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Prof at Canberra University: Impact on Mortgage Loans - Job Losses

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Extracts from :

Submission to the SENATE ECONOMICS REFERENCES COMMITTEE

INQUIRY INTO THE POST-GFC BANKING SECTOR

Milind Sathye,  Professor of Banking and Finance, University of Canberra.   May 2012

  

The impact of international regulatory changes on the Australian banking sector,

 

Impact on Mortgage loans:

Securitisation provided a major source of funding for mortgage loans. Under Basel III, there is enhanced risk weight for securitisation instruments.

It means the risk position of a bank as depicted in the balance sheet doesn’t capture the changing reality and by the time the regulators, shareholders and investors know the reality it might be too late.

A recent case of J P Morgan incurring a loss of $2 billion because of ‘error’ by the chief investment office is a pointer to the grim reality how fortunes of even mighty institutions can change overnight.

 

External regulation that can’t keep pace with these internal changes in risk position would be of little value.

  

 

The dazzling profit performance of banks hides the fact that their cost to income ratio is now worse than what it was during the crisis year.

 

The banks also hide the fact that the borrowing cost they face is also because S&P recently downgraded their credit rating.

 

To reduce the cost banks will be outsourcing jobs to India and the Philippines.

 

In all this, what way have ordinary Australians benefited? Consumers face lower deposit rates and higher lending rates and fees, and employees face job losses with more outsourcing.

 

Who cares for these social costs so long as the managers get hefty pay packages?

 (Allan Fels noted Australian bank executives are highest paid even by international standards) and shareholders get enviable return which, incidentally, is high even by international comparison.

 

The exposure of the Australian banks to mortgage market, however, potentially raises the issue of concentration risk.

A sharp decline in house prices could be disastrous for our SIFI as well as for the Australian economy.

 

The mortgage portfolio of banks is vulnerable to a sharp decline in house prices and unemployment rate.

 

Banks shy away from business loans since such loans are more risky than the easy and safe mortgage loans. Rigorous credit assessment could help reduce business loans risk.       

However, banks are resorting to the cosy option of mortgage loans instead.

 

Recommendation:

Regulators and banks alike need to seriously consider the concentration risk in the mortgage market. The stability of our SIFI is critically dependant up on the mortgage market holding steady.

 

RBA should have an incentive to monitor the systemically important financial institutions

(SIFI –read the BIG Four banks as this is an inquiry into banking) more closely.

 

In my opinion, in the case of SIFI, the APRA/RBA need to have a more proactive role. It can be achieved by having a senior APRA/RBA official / representative sit on the Board of the banks

 

In countries where banks are publicly owned, the prudential regulator sits on the Board and also votes.

 

Recommendation:

It is recommended that the Senate Committee may consider that a representative of RBA or APRA is included as a ‘special invitee; on the Board of SIFI’s in Australia. It may require suitable amendment to the RBA/APRA Act.

  

It is interesting, however, that executive remuneration remains linked to shareholder value creation.

‘ Such a compensation structure induces high leverage choices and risk taking on the part of managers and traders’.

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Comments

  • doyla66
    doyla66 Saturday, 29 September 2012

    He's right - and that's just the beginning. With what we know of the true nature of bank "assets" and "value" their annual statements should be re-evaluated less the % inherent losses. If anyone has the time to do this that would be great, as a side by side comparison between Bank interpretation of data and BFCSA interpretation of the same data. Be on the look out for what insurances cost them, if there's a breakdown, which I doubt. Also sale of assets not realised, or realised and how they were reinvested. Strictly speaking solvency is not about assets, or even easily realised assets (ASIC bend the rules for banks) but about real cashflow.
    And if any one of them had too many complaints against them at FOS they be fined repetitively and even lose their EDR membership and thus be unable to maintain their AFSL, AFP and lending licences ...

  • doyla66
    doyla66 Saturday, 29 September 2012

    Allan Fels > noted Australian bank executives are highest paid even by international standards > HELLO!!!

  • doyla66
    doyla66 Saturday, 29 September 2012

    "Gang of 36" RMBS/Laf Fraud - "Debt Exposure" @$50b to $100b[up>$200b?] ASX: "Continuous Disclosure Rules" knowingly breached by banksters, as no provisions hitherto [$NIL] - post High Court "Tonto" decision [handed down 22 June 2012]

  • doyla66
    doyla66 Saturday, 29 September 2012

    If jobs have to be outsourced to India & the Philippines, SACK ALL THE BANK EXECUTIVES & outsource THEIR jobs! They can be replaced with more ethical, caring people that will be happy to work for a fraction of the current executives pay.
    If Gina Reinhardt thinks that she can get good workers to work for $2 a day, then surely we can head-hunt a good Indian or Philippino bank executive for maybe $10 a day?

  • doyla66
    doyla66 Monday, 01 October 2012

    That's a great idea, John W. I'll bet no one in the Banks thought of that!!
    There is more than a tinge of the last bastion of great white colonialism in their logic: get the cheap labour from anywhere for the basic jobs and keep the exec positions for the Bankster bosses.
    The truly sad part is that those "cheap and disposable" overseas staff are also human beings, being exploited, are often much nicer than some of their Aussie counterparts, certainly much more interested in me as a client than the execs EVER would be, take their jobs seriously and are usually women.
    We should boycott all banks that exploit any staff, labour, borrower or behave like patronising bores.
    Sorry old boy, you may have the old school tie, but it does not entitle you to get away with the type of conduct that is reminiscent of the slave trade and other social crimes.
    For the record, many of your borrowers feel much the same, especially when they've fallen on hard times or discovered that you serve them up a FRAUD LOAN and still expected them to live on the breadline to furnish your unconscionably lavish self-indulgences. And you treat borrowers like disposables as well!
    Bankster Executives and Pirate Bankers: Enjoy your ill gotten gains while they last - So many Australian borrowers and clients are looking forward to putting you through the "reverse cycle" of your long standing money laundering racket - just like in America :)

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