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With just over a month to go, (and not a moment too soon) APRA have release the final versions of all of the Basel II standards, applying from 1 January 2008.

Go here for the announcement and here for the standards. I will be writing up a review of them if there is anything truly different about them. I hope there is not, as we all have to apply them only a month from now – well, almost all of us. See below.

I will also be retiring my page on the standards, as it is now redundant.

In all the excitement going on about the US implementation and several other matters (like work) I have not been saying much about how the Australian banks are going on their applications for “Advanced” accreditation.

Just out of interest, I did a search for Basel II on each of the Bank’s websites earlier this week. Hit stats went something like:


ANZ – 36
Commbank – 4 (2 identical documents in two places)
National – 1 (an employee profile only)
Westpac – 1.

Very poor outcome – but try the same using Google site search and the results change a bit:

ANZ – 26 (a drop?)
Commbank – 21
National – 1 (the same)
Westpac – 52.


BankWest (HBOSA)- 0 (I cannot find a search facility. Odd)
Macquarie – 29 (but many repeats)
St. George – 8 (again, a few repeats)

BankWest (HBOSA)- 0 (looks like the search facility would not have helped)
Macquarie – 13 (no repeats this time)
St. George – 3 (again, no repeats)

Additionally, not many of the documents are recent. This is, I suspect, for a good reason – several of them will not be ready on time or have been otherwise failed by APRA.

Under the prudential standards, this leaves them in an interesting place – the existing prudential standards will be withdrawn on 1 January and the Basel II ones will come in – but the banks that APRA have “delayed” accreditation for will not have done Standarised projects, and so will not be able to go to either system.

In practice, as Bernie Egan (APRA Basel II program director) made plain, these guys will stay on Basel I until they are cleared.

The big question is – who has already been cleared? Maybe those making the most noise about it?

A quick reminder, if any were needed, that it is not just banks that can suffer from an operational risk event. Governments can too. The difference, of course, is that you can change your bank at any time.

I have been out of contact over the last few days due to the fact I am moving house, so when I finally got my podcasts to listen to there were a few. I saw one from the BBC’s Today program on Northern Rock (warning – multi-megabyte MP3 file) and I thought this may be a good one, in light of my previous experience with them. I was gravely disappointed.
In what is now a continuing meta-story, the journalistic coverage of Northern Rock is showing just how little even financial journalists understand banking.

The errors in this particular piece revolve around a mis-understanding of one of the absolute basics of banking – liquidity risk. The premise of the argument in it was simple – Northern Rock was unable to meet calls on deposits meaning Northern Rock is insolvent and therefore worth nothing.

A basic understanding of banking would show this up as not a logical argument. As discussed in the post on liquidity risk linked to above, banks borrow short and lend long. This gives rise to liquidity risk, which means that if more than a certain amount of deposits are withdrawn in a short period a bank will not have enough physical cash to pay them. This can be, and must be, separated from the overall worth of a bank.

To put it in simple terms (and turn it around a bit) – let’s say I borrow money from a bank to buy a house. I manage to service the loan for a few years, during which time the value of the house goes up by 50% per annum – making me very wealthy (in part due to the leverage effect). Unfortunately, I lose my job and, during the period where I cannot find another one I cannot meet the repayments on the loan.

Am I financially worthless? Clearly not – there is a lot of value in my home. Can I meet the bank’s demands to pay my mortgage? No.

The Today piece confuses these when the journalist and the talking heads pulled in for the piece argue (at some length) that the failure to pay the demands of depositors means that Northern Rock is worthless.

One event I missed posting on at the time was the final agreement of all of the US regulators on the way that Basel II will be implemented in the US that happened 10 days ago. After some seriously silly obstinate argument from the FDIC, I was please to note at the time that the Fed largely got its way in the end, and now those rules have now been given final agreement.

To those of us watching from the outside this has been a painful process. I can only imagine how difficult it must have been for the US banks. The end result was close to the right one – the one I suggested a full year ago. In this, at least, the delay was worthwhile. Going with the FDIC’s original position would have been close to suicide for the whole US banking system – and a long, slow suicide it would have been.

Randall Kroszner’s speech on the matter is worth a read. The way he delicately steps around the blithering idiocy errors of the FDIC and the local bank lobbyists is almost artful.

One bit irks me, though – at the bottom of page 5 of the speech he is seeming to say that the US regulators will be coming up with a “standardised”  method of implementing Basel II. Amazing – I wonder what paras 50 to 210 of the New Accord are?

Anyway, if you are interested in my opinion on the whole process read the category. Reading in reverse order is probably best. I think some of my best posts have been in there.

In most of the rest of the world the process has been fairly sedate – well, as sedate as a nearly complete change to the bank regulatory framework can ever be. What am I going to talk about in this way again while we wait for Basel III?

I am glad to see someone takes me seriously. Amir from Austrolabe took my suggestion on a Google Maps mash-up and ran with it. The result can be seen here.

He has taken up to nine news feeds and the map then takes a pretty fair guess at where the story relates to. The locations are not always perfect, but most are spot on. The feeds are user selectable, with the BIS feed being the default.

If you have any feedback, suggestions etc., feel free to email using the link on the page or just post them here. If you know of good news links with reliable place names embedded within them he may be open to adding them in.

In the mean time, enjoy – if you find it useful, bookmark it.

First one to work out what building the map considers to be the centre of the world and identify it here in a comment wins a prize.

When I first saw Google Maps I thought at the time this would be a good thing for me and my kids to discuss the news, where everything was and what is going on where. What is happening now is to cut me out of the process – even my kids can now instantly see where things are happening.

A mash-up, for those of my readers not perhaps as familiar with terminology, is where information from two or more sources is joined into a seamless whole. A good example, using Google Maps and various news feeds (and advertising) , is the “Global Incident Map” where terrorism incidents (as defined by the news feeds) are combined with the maps to show the location of every incident combined with headlines and, on clicking on it, the full news article.

Anyone care to do one for the BIS news feed? Add in the FT, the BBC business news, the ABC business news, The Economist and a ticker above for the latest news and you have near perfection in a banking business news website.

I am gradually coming to a general rule on actually reading the speeches published by the BIS – the less interesting the title is, the more likely it is that the speech is actually worth reading.

This one “Some thoughts on securitization and financial turbulences” by Jean-Pierre Landau, Deputy Governor of the Bank of France, is a good example. Fairly boring title – quite good content. His (or, more likely, his underling’s) analysis is robust, with a good idea of what happened over the last few months. He is also right that the worst is currently behind us as the real problem was always the liquidity freezing up, not the size of the actual losses.

Where I feel he is wrong, though, is in the policy prescription:

Strong capital will not guarantee liquidity in all circumstances. There can be panics and sudden increases in the demand for liquidity. That’s the job of Central Banks to help in those circumstances. But a strong capital base in the system – and in all its components – is likely to limit future liquidity shocks.

The first two sentences are perfectly correct. Capital is simply not a substitute for liquidity. The next two, though, are wrong – and they do not logically flow from any of the analysis in the rest of his “Thoughts”. Bank regulators commonly get fixated on capital as the be-all and end-all of bank risk management. The attitude commonly seems to be more risk (of any type)? More capital needed. Liquidity, though, is not improved by having more capital; in fact, it may be hurt.

The best capitalised bank in the world will not be able to pay its debts as and when they fall due without liquidity – i.e. it will be bankrupt. Liquidity management is, and always should be, considered separately from capital management.

He is right that a well capitalised bank will find it easier to get liquidity in a liquidity poor market – but Northern Rock was, by the standards of the industry, well capitalised and profitable. Having to go to the Central Bank (the Bank of England) was what destroyed them. Adequate liquidity would have meant that they had no problems and no need for the Bank of England’s help.

The message? Good capital will help – but in a liquidity crisis what you actually need is liquidity. Also, don’t always believe that a Central Banker is right.

APRA has its annual publication of the ADI (banks, building societies, credit unions etc.) “Points of Presence” out. “Points of presence” is, for the non-banking junkies out there, APRA’s terminology for branches, head offices, ATMs etc.

See the summary here, and the full spreadsheet (warning 8+ Mb in a zip file) here.

Apparently there has been a slight drop in branch numbers over the last year, with the total number of points of presence up due to an increase in the Bank@Post (giroPost) outlets.

The definition used of a “branch level of service” is interesting:

Branch level of service comprises all service channels that meet the following minimum criteria:
· accepts cash and other deposits (including business deposits) and provides change;
· facilitates the keeping of accounts for customer access, including the provision of account balances;
· opens and closes accounts;
· can facilitate or arrange the assessment of the credit risk of existing and potential customers; and
· offers additional services in the one establishment such as financial services, business banking and specialist lending.

Depending on how you read the definition, this is a fairly high level of offering – some local “branches” I know of would find it difficult to pass the last two tests.

Anyway – knock yourselves out. There is a fairly good amount of data here to support any number of arguments about the retreat or advance of banking presence in Australia.

In this case I think you have to admire the ambition, at least. Perhaps not the cover story though.

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