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The recent releases by APRA of near final drafts of APS 110, 111 and 120 means that APRA are getting close to finalising the regulatory requirements that will apply to all Banks, Building Societies and Credit Unions from 1 January next year, arising from the application of Basel II in Australia.

There are a couple that remain as yet not even been published in draft form (the infamous APS XXX on the requirements for Standardised operational risk being the most obvious) and none of them have been published in final form, but the direction is obvious and the discussion is now mostly over exact wording, rather than substance.

Important dates coming up: 30 July (today); close of comments period on the draft APS 110 and 111 on capital adequacy and 10 August; close of comments period on the draft APS 120: Securitisation. None of these is expected to be contentious as APRA have accepted most of the input from the submissions on the previous drafts.

The interesting issues now are in application. A few of the banks working towards using the advanced methods are having real trouble in convincing APRA they are ready, with at least two being told they will be delayed past the start date. Whether this is for valid reasons or not is in dispute, but provided they are allowed to go Advanced soon it should not make a major difference.

The only major bone of contention left is APRA’s insistence that the capital held against losses in the housing loan market will need to be more than double the amount the Banks have calculated – increasing the costs of housing loans. Given APRA’s track record in the area it is unlikely this will be relaxed soon.

The good points? APRA have not made the mistakes that the US regulators have and we are now fairly certain on the regulatory framework to be applied from next year.

In what looks like a (near) total victory for the US Federal Reserve, agreement has been reached between the various US regulators on the final implementation of Basel II in the US.

The elements of the deal:

  1. The risk insensitive capital floors (flaws) have been dropped, replaced with a gradual (5%p.a.) maximum drop in capital over the first 3 years;
  2. Basel IA has disappeared as an option;
  3. Basel II Standardised becomes an option for US banks; and
  4. Basel II Advanced will be implemented “and should be technically consistent in most respects with international approaches”

All I can say about this is: Excellent. Amongst many others, I have long been a critic of the stupid questionable US approaches. I am very glad the Fed held their line and, apart from a fig leaf of a review at the end of year 2, they have been vindicated.

Well done.

…that is the question.

Over the last few years many firms in Australia, and in particular the mining firms, have taken conscious decisions not to hedge. Note here I am not talking about hedge accounting, but economic hedging.

For the last few years this has been a very profitable strategy. Commodity prices have largely, and sometimes spectacularly, gone up. The Aussie dollar has been largely stable in the 70 to 75 cent (to the USD) range, and so anyone that did hedge has normally been losing money on the strategy.

The temptation, then, has been to decide not to hedge.

The problem is that the future is, as always, uncertain. If you know anyone who can be certain what will happen in the markets even 5 minutes from now then I suspect they are one of:

  1. A fool
  2. A liar
  3. Simply wrong or
  4. Misinformed.

Read the rest of this entry »

For those looking for an up-to-the minute summary of why Basel II is needed I would advise a look at this speech by Randall Krosner of the US Fed. Like most of the speeches by members of the Fed, he appears to understand the reasons for Basel II and why, in a global sense, it is important – unlike the lack of understanding displayed by other US regulators.

As a side note – it is interesting that the BIS PR department choose to publish the speeches of Fed employees and not those of the FDIC. Curious.

I would disagree with him on the need for Basel IA though – as I have said before, if a small credit union in Australia can implement Basel II Standardised I see no reason why a US S&L cannot.

Just for a little light relief Peter Roberts over at Finextra points to a video that asks the important question – will an iPhone blend?

The pace is certainly quickening. As I was just a little busy at the time, I missed posting on the release of new drafts of APSs 110 and 111 on 2 July.

Not much to say on them until I have had time to read them. The interesting thing to note is that they are now all bundled into one convenient package, rather than in several documents. Other than that, and for the moment, read them yourselves here:

Draft Prudential Standard APS 110 Capital Adequacy

Draft Prudential Standard APS 111 Capital Adequacy: Measurement of Capital

Discussion paper

Press Release

The prudential standards page should now be up to date, with the usual caveats, of course – E & OE.

Just a quick note to let any interested parties know that a new draft APS 120: Securitisation has been released by APRA. I will write an examination of it if I get some inspiration.

Press Release

Draft APS 120

Response to Submissions

The links on the prudential standards page have been updated. I should add that the draft APG 120 will not be updated at this stage – so no need to print that one out again.

I would invite readers to have a read of Chris Skinner’s post over at Finextra today. As I am not a beta tester over there, I cannot comment directly, but the basic premise of the post is that most money-launderers use cash at some stage of the laundering process, so the solution to money laundering is to do away with cash entirely.

Personally, I find this a bit extreme a solution. Cash is useful to me for several reasons beyond the illegal (not, of course, that I would do illegal stuff with it). It is handy for small payments and for buying things like lunch it is a lot quicker. Paying for things I buy off mates is easier in cash as I do not always have a web browser with me to make a direct payment into their bank account (although my new toy, a Nokia N95, comes close) and it saves me having to note everything down to transfer the funds later.

It also makes it easier to hide purchases (like birthday presents) where I do not want my wife to know how much I spent.

What do readers think? Is the proposed solution worse than the proposed cure?

As the Basel II process beds down it looks like it is the insurance world that is next. The replacement of Solvency I (as it is now known) by Solvency II has been set down for 2012 in the EU, with the expectation that it will be broadly followed elsewhere.

We can only hope for two things:

  1. They will come up with a better name for it (it lacks the ring that even a fairly boring town in Switzerland can bring it); and
  2. The US will not cock it up as badly as they have Basel II.

I know that, unlike Basel, there is no real global need to follow Solvency II, but given the globalized  structure of the industry, something like this is inevitable.

I cannot claim to be too aware of insurance issues, so I will not try to pretend – but if you want to vent your own spleen or discuss the issue, go ahead.

I just finished an update on IFRS 7 and was reminded about how much of a load this standard is going to put on most firms – and how little value this will add to published accounts.

In Australia, all firms, big and small, need to use full IFRS if they are reporting entities (this is most firms), which means that full compliance with all standards is mandatory.

For corporates IFRS 7 is of dubious value at best. As an investor, unless the firm I am investing in is taking large, naked speculative positions in foreign currency, am I really interested in their forex sensitivity or perhaps the holdings of HTM, AFS assets and loans and receivables?

Even for banks I doubt this will be useful – but it will require the disclosure of much information that is market sensitive, meaning that those reporting early in the first year of implementation will have their holdings a bit more exposed than those reporting later.

In summary – you have to do it, you have no choice; so learn to live with it. Engage with your auditor early, but get independent advice on what does, and does not, have to be disclosed. Make sure the person you are getting the advice from knows what they are talking about (there are not many who do) and even your normal audit partner / manager may not know. Check they have at least some experience.

If they do not, and for those of you reporting early, read widely. This is an example of disclosure for the sake of it.

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