Australi ë heeft géén last van f inanciële crisis

[Cees Binkhorst]

REPLY TO: D66 at nic.surfnet.nl

Australië heeft géén last van financiële crisis, maar ze zijn ze wel
bezig de stock-exchange te re-organiseren. Dat is daar toch af-en-toe
het wilde-westen (in down-under ;).

Groet / Cees

Banking Regulation: Protecting the Engine Room of the Economy
http://knowledge.asb.unsw.edu.au/article.cfm?articleid=1105
Published: April 16, 2010 in Knowledge at Australian School of Business

In the wake of the global financial crisis, Australian bankers have been
singled out as different from their counterparts on other continents. In
the US, the government had to bail out Citibank and Bank of America, the
German government took action to stop the collapse of the Hypo Real
Estate and the British government nationalised Northern Rock Countrywide
Financial. But in Australia no taxpayers' money was spent on banks, nor
did the federal government have to nationalise any banks. Technically,
Australia did not even have a recession. But what exactly did Canberra
do better than London, Brussels or Washington?

David Bell, chief executive of the Australian Bankers' Association,
tells anyone who will listen that Australian bank boards have done a
good job running their institutions. “They have made, and continue to
make, prudent lending decisions and have minimised their exposure to
toxic debt instruments.” It’s true, but it’s only one side of the story.
The other is the regulatory practice in Australia that forced the
nation's bankers to manage risk properly. That’s what the London G20
Conference, the International Monetary Fund (IMF) and the World Economic
Forum said in unison.

“Australia created what’s now internationally regarded as a model of
corporate governance. This model tamed the rise and dominance of the
management culture with a culture of risk mitigation and
accountability,” says Michael Peters, lecturer in business law and
taxation at the Australian School of Business. The backbone of this
model, created in 1998,has three parts: the Reserve Bank of Australia
(RBA) which defines the monetary policies and guarantees the stability
of the system; the Australian Securities and Investments Commission
(ASIC) which acts as the “policeman” controlling market integrity and
protecting consumers' rights; and, the Australian Prudential Regulation
Authority (APRA) which provides the “health service” for all
corporations authorised under the Banking Act (1959) to accept deposits
from the public.

Strength in Collapse

The biggest bankruptcy in Australia’s history – the 2001 collapse of
insurance giant HIH that had some 30% of market share and left a loss of
A$5.3 billion – also helped to firm up Australia’s regulatory
resilience. The shock led to massive investment into APRA's
competencies. A probability and impact rating system was created to
measure the potential for failure for the Australian economy, along with
the supervisory oversight and response system to measure and determine
how to manage risk.

The demise of HIH also opened ears to the recommendations of the Basel
Committee on Banking Supervision (Basel II), designedby the Organisation
for Economic Co-operation and Development and the IMF in 2004 as a
codified legal regime to regulate almost every aspect of the banking
business. “Australia was one of the few nations toadopt the guidelines
virtually in full,” notes Peters. With Basel II, APRA freed banks to
reduce the funds available to meet the demands of deposit holders. It
also meant that traditional banking was no longer the obvious business
model. Banks could now lend funds to themselves, set up hedge funds and
other trading ventures, and become their own customers. Basel II also
instigated corporate governance to instill healthy risk management
practices. So long as the corporate culture was geared towards
containing the risks, such ventures were considered suitable.

In implementing Basel II, the US and the UK focused solely on the
libertarian side of the new rules and allowed their banks to start
owning and investing in hedge funds and private equity, and to trade
through their own accounts. “They ensured their banks'liquidity, but the
regulators widely ignored the risk management and the corporate
governance side of the matter,” Peters points out.Consequently, while
the exposure to toxic investments of US and European financial services
companies at the beginning of the financial crisis was up to 15%, the
exposure of Australian banks was less than 1%. That was due to good
regulation and structural differences: “Australian banks were less
conflicted, since the proportion of investment banking in Australia's
financial services companies was nowhere near the proportion of their
counterparts in the US.,” explains Brian Johnson, bank analyst at Credit
Lyonnais Securities Asia.

Still, no system is perfect and when the crisis hit, the Australian
government cautiously guaranteed deposits to keep worried citizensfrom a
bank run. Fariborz Moshirian, professor of finance at the Australian
School of Business, does not believe that the rules of Basel II alone –
even if implemented properly worldwide Aussie-style – could have
prevented the global financial crisis. “The issue is the new financial
instruments. Derivatives are complicated, and many banks did not
understand what they were dealing with and did not put aside adequate
funds to cater to the risks involved.” What’s needed, according to
Moshirian, is a global supervisory board “to measure the risks from the
actual products on the banks' balance sheets.”

Not Desperate, but Dateless

The G20 leaders who gathered at the summit in London in April 2009 had
similar thoughts.They established the so-called ”Financial Stability
Forum” to work with the IMF to ensure wider global co-operation and to
provide an early-warning system for future financial crises. This
regulatory agency will be able to do what Basel II could not: enforce
itsrules through police and penalties. The outcome is supposed to
enhance capital requirements, and link the remuneration of bank managers
to how well they manage risk and cater to social objectives, since banks
are the engine room of any economy. Shortly after the G20 summit, the
Basel-based Bank for International Settlements set a revised "Basel II"
requiring banks to bolster capital provisioning and remedy flaws in
remuneration. Twenty-seven major countries agreed in general to new
standards –but no date was set for implementation. If, and when, updated
rules will apply remains uncertain, says Moshirian. “As much as I would
like to see an international standard and more rules to govern the
financial institutions, so far I cannot see the executive power to make
it happen. There is no such thing as a world government.”

True, the US has its own agenda. President Barack Obama's proposal, the
”Volcker rule” (named for the former chief of the Federal Reserve, Paul
Volcker) aims at separating the ordinary financial activities of the
publicly-guaranteed banking system from the speculative ventures of
investment banks: Banks that take deposits should not be allowed to
trade in stocks or derivatives on their own behalf, the draft says, nor
can they invest in hedge funds or private equity funds, to limit the
size of their liabilities. Plus, the 50 largest banks have to pay back
taxpayers for the bailout. The basic idea is to micro-manage the banks'
internal risk mechanisms and remuneration policies – and to re-size them
according to the principle that no bank’s failure should be big enough
to jeopardize the whole system.

Go with the Flow?

Australia’s big four banks are arguably “too big to fail”. Australia and
New Zealand Banking Group Ltd., the Commonwealth Bank of Australia, the
National Australia Bank Ltd., and the Westpac Banking Corp. together now
represent 76.1% of all banking when measured by assets. The Australia
Institute, an independent research body, estimates in a recent paper
that the “big four” alone make underlying profits of around A$35 billion
before tax –or just under 3% of GDP. But most have no big investment
bank operations, which would make “the Volcker rules vastly meaningless
for Australia's banks,” suggests Johnson. Moshirian does not believe the
Volcker rules would work for Australia either: “Banks need a certain
size to compete internationally.” Breaking up the big four or
prohibiting further mergers with wealth managers or insurance companies
will not necessarily strengthen Australia’s economic well-being: “Banks
need to be efficient – and, from a global perspective, it’s clear that
all small banks are struggling.”

New regulations, following the G20 initiative, are like an insurance
policy and someone will have to pay the premium. Australia's big four
“are impregnable and they will use their oligopoly to pass on the
ensuing costs to the customer,” suggests Peters. “Australia’s credit
rates are already among the most expensive in the world, and new rules
will make money more expensive in comparison to the US and UK.”
Additional costs will also affect the regional banks and the already
slim margins of Australia’s 132 credit unions. “They do not have the
market power to just pass costs on to their customers and might find it
difficult to remain viable as a business,” he says. “This could weaken
competition in Australia even further.”

These are some of the reasons why Moshirian believes that the Reserve
Bank is not leaping into new rules. He says there’s a prevalent
question: why should we be penalised with new rules just because some 40
foreign banks created problems? David Craig, chief financial officer of
the Commonwealth Bank of Australia, also believes local regulators are
conscious of the risk of importing blanket regulations.

On the other hand, there’s a hunger for foreign capital because about
62% of all finance stems from domestic savings; the rest is foreign,
with the majority of the capital increasingly originating in China.
“Chinese state banks are exposed dramatically to the sub-prime
derivatives that led to the financial crisis in the first place, and
they will join the efforts for new rules to get rid of them,” Peters
predicts. Japan will have to join as well, and when Australia's biggest
trading partners are subscribing to new standards, Canberra will have to
go with the flow. “Some legislative tweaking may be possible but, in the
end, Australia is “such a small economy, it will have no choice but to
comply, provided others also comply with these new international rules,”
says Moshirian. Prime minister Kevin Rudd bowed to the G20 and committed
Australia to complying with the new rules.

The experts agree. As for the proposed changes to liquidity,
provisioning and industry structure, Australia will be most affected by
the question of liquidity. And that's a good thing, according to bank
analyst Johnson. The major flaw in Australian banking practices is in
their exposure to short-term offshore debts, he says. “What we really
need is better liquidity requirements.” The pressure is on for Aussie
banks to hold more liquid assets and to use long-term debt to fund
balance sheet assets that cannot easily be exchanged for cash.

**********
Dit bericht is verzonden via de informele D66 discussielijst (D66 at nic.surfnet.nl).
Aanmelden: stuur een email naar LISTSERV at nic.surfnet.nl met in het tekstveld alleen: SUBSCRIBE D66 uwvoornaam uwachternaam
Afmelden: stuur een email naar LISTSERV at nic.surfnet.nl met in het tekstveld alleen: SIGNOFF D66
Het on-line archief is te vinden op: http://listserv.surfnet.nl/archives/d66.html
**********