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Following on from the recent discussion regarding bank logos, this post (from this week’s cavalcade) made me think that perhaps we could do something with Australian bank names.

In the spirit of French Connection UK, then, suggestions are requested for bank names relevant to Australia (or New Zealand) that would have as big an impact as the name FCUK did.

The best entry will be close to an existing name, have real impact and would be legal to put on the outside of a bank branch.

Warning, though – anything outright obscene will be summarily deleted.

Media release, requirements and forms relating to the Basel II reporting requirements were today released by APRA – only half way through the period for which the reporting will be needed. Good timing. Maybe the next changes will be released before we have to comply with them. I don’t ask for much.

By the way, there is a slightly misleading title to this piece, as the standards released today are plainly not final. In the response to submissions paper APRA moot two further changes, both to undo changes that have been made to this version. These are covered below.

One other little gripe – I had some trouble finding the response to submissions paper on the Basel II home page at APRA, as, silly me, I was looking for a paper released in 2008. Perhaps in a cunning plan to make it look like they were early, the release date on the page is 6 February 2007, not 2008. I trust this will be fixed shortly. If you are with APRA, you may want to talk to your web people and get his fixed, pronto. On the other hand, maybe not.

OK, onto the actual content. I will use the APRA paragraph numbers from the response paper to talk through them. If you are really interested, print the thing out. Double sided, it is only 7 pieces of paper. Don’t ever print all the requirements. Read the rest of this entry »

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.

A quick piece in today’s Bobsguide reminded me of another reason why smaller institutions, even when going standardised, need to improve their risk management in response to the implementation of Basel II. The reason is adverse selection.

As the Advanced banks improve their ability to pick the good credits and price all their lending much better they will be able to demand higher prices from the customers their systems identify as poor and give lower prices to the customers identified as good. This means that a institution offering a single price to all customers that meet a minimum standard (the current norm) will end up with, increasingly, the customers identified as poor by the Advanced banks’ systems.

This is a real problem. Banks currently lend at one price for all on the basis that, on average, the good credits will cover the bad and because the systems required to price for risk are expensive.

This implicit assumption breaks down once one or more lenders are genuinely pricing for risk – they will tend to pick up the good credits while the bad credits will tend to move to the institutions that are still offering a single credit price. This will mean that the implicit assumption on which single pricing models are built breaks down – over time, the bad credits will dominate over the good.

This trend will take time. Customers are always slow to change banks. However, proper credit pricing is no longer a nice to have – it is simply a matter of survival.

I was forwarded a link to an article earlier today for comment. Reading it, I just felt like putting my head in my hands and crying – how could a financial journalist write something like this and get it so wrong? It looks like he has taken a press release or a letter to APRA from an LMI (Lender’s Mortgage Insurance) provider and tried to rework it – while misunderstanding it.

I thought writing this up into a piece here would be a good start – but where to start? Can I question his journalism, use of stats or factual issues first? Maybe paragraph by paragraph.

The first two paragraphs are error free – good start, but these seem to be just a rewording of the press release / letter.

The third and fourth start the rot. A 50% risk weight the capital required to be held for a $100 loan is not $50, as stated, but $4 ($100 *50% * 8%). The 8% figure is the full risk weight capital ratio, and is not changing under the new regime. If you are interested in why 8%, my take on it is here. He has also totally missed the new operational risk capital amount, so the drop will not be from 50% to 35%, even for the safest, it will be (probably, but not certainly) a drop from 50% to a number that depends on the operational risk calculation. Read the rest of this entry »

With just over 6 months to go APRA have today released their draft of the standard giving the market disclosures needed under Basel II.

In short, and as expected, they have largely followed the disclosures under Pillar III of the accord for the banks going Advanced – with the bulk of the disclosures copied (sensibly) word for word. As with any of these, APRA needed to make some changes (discussed below). The real interest is in how scanty the disclosures will need to be for the ADIs (authorised deposit taking institutions) going standardised. For these guys the disclosures are (very) little more than they have to make now.

The other interesting point is in how you may disclose these – release to the website (para 18)! There is no need to formally publish the results in hard copy. Good move.

Many of the changes are simply textual – just making the disclosures work with the previously released standards. I will confine my discussion at this point to the substantial changes from Pillar III. Read the rest of this entry »

Through the whole Basel II experience there has been continuing questions raised about the viability of the smaller institutions (in Australia these are mutuals like the Credit Unions / Credit Societies and the Building Societies – not all of them mutually owned) . They will only get minor capital relief, if any, and this was felt to be likely to put them at a disadvantage to the bigger banks.

A couple of points can easily be made against this argument. Not the higher capital part – that is virtually indisputable. The banks using the more advanced methodologies will have lower capital requirements than those institutions going standardised – which, to be blunt, is the way it should be. The amount of likely disadvantage, though, is disputable.

As this media release makes plain customers like the smaller institutions. They consider they get a better deal through them – perhaps not in pricing (though this is disputable) but certainly through customer care. While this continues the customers will stay with them and they may well attract new ones.

The trick for the smaller banks is to weed out the customers that are costing them too much money to service and either get rid of them or charge them more. If they manage that then I see no reason why the smaller institutions should not continue for a long time to come.

Apologies for the low posting rate over the last few days – I have been finishing one Basel II project, starting another for another ADI and working on some Islamic finance projects.

As the new project is my first really serious Standardized project look to a few posts in the next few weeks on compliance for the smaller institutions. My early impressions are that the major difference in pillar one terms is the operational risk area. Pillar 2 – well who knows? It depends on your regulator. Pillar 3 reporting should be interesting too.

It is confirmed that APRA are seeking to impose a doubling of the minimum capital required for home loans – the banks have all received their letters confirming this over the last couple of days. This will mean two things – a home loan will be both more expensive and difficult to get in Australia.

As background (and without getting too technical) the amount of capital (the safety margin, in a way) that a bank is required to keep against any lending it makes is calculated based on past losses and the current economic situation. The ‘LGD’ is one of the factors in there. Double one of the factors and the safety margin doubles with it. This safety margin costs the bank money – so this is passed on in the form of increased interest charges on the home loan. Read the rest of this entry »

Interesting move here by the CEO of the (Adelaide Based) Savings and Loans Credit Union – giving out a phone number to call him directly – if only for two hours a month. It is a facility that would only work in a smaller institution (try to imagine John Stewart, the CEO of the National Australia Bank, doing the same thing) but what it does do is emphasise the fact that it is a smaller institution and the potential benefits that brings.

The personal touch is really the strength of the smaller players – they generally cannot compete on price as margins are thin and their cost-to-income ratios are high, so competing on service is the way to go. Committing to this sort of self discipline is also a healthy reminder to other staff that it is the customer, not the bank’s internal operations, that really matters.

(Just a note for those not familiar with Australian banking regulations – “ADI” is an “authorised deposit-taking institution”. They are banking institutions in all but name. In Australia you need to jump through a few hoops before you can use the words “Bank” or “Banking” in your title or in relation to your business. All are registered under the Banking Act 1959.)

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