra says your Freedom is Out of Scope

Economist John Adams and Analyst Martin North discuss the recent Treasury FOI response relating to the Cash Restriction legislation which was open (briefly) for public comment.

https://treasury.gov.au/sites/default/files/2019-11/foi-2580.pdf

https://www.adamseconomics.com/post/official-letter-of-compliant-against-the-australian-treasury

https://www.aph.gov.au/Parliamentary_Business/Committees/Senate/Economics/CurrencyCashBill2019

Action Stations On The Cash Ban!

I discuss the latest with CEC’s Robbie Barwick.

With 2 weeks left to make a Senate submission, we explore some of issues people may want to touch on, to assist.

Final date is 15th November 2019.

https://www.aph.gov.au/Parliamentary_Business/Committees/Senate/Economics/CurrencyCashBill2019

There is still time to make a submission, and stop this from becoming law. Our civil liberties depend on it.

Here’s how you make a submission: email economics.sen@aph.gov.au

Address to: Senate Standing Committees on Economics, PO Box 6100, Parliament House, Canberra ACT 2600

Some points to consider:

Civil liberties – cash is legal tender and you have the right to privacy and to not use a bank; you don’t want government and banks to “monitor and measure” everything you do.

Practical benefits of cash – power supplies and communications technology not always reliable; instant settlement of payments so can be better for commerce, good for discounts etc; whatever else.

Excuses for the law are false. Eliminating the black economy is a lie and won’t work: Australia’s black economy is small and shrinking, and cash restrictions have not reduced black economies in Europe, in fact the opposite.

Restricting cash won’t stop tax evasion, because the majority of evasion is done by large corporations and bank, assisted by the Big Four accounting firms – who want this ban. As Andrew Wilkie said, the government has enough laws to crack down on money laundering and the black economy – use them.

Real reason is to trap Australians in banks. This is explicit from the IMF: Cashing In: How to Make Negative Interest Rates Work. Won’t be able to escape negative interest rates, or bail-in.

Finally, government’s reassurances are fake, not guarantees. Treasury issued a fact sheet, which Melissa Harrison quickly refuted: exemptions aren’t contained in the legislation, just in the regulation that is easily changed.

Why Audit Needs Reform

Here is a show about my submission to the Senate Inquiry into Audit in Australia, where I focus in on the key issues, show some of the gaps in the current system and suggest reform. Submission close on 28th October if you want to have your say!

Just remember the many banks which passed audit in 2018 and then failed, as this Guardian article at the time highlights.

DFA Submission To Senate Inquiry On Auditing In Australia

On 1 August 2019 the Senate referred an inquiry into the regulation of auditing in Australia to the Parliamentary Joint Committee on Corporations and Financial Services for report by 1 March 2020.

Submissions close on 28 October 2019. DFA has made a submission.

Introduction.

We welcome the current inquiry and note the similar initiatives underway in several other jurisdictions. This is an important issue.

We believe there is a need to refocus the auditing practices which are currently deployed by the “big four” firms in particular and the industry more widely. We reach these conclusions, having analysed the financial sector for more than 30 years, as a consultant, financial firm employee and a partner within Arthur Andersen before its dissolution.

There are many threads to the argument, but, these large audit firms are in our opinion too close to management of large companies, as they both advise them on strategy and tax minimisation, and separately provide audit services. In addition, these big four firms are responsible for the evolution of accounting standards, including off-balance sheet minimisation, as well as providing advisory services to companies and Government, and they also offer auditing capabilities. Conflicts abound.

Whilst in theory audit practices should be separated from other commercial and advisory operations of the big four, I have seen examples when company account planning sessions have included cross discipline discussions, from advisory, consulting, services AND audit, to craft strategies to maximise the commercial benefits to the audit and consulting firm. This happened regularly at AA.

In addition, the audit of large companies are executed in a formulaic and superficial way, where the main test is the need to meet relevant accounting standards, not separately confirming independently that the business is functioning as advertised from a financial and compliance perspective.  Who audits the auditors?

Remember that in 2008 several banks failed, despite having been given an unqualified audit in the months prior. Others required substantial Government bail-out or were absorbed by other industry players. Nothing has changed (other than the quantum of debt and other exposures have increased substantially) since then.

A Financial Services Example.

To illustrate the limitations of audit, I will highlight four areas, where from my research and experience current banking sector audits are deficient.

Financial Derivatives Exposure.

According to recent RBA data Australian banks have some $48 trillion of gross derivatives exposures. This will include services to client, but also position taking on a trading basis within the bank’s treasury operations. Recent BIS research highlighted that in a low interest rate environment, banks will tend to lend less and trade more to try to bolster profits[i].  Plus, some window-dress their books for quarter end.[ii]

Derivatives gross exposures dwarf the capital and assets held within banks. This gross exposure is not reported clearly within the accounts, because most is held off balance sheet. Moreover, the true net-exposure which a bank may face will be determined by market movements and relative trading positions. But even net exposures are not adequately reported. We only get a glimpse of the true positions (and risks) when capital is applied under the Basel rules, but this does not tell the full story, yet are within current accounting standards, and off-balance sheet rules. We see no evidence of auditors picking through the derivatives book and validating or reporting these gross exposures. In a crisis this may well hit the financial position of an individual bank, and trigger the need for a restructure, bail-in or bail-out.  Current audit rules and approaches are designed to minimise disclosure and obscure the true risks.  APRA does not provide an alternative route to disclose such risks.

Internal Risk Models

Major banks can use their own “internal risk models” to estimate the amount of capital applied to the business, under the Basel rules. These models are complex and “tuned” by the institutions to enables institutions’ to maximise their use of capital. However, we are not convinced these models are functioning as intended, and they are not subject to regular audit, either by external auditors, or APRA. Thus, the data is taken as accurate from the “black-box” and this may lead to higher risks in the business than are disclosed.  Again, the true position will not be exposed until a crisis hits.

Property Portfolio Revaluations

Large financial companies hold significant portfolios of mortgages backed by residential property. An initial valuation is used in the underwriting process. However, unless there is a material refinancing event, subsequent portfolio adjustments, (because for example property prices move down) are applied only at an aggregate level (for example state level). As a result, there is a significant risk the property portfolio is overstating the real current value of the underlying security, and this may translate to bigger risks in a downturn. In addition, the amount of capital held under Basel rules could well be understated. There may be offsetting benefits in a rising market, but the standard portfolio analysis is not very accurate. But once again external auditors will be not examining the operation practices of portfolio valuations yet will sign off on the accounts as true and accurate.

Household versus Loan Risks

Households often hold multiple loans across a lender or lenders. APRA only considers the status of individual loans. Reporting for audit purposes will be at a loan, not household level.  Indeed, there are cases when loans are deliberately split to reduce the overall loan to value results. Once again this is an area where auditors will not tread, but the risks in the system are higher than those reported in the accounts. Again, the true position will not be exposed until a crisis hits.

These are just examples of pain points which the current audit processes will not adequately examine. There are many others.

Final Observations

The role of an auditor should be more than just checking with the accounting standards and signing off. They should be seeking out material issues, independently from management. But in the four cases above the results are wanting.

The solution would be to create an independent audit function, perhaps within the Auditor General’s domain, to provide accurate and independent analysis of large financial players. In addition, we believe that the audit functions of major firms should operate as separate service businesses and should NOT be also be allowed to offer creative accounting and off-balance sheet techniques as part of their service suite. The conflicts and limitations are obvious and concerning.

However, the true impact of such deficiencies would only be revealed in a crisis, mirroring 2008, by which time it is too late. Changing management and audit practices as suggested would place our important financial sector companies on a firming footing. Such changes could well benefit other industry sectors as well.

Changes to audit practice and structure are essential!

Martin North

Principal Digital Finance Analytics[iii]

October 2019

[i] The Real Problem With Low Interest Rates – https://youtu.be/LLUfzna5iys

[ii] https://digitalfinanceanalytics.com/blog/bis-confirms-banks-use-lehman-style-trick-to-disguise-debt-engage-in-window-dressing/

[iii] Digital Finance Analytics is a boutique research and advisory firm. More details are available via our Blog. https://digitalfinanceanalytics.com/blog/

APRA’s Myopic On Housing Loans

APRA took a question on notice relating to the average size of mortgages from Senator Peter Whish-Wilson during Budget Estimates, and the answers have just been released.

The questions are sensible, the answers once again show how myopic the data APRA produces is. They only report the value of loans and number of loan accounts on the ADI’s books). Nothing about household exposure across multiple loans. Who then is, I ask?

Questions:

What method does APRA use to calculate the “average balance of housing loans” as provided in the publication Quarterly ADI Property Exposures?

How does APRA account for mortgage offset (redraw) accounts in its method?

How does APRA account for instances where there is more than one loan on a property (‘loan splitting’) in its method? Does APRA tally the total of all loans against a property; or does APRA tally individual loans, regardless of whether there is more than one loan on a property?

What is the extent of ‘loan splitting’? How many properties have more than one loan against them? How many properties have more than two loans against them?

What is the average value of loans where there is more than one loan against a property?

Where there is more than one loan against a property, what proportion is fixed interest and what proportion is variable interest?

Where there is more than one loan against a property, what is the average value of fixed interest loans and what is the average value of variable interest loans?

What is the extent of ‘loan splitting’ being undertaken by different ADIs? In particular: what is the extent of ‘loan splitting’ by the major banks?


Answer:

The average balance of housing loans in Quarterly ADI Property Exposures (QPEX) is a simple average calculated as the aggregate balance of all housing loans, gross of offsets and provisions, divided by the number of loans. It is important to note that QPEX reports data from the ADI’s perspective and not the customers (e.g. the value of loans and number of loan accounts on the ADI’s books).

APRA does not consider the average loan size to be a reliable indicator of risk. ADIs are required to assess the borrower’s ability to service each loan, and the amount of security against each loan taking into account all borrower liabilities. APRA’s expectations are set out in Prudential Practice Guide APG 223 Residential Mortgage Lending (APG 223). ADIs are
required to report to APRA on the value of new loans originated without fully meeting the ADI’s serviceability standards.

Offset accounts are considered a deposit liability and do not reduce an ADI’s housing loan exposure.

APRA does not adjust for loan splitting in QPEX reporting. However, under APG 223 the ADI is expected consider the customers’ aggregate exposure in the serviceability calculation and available security when originating housing loans.

APRA does not collect information on loan splitting, by loan type, or across institutions. In addition the focus on the LOAN not the customer exposure.

An Open Letter to Australians: Only Glass-Steagall Can Save You from the Banks

Via Wall Street On Parade – Pam Martens: April 4, 2019

Dear Engaged Citizens in Australia:

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.

It is already clear where Australia is heading without this legislation. Australia will become the plaything of a global banking cartel just as is occurring in the United States. See Goldman Sachs’ Top Lawyer Is Part of a Secret Banking Cabal as CEO Blankfein Denies One Exists; and Citigroup, Deutsche Bank Face Australian Court in Landmark Cartel Case; and Banking Fraternity Felons. Your children will become the debt slaves to the banks in order to get an education; the banks will carve out their own private justice system to hear customers’ claims against them, effectively closing the courthouse doors for bank fraud claims; and your country will end up with the greatest wealth inequality since the 1920s.

Or, you can mobilize to pass the Glass-Steagall Act legislation. The choice is yours. (Americans, I hope you’re listening too.)

Dwelling Investment To Detract From Growth – Treasury

Philip Gaetjens, Secretary to the Treasury addressed the Senate Estimates today on the budget. We are being helped by super-high iron ore prices, but downside risk sits in the household sector, and especially, the falls in property and household consumption.

Fiscal outlook

The Budget forecasts an underlying cash surplus in the 2019-20 financial year of $7.1 billion, the first surplus since 2007-08. It is then forecast to increase to a surplus of $11 billion in 2020-21, with sustained surpluses projected into the medium term. The fiscal outlook continues to benefit in particular from commodity prices that have remained at elevated levels, coupled with continued growth in resource exports, which both support further expected improvement in company tax collections in 2018‑19 and 2019-20.

Ongoing strength in iron ore and metallurgical coal prices since the MYEFO and a consequent delay in the assumed phase down in these prices have contributed to a higher terms of trade in 2018‑19. The Budget prudently assumes a return to more sustainable levels over the next four quarters. Nominal GDP growth is expected to be 3¼ per cent in 2019-20, ¼ of a percentage point lower than at the MYEFO, and 3¾ per cent in 2020-21. In contrast to the upgrade in the terms of trade, growth in real GDP and domestic prices have been revised down, reflecting data since MYEFO, including the weaker‑than‑expected December quarter 2018 National Accounts released on 6 March.

As I noted in my last statement to the committee, the path to returning the budget to surplus has been a long one and reflects the long lasting fiscal impacts of financial shocks and economic transitions that occur as an economy rebalances. The long run of deficits has also left Australia with substantially higher public debt levels. The improved fiscal outlook now enables a greater focus on public debt reduction to improve Australia’s position to meet future domestic and international challenges.

In the Budget, gross debt is expected to be 27.9 per cent of GDP in 2019-20, falling to 25 per cent of GDP at the end of the forward estimates and further to 12.8 per cent of GDP by the end of the medium term. Net debt is also expected to decline in each year of the forward estimates and the medium term, falling from 18 per cent of GDP in 2019-20 to a projected zero per cent by 2029-30.

Domestic economic outlook

The economic data released since MYEFO were a bit weaker than had been expected, which I highlighted in my address to the committee in February. The December quarter 2018 National Accounts data confirmed the slowing in momentum in the real economy in the second half of 2018, although this followed two quarters of strong growth earlier in the year.

Spending by the household sector, on both consumption goods and housing, has moderated. We also know that housing prices have been declining over the past year and a half. Falls in residential building approvals since late 2017 are expected to flow through to lower dwelling investment over the coming years. Consumption of discretionary items has been particularly soft, including for those components that relate to housing market conditions, such as household furnishings and motor vehicles. While the pick‑up in growth in retail sales in February was welcome, it followed a number of weak outcomes.

In contrast, non-mining investment has continued to grow at a solid pace and spending by the public sector, including on services, such as health and education, as well as on infrastructure, has been growing above its long-run average rate. Mining investment is expected to grow in 2019-20 for the first time in around seven years.

Despite some weakness in the real economy, there has been continued strength in the labour market. Employment growth was above its long-run average over the year to February, and the unemployment rate is now 4.9 per cent, a rate last recorded in June 2011. The participation rate is close to its record high.

Growth in real GDP is forecast to be 2¾ per cent in 2019-20 and 2020-21. This is around Australia’s estimated potential growth rate. Growth overall is expected to be supported by accommodative monetary policy settings and the Australian dollar, which is one-third lower than its 2011 peak against the US dollar.

Household consumption, business investment, and public final demand are expected to contribute to growth over the forecast period. Dwelling investment is expected to detract from growth over the forecast period, particularly in 2019-20.

Solid economic growth is expected to continue to support employment growth, which is forecast to be 1¾ per cent through the year to the June quarter 2020 and the June quarter 2021. Consistent with positive employment prospects, the participation rate is forecast to be 65½ per cent and the unemployment rate is expected to be 5 per cent across the forecast period. As economic growth strengthens and spare capacity in the labour market continues to be absorbed, wage growth is expected to pick up.

Before moving onto the global economic outlook, I would like to take a moment to emphasise the importance of business liaison in formulating Treasury’s economic forecasts. In the lead-up to the Budget, Treasury conducted business liaison with a range of stakeholders, including banks, mining companies, industry bodies, economists, state and territory governments, representative organisations and small businesses. These consultations provide detailed forward-looking insights on the economic outlook, which directly inform our deliberations on the economic forecasts. Our business liaison activity also substantially benefits from Treasury’s state office presence in Sydney, Melbourne and Perth.

Global economic outlook

Moving now to the global economic outlook, since MYEFO there has been some deterioration in the outlook for global growth, particularly in the euro area and economies outside of Australia’s major trading partners. Reflecting this, forecasts for global growth have been downgraded. Nonetheless, growth in Australia’s major trading partners is forecast to continue to be robust, at 4 per cent in each of the forecast years. Labour market conditions continue to be strong and inflation remains relatively contained in most major advanced economies compared with historical experience.

The United States economy continues to grow solidly. Wage growth has picked up and inflation has increased slightly, closer to the target rate. Growth in China is moderating, reflecting weaker domestic demand as authorities address risks in the financial system and trade pressures weighing on business confidence. With help from targeted macroeconomic policies, China is expected to achieve the authorities’ target of 6.0 to 6.5 per cent growth this year. ASEAN-5 economies continue to perform solidly, with domestic demand and favourable demographics supporting growth.

As outlined in the Budget, there is a high degree of global uncertainty, which appears to be weighing on measures of global confidence amid a range of economic and geopolitical risks. These risks include continued concerns about trade protectionist sentiment, high levels of debt in a range of countries, including in Europe, and Brexit risks, although Australia’s trade is oriented more towards Asia than Europe. In the near term, there is also uncertainty about how quickly activity in some countries will bounce back from temporary factors that weighed on growth in the second half of 2018.