Senate endorses politico-housing complex

Well, I guess I can’t complain about no takers for the “Lost Child of Wallis Competition” over the weekend. If I couldn’t find the inspiration to give up my weekend on the document, I can’t blame anyone else for doing likewise.

I’m glad I bothered this morning, though, because the results are, in a word, shocking. The wanton child has a useful batch of consumer-related reforms but is combined with a range of disastrous regulatory-related recommendations that makes the total package a clarion call for the politico-housing complex to become a permanent feature of the Australian economy.

Recommendations 1-19 look pretty good:

Recommendation 1

The Committee recommends that a broad ranging inquiry into the Australian financial system be established, modelled on that conducted by the Campbell Committee. The terms of reference should be broad, covering the role of banks and other financial institutions in a post-GFC financial environment. The inquiry should be well resourced and have its own secretariat, independent of government departments.

Recommendation 2

The Committee recommends that  the Reserve Bank publish further regular information on banks’ interest margins and returns on equity; and compare these to returns in other industries to allow an assessment of whether risk-adjusted returns in the banking sector are sufficiently high to suggest that competition is inadequate.

Recommendation 3

The Committee recommends that the Australian Bankers’ Association meet with small business representatives to develop a code of practice specifically relating to lending to small business.

Recommendation 4

The Committee recommends that the Government reconsider its decision to ban exit fees, before the amended regulations come into effect, with a view to allowing enough time for  the effectiveness of the existing ban on unfair and unconscionable exit fees (as implemented through ASIC Regulatory Guide 220) to be assessed. If it proceeds with the ban, it  should only apply to authorised deposit-taking institutions.

Recommendation 5

The Committee recommends that  lenders be required to inform borrowers when they take out a loan of the provisions of the National Consumer Credit Protection Act 2009 which relate to unconscionable charges.

Recommendation 6

The Committee recommends that borrowers be required to sign off on a form clearly disclosing any  exit fees applicable to their home or small business loan before making any commitment.

Recommendation 7

The Committee recommends that lenders charging exit fees be required to explain on their website how the exit fee relates to relevant costs. As well as excessive exit fees, the Committee identified other barriers to customers moving between lenders, which it believed should be addressed.

Recommendation 8

The Committee recommends that lenders mortgage insurance always be  made either pro-rata refundable or transferable and that this be  made clear to borrowers.  As an alternative, lenders mortgage insurance should be payable by instalments (eg. monthly, quarterly or annually) rather than as an upfront lump sum payment (as occurs in other jurisdictions).

Recommendation 9

The Committee recommends that the Reserve Bank and the Australian Prudential Regulation Authority draw  on their data collections to publish regular information about the total cost of home loans (based on standardised assumptions on the average size and term) for the twenty  largest ADI home mortgage lenders.

Recommendation 10

The Committee recommends that a  working group be set up including Treasury, the Australian  Prudential Regulation Authority, the Australian Securities and Investments Commission, the Australian  Competition and  Consumer Commission, the Reserve Bank, the Financial Ombudsman Service, the Australian Bankers’ Association, Abacus, consumer representatives and relevant academics to develop standardised words for financial products and their characteristics to allow consumers to more readily compare offers from different financial intermediaries.

Recommendation 11

The Committee recommends that  the Government ask Treasury to investigate the feasibility of personal  credit ratings to facilitate borrowers  moving between lenders.

Recommendation 12

The Committee recommends that banks should be required to contact customers before the expiry of term deposits advising them of the rate that will apply if they are automatically renewed and the current ‘special’ rates available.

Recommendation 13

The Committee recommends that the abolition of stamp duties on refinancing of mortgages be placed on the agenda for the forthcoming tax forum and that the agreement on their abolition be implemented.

Recommendation 14

The Committee recommends that a scheme based on those in Europe be introduced requiring a bank, upon being advised that a customer has left for a new bank, to reroute all direct debits and credits for 13 months and provide the new bank with details of those direct debits and credits.

Recommendation 15

Subject to the release of the Government’s independent legal advice, the Committee recommends that the  Competition and Consumer Act 2010 be amended to include a provision which states that a corporation engages in price signalling if it communicates future price-related information to a competitor, and the communication of that information has the purpose, or has or is likely to have the effect, of substantially lessening competition.

Recommendation 16

The Committee recommends  that an amendment to the Competition and Consumer Act 2010  to introduce a price signalling provision should be accompanied by ACCC guidelines providing:

• examples of the type of communication that would fall foul of this provision;

• examples of the type of communication that would not fall foul of this provision; and

• the protection offered by the exemptions.

Recommendation 17

The Committee recommends that the Government introduce regulation of mortgage early exit fees (including  deferred establishment fees), requiring disclosure of these fees upfront in a simplified and comparable format.

Recommendation 18

The Committee recommends that mutual financial intermediaries be allowed to refer to themselves as a  ‘mutual bank’ or ‘approved banking institution’ and use terms such as ‘credit union bank’ in their name.

Recommendation 19

The Committee recommends that financial intermediaries not supervised by the Australian Prudential Regulation Authority be required to state clearly that funds placed with them are ‘not guaranteed by government’ but otherwise should not be prohibited from applying familiar terms such as ‘debenture’ where this would not be misleading.

I’ve got no important issues with any of this. More information, more clearly presented and a push to commoditise banking via consumer empowerment. Fine.

Now we get into the sticky parts:

Recommendation 20

The Committee recommends that, to increase the competitiveness of smaller lenders, the Government immediately standardise the fee for all borrowers under the wholesale funding guarantee to a uniform rate of 70 basis points.

So, no attempt to hand risk back to the big banks. Only a recommendation to remove it from the smaller firms. This is not only a complete corruption of market pricing, it’s entrenching the public risk for private profit moral hazards that caused the GFC in the first place. Next:

Recommendation 21

The Committee recommends that the  financial claims scheme should be retained in its current form pending the outcome of a full inquiry into a deposit insurance scheme, possibly charging risk-related premia. The inquiry should also examine the issue of guaranteeing non-ADI products that are close substitutes for deposits, with a view to being better placed to provide such a guarantee as future need arises.

See above. Next:

Recommendation 22

The Committee recommends that the Government ask the Australian Prudential Regulation Authority to review aspects of its prudential framework to ensure that there are no inadvertent impediments to the issuance and trading of bullet bonds.

Inadvertent? This looks suspiciously like a move to push APRA to include bullets in Level 2 capital ratios. Is it a good idea to allow banks to hold each others assets and count that as capital? Or does that remind you of something? Next:

Recommendation 23

The Committee recommends that, in order to retain incentives for careful credit assessment, an authorised deposit-taking institution which securitises a loan portfolio be required  to keep a proportion of  the resultant asset-backed securities on its balance  sheet and hold appropriate levels of capital. The proportion should be set by the Australian Prudential Regulation Authority in consultation with the Australian Securities and Investments Commission to balance incentives to maintain credit standards with the desirability of encouraging the recovery of the securitisation market.

Well, this is all right in theory but is much more problematic in practice. How big is the equity slice going to be? I’m not sure there’s an answer. Big enough to exert a credit standards impulse is probably so big that securitisation is no longer competitive. And if the committee doesn’t know the figure, why are they recommending we have one? Next:

Recommendation 24

The Committee, having more confidence in the Australian Prudential Regulation Authority’s oversight than in  the opinions of credit rating agencies, recommends that the Reserve  Bank accept as eligible paper for repurchase agreements long term debt  issued by any authorised  deposit-taking institution rather than just those rated above A.

The RBA’s repo facilities have remained weirdly opaque since the GFC and now we want to let everyone into the fog? Why is it more transparency for consumers and less for financial stability? Next:

Recommendation 25

The Committee recommends that  the Australian Office of Financial Management  programme be expanded to include asset-backed securities based on assets other than home mortgages and to include securities rated AA or A (rather than just AAA) or issued by a  financial intermediary supervised by the Australian Prudential Regulation Authority.

Recommendation 26

The Committee recommends that  the Australian Office of Financial Management be given the discretion to purchase  residential mortgage-backed securities issued by entities with a substantial bank shareholding where it judges this would promote a more competitive market.

Recommendation 27

The Committee recommends that the Government commission a survey of potential demand for types of asset backed securities.

Recommendation 28

The Committee recommends that the  broader inquiry into the financial system investigate ideas that may further the participation of smaller lenders in the securitisation market, such as greater standardisation and disclosure, liquidity support for securities issued  by mutual ADIs meeting certain quality standards and better co-ordination between regulators.

Recommendation 29

The Committee recommends that Treasury develop a plan to introduce a support programme for RMBS similar to  that operating in Canada in case a future deterioration in the securitisation market requires its introduction.

In effect, these five recommendations argue that the AOFM should be able to spend your money on higher risk tranche’s so that securitisers don’t miss out on the moral hazard bonanza being offered to ADI’s. There’s the Chris Joye provision for a full-blown Canadian SwannieMac that keeps buying this expanded high risk melange ad infinitum. Then there’s the John Symond provision allowing AOFM to specifically buy RMBS from securitisers with a bank shareholder (ie Aussie).

I understand the need to balance interest in a democracy but what about those of the tax-payer? Again, why is there no effort to inject greater transparency?

The remaining recommendations are a mix of savings-oriented reforms that make sense:

Recommendation 30

The Committee recommends that  the Government establish a working group with an independent chair, representatives from Treasury, the Australian Prudential Regulation Authority, the Reserve Bank, and the banking and superannuation industries, and also including academic experts, to explore and assess options that could promote investment in deposits and fixed income assets by superannuation funds and other funds managers.

Recommendation 31

The Committee recommends that  the Australian Payments Clearing Association and the Australian Bankers’ Association encourage their members to have their ATMs screens display a real-time warning to consumers where a penalty fee will be imposed if a particular transaction goes ahead.

Recommendation 32

The Committee recommends that the government deal with the problem of excessive ATM fees in remote indigenous communities by tendering for an ATM provider to install a network of ATMs in these areas which make specified minimal charges for balance enquiries and low charges for cash withdrawals.

Recommendation 33

The Committee recommends that the Government direct the Australian  Competition and Consumer Commission to conduct an examination of barriers to competition in the Australian payments system and publicly report by the end of 2011 on any legislative or other reforms that would enhance competition and efficiency in the provision of payment, clearing and settlement systems.

Recommendation 34

The Committee recommends that interest withholding tax be abolished as budgetary circumstances permit to increase the ability of foreign banks to compete in the Australian market.

Recommendation 35

The Committee recommends the taxation arrangements applied to bank deposits and mutual ADI deposits should be reviewed by the inquiry into the financial system.

Recommendation 36

The Committee recommends that the Government require Treasury to  review the GST input tax arrangements for mutual financial intermediaries having regard to the comments in the Henry Tax Review.

Recommendation 37

The Committee recommends that the Government require Treasury to review the treatment of building societies and credit unions in the franking credit arrangements and report  publicly on the advantages and disadvantages of various options.

Recommendation 38

The Committee recommends that the Government require Treasury to review the abolition of the LIBOR cap to the tax deductibility of interest paid by a foreign bank branch on borrowings from its parent bank.

Recommendation 39

The Committee recommends that the Government require Treasury to review the operation of the First Home  Savers Accounts scheme and report publicly on the advantages and disadvantages of various options.

In sum, good recommendations for consumer transparency, savings and banking competition. These measures would potentially lower the cost of credit. The sensible accompaniment of such measures should be increased incentives and regulations for risk assessment to ensure the stability of the financial system rises with increased competition. Instead, there are series of terrible and contradictory recommendations for the public purse to absorb and hide much greater amounts of private sector mortgage risk. Put together, the Senate Inquiry has basically recommended cheaper, more widely available credit, with you the tax-payer carrying the bag.

Houses and Holes


  1. ” Recommendation 24

    The Committee, having more confidence in the Australian Prudential Regulation Authority’s oversight than in the opinions of credit rating agencies, recommends that the Reserve Bank accept as eligible paper for repurchase agreements long term debt issued by any authorised deposit-taking institution rather than just those rated above A.”

    I’ll agree with the ratings agency assessment but the rest is the literal definition of credit inflation. I thought that anything below A was junk? The Australian dollar junk!?

    I’ll sum the report up for you; Weak dollar policy. Harry Triguboff is currently cracking open the Dom Perignon.

  2. A sad task you’ve had to undertake HH but I agree with your summary. At least if recommendation 1 is implemented soon it may allow for further wider debate on the real issues.
    What happened to the topic of banker’s bonuses when paid by taxpayer supported organisations?

  3. Sections 24, 25 + 26 have the net effect of allowing banks to dump potentially toxic mortgage backed securities onto the public purse shifting risk. Privatise the profits – socialise the debt.

    When Kerry Packer was being investigated by the ATO a number of years ago and cross-examined in court, he was asked why he objected to paying taxes. His reply was (going off memory) “ …I don’t object to paying tax, what I do object is how you people spend it”

    I personally do not want a US style nationalised Freddie Mac & Fannie Mae situation here in Australia.

  4. Recommendations 31 & 32 vis-a-vis bank fees do not “make sense”, H&H.

    They will achieve nothing by way of “reform”, and simply permit banks to continue rorting customers with ever higher transaction fees, for less service.

    I mean, really … “recommending” that the ABA should “encourage” their members to display penalty fee warnings on ATM’s pre-transaction?!? Use *taxpayers* money to install special ATM’s in indigenous communities with a condition of low transaction fees – but still profiting the banks?!?!

    The Senate report showed that banks’ highest fee-based profits come from charging us to access *our own money*. Even more than fees on cc’s, personal loans, and housing loans –

    It’s long past time that these profit-maximising “unfair and unconscionable” fees were addressed.

  5. Crocodile Chuck

    “Put together, the Senate Inquiry has basically recommended cheaper, more widely available credit…”

    Great; and this is consistent with something I read in April, ie encouraging the entry of more foreign banks into Australia to stimulate ‘competition’.

    Are these people not old enough to remember Keating’s big experiment in the mid 80’s? Barclays, Natwest, Midland, Royal Bank, Chase, etc all obtained banking licenses…..and then couldn’t gain any retail customers. So to whom did they lend to? The c _ _p corporate credits the ‘Big Four’ declined! Alan Bond borrowed over a billion, separately from each Standard Chartered branch! (they couldn’t even aggregate their own exposure to him, though this is another story). This was a big driver for the commercial r/e bubble at the end of that decade…..and the collapse shortly after.

    More credit-the last thing Australia needs!

    ps I skimmed the recommendations, but not as thoroughly as yourself-I couldn’t find anything regarding roping in the ‘Shadow Banking System’…..

  6. Purling version of a
    effectively a series of adjacent Deceases.

    The simplest binding-off method ,is to pass each knitted loan over the loan next to it.
    The final loan is secured by passing the knitting barn through it,value,so it is best to start at the point furthest from the knitting barn,value.This makes a tight edge,on costs,in contrast to other blinding-off methods ,that have a tendency to flare-out ,Fat tail..'(some can be done tightly or loosely depending on the tension of the knitter.If you want to ensure that the bind-end is loose edged,one method to ensure this is to use a needle at least two sizes larger than the project needle
    size’..But the first method of bind-end off does not require that the knitting barn be nearby ,central ,and can be done at anytime or position ..e.g to form
    button holes…too

    Next it’s ‘Budget Rows’ ,of made in china ‘Big-Buttons’ and the local ,loop the loops..a yarn about left-leaning decreases
    cheers JR

    Sorry I didn’t take time ..Hope you didn’t think it was going somewhere..and (I do however appreciate your workings
    they enlighten me(enjoy your night)..just of late ,and by night it’s been getting cold, needed a Jumper…hence the Knit.

    Research taken from-

  7. I want to know why the hell they’re taking aim at the First Home Saver Account Scheme. I’ve got one of those! Frankly, as far as I’m concerned, if there was any governmental housing program that is *less* likely to unnecessarily inflate the housing market (ie compared to FHOG or negative gearing on established homes) it’s the FHSA. In fact, my personal opinion is that not only is it good in that it teaches the usually youngish, first home buyer segment some patience in building up their deposit (because of the 4 year rule), it also is good in more general terms as people (like myself) who start building these accounts learn to start valuing a lifestyle based on having savings to fall back on, rather than living a credit card lifestyle. (Guilty!)

    So why are they putting it under the microscope?

    Why aren’t they similarly putting the FHOG under the microscope?