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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.
I do not often point out an individual bank’s marketing – but what is with that new logo from the ANZ? The first time I saw it I thought it had to be a joke – and then I thought about the history of some Australian bank logos and I thought it may not be. Then I saw their new ads and I knew it was not.
I am not really sure what it is – but I can think of a few things, not all of them would be suitable for publication.
If you have any suggestions feel free to add them in comments.
A friend of mine is trying to get an credit card merchant account so that a new business he is starting is able to accept credit card payments. The only slightly non-standard parts of it are that he would like to be able to keep forex receipts in the foreign currency to reduce the forex risks (some of his payments will be in USD) and that he would like to be able to do recurring billing.
Personally, I do not think either of these should be a difficult thing, but I have run out of suggestions and I do not work in the credit card area much these days.
If you can think of a way to do it, please either comment here with a suggestion (which I will forward on), or head over to Troppo where Jacques would be happy to hear from you.
By the sound of it he is now also prepared to consider going overseas to get such an account – incorporation in Delaware has been suggested. Any other ideas would be welcome.
If you want to sound off or empathise I think that he would also be happy to here those as well.
Bank capital allocation is normally a pretty dry subject – and that is to people who work in the area. To the rest of you it must be sleep inducing. That is, until you consider the real effects that it can have.
This is a follow on piece to yesterday’s article.
On a macro level, of course, the differences in the capital charges (between Economic, Regulatory and Total) drive some really odd behaviour. The effects on an unregulated institution (or one without effective capital regulations) are that, in the absence of regulatory restrictions, they can hold assets with less of a capital charge than a bank. This means that, if the bank lends the money out in the first place, the loan is worth more to an unregulated institution than to a bank. Selling the loan then means that both parties make money on the deal. It also means that it is worth trying to get the home loan into a different regulatory capital category – say as a traded instrument rather than a loan.
Banks therefore bundle(d) these up into corporate vehicles (securitisations) and tradeable instruments (CDOs etc.). If the bank can get the loans off their books then they can make the money from the initial fees from lending, selling the loans and also from managing the loans once they are off the bank’s balance sheet.
If the loan is sold and the bank retains little or no credit risk (i.e. if the loan goes bad then the bank does not have to pay) then the incentives are simple – write as many loans as possible regardless of the credit risk provided you can then sell them. If housing prices go up then there is no problem at all – everyone (including the borrower) stands to make money. The bank gets a fee for originating the loan, the purchaser of the loan makes money off the interest and, if the loan goes bad gets the remaining funds from the sale of the house and the borrower gets to live in the house and may well be given some money at the end when it is sold.
If prices go down, though, it is another story. The originating bank still makes money, the borrower (in the US at least due to the without recourse lending) gets to live in the house until foreclosure but the loan purchaser gets stuck with any losses, as has happened in the US over the last year.
The point here is that the excess and disproportionate requirements of regulatory capital is one of the main things driving this. People will always try to make money and should be (justly) condemned for doing so when it involves fraud or negligence, but the system itself should not create the incentives in the first place.
Creating a CDO or securitisation costs money. There are legitimate reasons for them to exist (some banks are better at lending than borrowing and some investors want to be able to lend specifically for housing for example), but having them drive adverse lending behaviour can cost vast amounts more money. Reducing the incentives for them to exist means fixing the regulatory capital weights.
Until that is done merely requiring more capital in banks will increase, not reduce, the problem.
I was asked yesterday about capital charging – and I started talking about transfer pricing. Whoops.
Without going into a full description of banking capital, I would like to set out a few basics on capital charging, my philosophy on how it should be done and (tomorrow) some of the effects of this on the current system.
The first decision you need to make is whether to use economic,
regulatory or total capital. In deciding the level of total capital, it
should be above (by a certain margin) whichever of economic or
regulatory is the higher. If we assume that regulatory capital is the
higher (a fairly safe assumption) you get the following:
Total Capital > Regulatory Capital > Economic Capital
The reason for this fairly simple – if you are operating below your regulatory capital then the regulators will (or should under the law) insist that you increase your capital level or they will move in and shut you down. Regulators normally insist on more capital being held than is conventionally prudent, and the economic capital value is what you would choose to hold if you were being conventionally prudent (i.e. within your risk appetite).
The important question when internally charging for capital is which of these to use as the correct value for charging? Read the rest of this entry »
I was asked a question today that I thought would be interesting for the general readership – to see what approaches were being used. To quote the question:
My … question for you is regarding retail pooling……as you know, when we implemented in <deleted>, each exposure was individually assessed and the pooling approach was not adopted.
Given that SMEs have the ability to fluctuate between Corporate and Retail classifications, how does that work from a model perspective for banks that have adopted the pooling approach for retail? For example, a business is assessed using a non-retail application scorecard as it meets corporate criteria and a PD is calculated. If that business then ceases to meet the corporate criteria would it then need to be allocated to a Retail pool? Then what happens if it pops back into the Corporate bucket?
I can only assume that this is not dynamic managed and that there would need to be some manual reclassication / reassessment of the exposure.
I know what my response would be, but I would be interested to see what approaches are being adopted outside my own little world. Comments?
I was writing up a long piece on deposit insurance in Australia when I read the news that the Federal Government had just moved to guarantee all bank deposits in Australia – meaning the bulk of the text was pointless. I will rescue some of it in this piece – but not much.
With my long opposition to the implementation of such a thing I can only hope that this is a temporary measure. I believe, however, that there is virtually no chance of this being reversed any time soon.
On a personal level, over the next few weeks my reaction is going to be fairly simple. Any surplus cash I may have I am now going to move into the highest possible paying bank account totally regardless of the riskiness of the institution – for the simple reason that risk is no longer any different across any of the ADIs in Australia. This is a totaly ludicrous outcome, but one that has been set up by this change. Provided the institution is APRA regulated I just have to look for the highest rate. This is bad micro-economics.
In short, this move gives an advantage to the ADIs with high risk portfolios and penalises the safe ones. This measure will effectively guarantee a funding stream for any banks that want to play fast and loose with the markets. APRA’s supervision will have to be stepped up to levels reminiscent of the USA. Great. Is this really the outcome that the Government wants?
The other, again rhetorical, question I would ask is whether this will actually make the system any safer. Just have a quick guess as to the stability of those countries with “strong” deposit insurance schemes against those without them. Good examples of “strong” schemes are the USA and Britain – and (drum roll) which countries have had the most problems? The USA, Britain and Iceland. Oh, just in case you were wondering, Iceland had a strong scheme too. Check out this World Bank paper. It simply does not do what it is meant to do.
I do not believe this is going to prove temporary for the simple reason that it would be very difficult to remove any time soon – if ever. Having made the announcement that deposit insurance is in place its removal would cause strong political stresses. Policians, being a spineless lot, will just use any subsequent problems as an excuse to intervene more. That said, many of the more advanced nations that once had full deposit insurance (like Sweden) subsequently reduced the protection – so there may be hope.
I should add that we have now joined those paragons of banking excellence who have full deposit insurance:
- The Dominican Republic
Time after time after time while attending seminars on the current problems I see “the Market” copping the blame for causing all this. It is also all over blogs everywhere. Supposedly, if only the regulators had been doing their jobs well, or current “fads” in deregulation had not existed then there would have been no problems.
As regular readers of this blog would know, I would class myself as very much of a sceptic on this type of analysis. There are several suppositions in there that I find at best unconvincing and at worst straight out wrong.
Firstly – apart from a few loans given out by fraudsters most of the loans were made in the expectation of returns. Banks are not charities and so they were expecting to get prinicipal and interest back. Where the loans were made to people with NINJA conditions (no income, no job or assets) it would have been through capital increase – i.e. appreciation in the value of the home.
A second problem here was those banks using brokers to sell the loans and then giving them incentives for getting the loans in through the door, rather than (as happens here – and not by regulation) for continuing performance through trail commissions. This mean that some brokers were just handing them out and using high-pressure techniques and breaking both the law and their contracts with the banks.
At a regulatory level, however, the problem gets more interesting. Firstly, Fannie and Freddie, as GSEs (government sponsored enterprises) were using their implicit government support to lower the lending rates to the prime loans they were (largely) restricted to. This also heavily skewed the markets – home lending through Fannie and Freddie became the same as lending to governments, so there was no risk sensitivity. They were also able to (and increasingly did) use these borrowing rates to issue many complex derivatives based on home loans. They were also, as GSEs, not subject to the same regulations as everyone else. Nobody really cared about this because there was an understanding that Uncle Sam would ride to the rescue if needed – as they did.
Worse, since 2004 Fannie and Freddie were not restricted to prime loans – they had about USD 500 billion in the sub prime market. The entry of Fannie and Freddie into this market acted to further squeeze the private money into the riskier end.
A further, major, regulatory problem is the way that housing loans were (and in the US still are) treated under Basel II. For capital purposes all home loans were treated exactly the same – whether a ninja loan to someone in the projects or a 10% LVR loan on a $10,000,000 stately home on Long Island.
Everyone knew this was silly, so there grew up a large market in
derivatives based on home loans that was designed to arbitrage the
difference between the loans the GSEs could touch and those they could
The net result of this interplay between the GSEs, the capital regulations and lax lending standards due to high monetary growth was that the banks were stuffed with cash they had to get out the door. They were unable to use the cash to make loans to the good risks that Fannie and Freddie had cornered and the capital regulations said that all home loans were as safe as each other. The brokers were often being paid to make loans (not necessarily good ones) and the banks did not care as much as they should have as, for the last 10 or more years, home prices had risen as much as, if not more, than their prime lending rates. Many of the banks were also, by their charters, prohibited from lending outside the US or for other than homes.
If Fannie and Freddie had not been there and the capital regulations (if they existed) had actually been risk sensitive then lending would have been (IMHO) better – but, as always, not perfect. This would have reduced (but perhaps not eliminated) the ninja loans, meaning the house prices would not have gone up as much, meaning returns from other than capital would have been examined.
I am not trying to assign sole blame for this to the regulators. All I am saying is that they did not help – so expecting more regulation to fix the problem would be the triumph of hope over experience. In the US at least, the problem was in large part caused by the multiple overlapping systems of regulation, the effects of the GSEs and the frankly stupid incentives it gave many of the market participants. My strong suggestion would be to look at sorting these out first before running off and trying to put in place more straitjackets for an industry that is already tightly bound.
The US Federal Government’s effective takeover of Fannie Mae and Freddie Mac may or may not end their lives as independent institutions. From my point of view, though, I hope it does. Far from being, as some would say, the guarantors of a stable housing market in the USA they have instead acted as that worst of government institutions in the market – exploiting their quasi-government status (and the government bond ratings that come with it) to act as maniacs with meat-cleavers.
Implicitly using the public purse (through the belief, now proven, that the government would bail them out) for private gain (dividends to shareholders) they have long used their ability to issue debt that the Fed would accept at the discount window to undercut fully-private institutions, stifiling the development of a full mortgage market in the US. Institutions wanting to gain exposure to the US housing markets either had to accept the sorts of rates that came out of a deal with Fannie or Freddie (and the losses on their own funding rates that resulted) or get into the lower quality mortgages that Fannie and Freddie would not (or could not) touch.
Possibly worse they also consistently tried to enter new markets, again also using their quasi-government status, to issue many types of new instruments that then distorted those markets. Their regulator, unlike the ones for fully private firms, was weak and did not require them to hold anything like the amounts of capital any other financial institution would have. This gave them yet another advantage and further distorted the markets.
The solution? In one of the (few) calls I have ever made for more legislation (or even nationalisation), Congress should move to fully nationalise both of them, paying out the shareholders the full market price as of Saturday, and then liquidate them both. Sell off all of the instruments they hold, repay the debt and then take any loss (or gain) that results.
While they are at it also wind up Ginnie Mae, the Federal Home Loan Banks, the farm credit banks and Farmer Mac. These children of the New Deal have long outlived any usefulness they may have had in the context of the 1930s and now only exist as means of distorting the markets and providing government pork to the farming community – who are, with few exceptions and the possible exception of the Europeans, the richest farmers in the world.
In one of my few forays into fact checking (I do not pretend to be
a professional journalist) I have spoken to a few people in and around
BankWest over the last few days. They have all been confident that there
is no sale process in the wind. A couple of them are in areas that
would be crucial in the event that there was to be any movement in this
area, so I can be fairly confident in saying it isn’t going to happen –
at least, it is not in the works now.
The last piece I did on this highlighted the issues with it. In my opinion, short of the relevant Act being amended, it is unlikely that BankWest will be sold to anyone other than another (non-Australian) bank. Operationally, the purchase by an Australian bank just makes no sense.
I also cannot see the WA state government agreeing to amend the legislation any time soon – so BankWest will remain.