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The seeming desire on the part of our politicians to regulate practices known as “predatory lending” simply does not stack up. I say this for a number of reasons:
- Other than a few anecdotes1 there is no real evidence that this is commonly happening in Australia.
- It is covered in any case by the UCCC (Uniform Consumer Credit Code) unless people sign a document stating the loan is for business purposes.
- A new regulatory regime is not going to be cheap.
- There is no evidence it is going to help in any case.
- There is in fact good evidence that “usurious” lending actually helps the borrower.
Regular readers here would know that, while I work in one of the more regulated industries, I generally oppose more regulation and believe that regulation should be minimised and only added to where there is evidence it will help. Basel II is an example of this – while much larger than the regulations it is replacing, the movement towards a truly economic base for regulation is a good thing.
Going back to Middle Ages style usury laws is not. If there might be a serious problem, let’s check it out first. Come up with some evidence it is a problem. work out whether the regulation is going to cost more than the problem does etc. etc. etc. You know, the basic stuff that should be done before you add an additional burden on us all.
1. And remember, the plural of “anecdote” is not evidence.
This is intended to summarise the several posts over the last few weeks on the current market issues. Let me start by making a few issues perfectly clear:
- No major Australian ADI (authorised deposit-taking institution – i.e. those you can deposit money into) is going to be unable to pay all their depositors their deposits on demand as a result of these issues. None. You are not at more risk than you would otherwise have been.
- I am not aware of any minor Australian ADI that is not going to be able to similarly meet withdrawal requests as and when they are made. There may be a micro institution out there in trouble, but I would be surprised.
- The only ones that may have some problems are the ones that do not take deposits, but rely on wholesale funds. Crucially, these will not the the ones you have deposited any money into. Again, I doubt any will collapse, but even if they did the worst consequence for their retail customers would be that they would have to re-finance their loans, or, if you are a shareholder, you may lose that money. It is unlikely, though.
The reason for this is very simple – the Australian regulator of ADIs, APRA, is very conservative (too conservative in my opinion – but beside the point here). If an Australian ADI was writing a lot of loans similar to the US sub-prime loan they would be stopped from doing so and essentially forced to unwind the loans in some way. I would be shocked if APRA had not noticed an Australian ADI running up these positions as they are normally very close to the regulated entities. The reason I am hedging a bit on some of the smaller ADIs is that there is always the potential for fraud somewhere, but I think it unlikely.
For clarity, the situation at Northern Rock in the UK:
- is illogical;
- will not result in the loss of any depositor funds; and
- is probably terminal for Northern Rock as in independent institution
for fairly simple reasons – and I would refer you to my previous post on this. It is unlikely to be copied in Australia for the simple reason that most Australian ADIs have good deposit bases and are not overly reliant on wholesale funds. In any case, as commenter Asa Mark linked to ( the second link) this market is starting to open up again in Australia as the markets work out that the fundamentals of the Australian economy have not changed and that lending is still as safe as it normally is.
If you are really worried and with one of the smaller ADIs, move to one of the big 4 banks or the major regionals. I would think you will move back fairly smartly though, once you get annoyed by the difference in service levels.
The current situation with Northern Rock shows just how important customer confidence is when you are (as are virtually all banks) profiting from the borrow short / lend long play. Without deposit insurance (which, I should add I oppose) panics can develop without logical foundation
As their most recent balance sheet makes plain they are entirely solvent – but cannot realise their mortgages fast enough to meet highly abnormal demands for repayment of deposits. This will may mean that the B of E will have to arrange a sale to the highest bidder – and the rumours I have heard is that a few institutions are looking at it, including the National Australia Bank, which has been looking around for further acquisitions in the UK.
The NAB would be a good purchaser, with, in contrast to the Rock, a good deposit base and no real reliance on wholesale funds – the reliance that triggered all this off for Northern Rock.
The lesson here? Watch that name risk and make sure that any announcement of problems is phrased correctly. Having the Bank of England make an announcement that it was moving in as lender of last resort, as Northern Rock did, probably does not set the right tone.
Have your plan up to date and ready to go at all times – take it off the top shelf, blow off the dust and review it now. You never know when you are going to need it.
APRA have released a discussion paper on Pillar 2 of Basel II – the Supervisory Review Process.
Most of the content has already been well telegraphed ahead, either by the prudential standards already released (particularly APS 110) or in the other discussion papers and speeches. The one real disappointment is the decision to maintain a 10% capital drop “floor ” for the next two years – “…pending a review of experience…”.
The levels of conservatism here are getting frustrating. APRA have already added floors (or is that flaws) into several places, both on a general level (the 20% LGD on housing loans for example) and specifically into many individual ADIs, for example many smaller ADIs have been hit with higher capital levels seemingly in preparation for Basel II.
All of the regulators around the world, and APRA no less than others, have been boosting Basel II as a much better risk management framework than Basel I. I would entirely agree. The new frameworks will make banks generally much safer. Why, then, do they need to keep capital at or near levels that had no justification when they were implemented?
To me, this is akin to a road regulator saying that, despite the improvements in car design, road safety and everything else since the early days of motoring we still need to have a person walking in front with a red flag “as it is just safer that way”. The only difference now is that the guy in front may be allowed to run.
APRA today released a discussion paper on the Basel II reporting requirements to apply from January next year – with the first reports to go to APRA for 31 January 2008.
On a first detailed read the proposals look fairly non-controversial, with the changes to current forms largely down to the changes needed for Basel II compliance. A few interesting points, though:
- In a speech in March this year (see the top of page eight) Bernie Egan (APRA Basel II program director) indicated that banks having trouble meeting the advanced Basel II requirements may stay with Basel I calculations. There is no room for the “pragmatism” he indicated in that speech to be reflected here – these forms (and APS 330 for that matter) will apply. I am currently presuming that the flexibility will be reflected in the transition arrangements mooted in para 5.2.3 of this discussion paper.
- For the banks going advanced there are a lot of forms, at least 24 and possibly more if there are some portfolios going standardised. Fortunately these will all be electronically submitted and, in a way, this reduces the difficulty. A fault in one item of data or formatting will not invalidate the whole process, just one file. I am just glad (or is that praying) I will not be the poor sod who has to review all these forms prior to transmission.
- Para 4.3 asks for the banks to report actual operational risk losses – not just the modelled amounts and the resulting capital requirement. This seems sensible – it allows back-testing – but I wonder what happens when an operational risk loss event (such as a fraud) appears a fair way down the track? Do you re-submit an old form or add it into current period losses? Small point, but one that should be cleared up.
Other than that and as far as I can see “Nothing to see here, move on, move on.”
Noticed an hour or so ago that Westpac’s website was not responding and they now have a “Website Unavailable” page up. The link to “Westpac Online”, which is meant to be another server to allow you to do your banking, is also down. Good to see the standard PDS is there*, though – risk management will always win, even with a server crash.
If there is any scuttlebutt out there I would be interested…
*”General advice on this website has been prepared without taking into account your objectives, financial situation or needs. Before acting on the advice, consider…”
A question for the auditors amongst us with some direct recent relevance. A friend asked me to get some comments on it. Corrections to the “facts” below are welcome as it may not be correct in all particulars.
Basis Capital’s (“Basis”) Basis Yield Alpha Fund (“Basis fund”) has substantial holdings of Collaterised Debt Obligations and other instruments that are the subject of considerable uncertainty as to value.
Basis fund is a “hedge fund” which took highly leveraged, and risky, positions in these and other instruments. Investors were allowed buy out of the fund with a month’s notice – giving notice at the end of a month resulted in the refunding of the investment plus profits (or minus losses) at the end of the next month. There was no active secondary market for investments.
On 17 July 2007, but backdated to take effect as at 30 June 2007, Basis suspended redemption from the Basis fund, citing that the fund was not “…currently able to repatriate funds required for the purpose of making payments“. This means that the last possible date for redemptions was 31 May 3007, due to the operation of the one month call discussed above.
The next day (18 July) Basis announced that Grant Thornton had been retained to assist in an orderly realisation process, and said that “that the enforcement action by the financiers of the Master Fund at distressed sale prices would result in a reduction in the net asset value of the shares in the Basis Yield Alpha Fund to below one-half of the level as at 31 May 2007“.
In a letter sent to investors on 15 August 2007, Basis announced that it was unable to “accurately estimate” the net asset value of units in the Basis fund because of “further deterioration of market conditions” and put the estimated losses at “in excess of 80%“.
On 30 August Basis announced that Grant Thornton has been retained to act as provisional liquidators of the Basis fund. Press speculation is that losses in the fund have increased further and that a total loss of investor funds can be expected. Read the rest of this entry »
Per today’s Bobsguide – Basis Capital’s Basis Yield Alpha Fund has been put into provisional liquidation, with investor losses now likely to be 100% of their investment. At the moment, a few of the funds run by Basis look to be the only substantial losses from the US sub-prime fallout. Lets hope it stays that way.
On of the issues that continues to bug me in relation to money laundering is the potential for (and almost certainly the actuality of) the use of various online non-bank payments services for money laundering purposes.
There must be tens, if not hundreds, of ways of moving funds around the globe while creating a good cover story to explain the movement and thus wash the funds.
A good example would be to use eBay and PayPal – if I needed to move funds from (say) Australia to Hong Kong it would be easy for my counterparty in Hong Kong to arrange an auction for a seemingly valuable, if fake, item (say an antique of some description) then I bid for the item, a fair way over its true value – using a second account (or another associate) to ensure the bidding goes high enough to transfer the funds I need to.
At the close of the auction I arrange payment for the item and it is shipped to me. Total costs of transfer – shipping for the vase (if you think it needed) and seller’s premium on eBay. Result – funds transferred with good cover story if the Australian Federal Police ever come knocking. If you want to totally cover your tracks (and maybe make an insurance claim) just break the vase.
The in-game transfers in the MMPORGs (such as Second Life) have been blogged on before, notably by Chris Skinner, as has eGold. While large, one off-transfers are likely to get picked up on these I would have thought that frequent, low value transfers would not. All you would need to move large numbers around the planet would be several accounts, possibly under multiple names.
The question then comes down to: should they be regulated like other money transfer services and, if so, how? Often there will be no physical presence of these firms in a country and blocking them in some way would cost a fair amount, be ineffective in any case and eliminate a legal business.
The only real way I can think of doing it is the way that the US attacked the online gambling industry – cutting out transfer to the business involved. In this case it would not be to cut them out, but to make them reportable.
Media release today from APRA – Dr. Katrina Ellis (of UCD) has been appointed as their new head of research, with the former head, Dr. Neil Esho, going to the BCBS for a while. Dr. Ellis looks like a good appointment for the role – particularly with some real (non-academic) experience through Mac Bank early in her career.
I do not know much about her, though. If anyone has any comments (non-slanderous, of course), feel free.