Unique Australian Equities Database launched to assist Australian share market investors and researchers

Posted on December 14, 2011
Filed Under Banking, Financial Institutions and Markets, Contracted Research and Consulting, Funds Management & Superannuation, Media Release | Leave a Comment

The Australian Centre for Financial Studies (ACFS), together with its research partner, ANZ Trustees Limited (ANZT), today announced the development of a unique digital Australian Equities Database (AED) covering data from 1948 to current date.

Professor Deborah Ralston, Director of the Centre stated that “research into Australian equities has been hindered by a limited historic digital record.  ANZT and ACFS have noted these limitations and have joined in seeking to remedy the deficiency.  The AED aims to extend the historic record of Australian equities back in time to the early 1900s so that the database will provide a broader and deeper set of equity fundamental and market aggregate information over a greater range of time than is presently available.  ANZT and ACFS have been supported in the project by RMIT University providing research support and Sirca providing a web platform for the database.  The project is a three year staged program of development and is now passing its midway point – a sufficient point to start sharing the benefits of the database more widely.”.

The database expands the publicly available digital equities data by over 150% and will further double in size by the completion of the program in the next 12 months.  The AED presently provides monthly data on almost 6,000 companies across the present 63 years of records collected.  The AED details major trading and fundamental data items including recorded earnings and dividend information, number of shares on issue, share turnover, equity nominal value, net tangible assets per share and price range data.  The database captures all capital change information and has been used to generate return and risk estimates at equity, portfolio and market level, together with all feasible ratios and performance indices. The AED has been extensively tested for accuracy, consistency and comparability so that it is now ready for user testing and application.

“The AED is a unique financial analysis strategy tool. Constructed from publicly available monthly stock exchange journal reports of the Melbourne Stock Exchange and, post-1972, the Australian Stock Exchange, the database enables longer term evaluation of investment and portfolio formation strategies relating equities to both historic and current trading and economic environment.  The AED is seen as potentially of value to a wide range of interested parties, such as the financial services industry; academia; media; private wealth and investment individuals; economists / market analysts.” Prof Deborah Ralston said.

Professor Ralston added that “ACFS has concentrated on development of the database with only limited research analysis undertaken.  However, even the analysis to date has found numerous market insights and suggested a number of significant equity performance indicators.  Some very high returns have been achieved in preliminary simulation tests.”

The database will initially be available through consultation with ACFS.  It is planned that increased direct access to the database will be made available at completion of full development of the program.

About the Australian Centre for Financial Studies
The Australian Centre for Financial Studies facilitates industry-relevant and rigorous research and consulting, thought leadership and independent commentary.  Drawing on expertise from academia, industry and government, the Centre promotes excellence in financial services.

The Centre specialises in leading edge finance and investment research, aiming to boost the global credentials of Australia’s finance industry; bridging the gap between research and industry and supporting  Australia and Melbourne as an international centre for finance practice, research and education.

The Centre provides access to and links between academics, finance practitioners and government and draws on expertise and experience from across these groups, to facilitate and disseminate knowledge creation and transfer throughout the greater finance community via its various activities.

The Australian Centre for Financial Studies (previously known as the Melbourne Centre for Financial Studies) is a not-for-profit consortium of Monash University, the University of Melbourne, RMIT University and Finsia having commenced in 2005 with seed funding from the Victorian Government.  Across the consortium partners ACFS has links with over 100 finance academics and over 200 postgraduate students engaged in finance research.

About ANZ Trustees
ANZ Trustees is a leading trustee company with expertise in philanthropy, wealth management and wealth transfer. Our expertise assists individuals, families, companies and charities to preserve and grow their wealth into the future. ANZ Trustees’ services include wills and estate planning, managing family and charitable trusts and foundations and investment and personal financial management.

Download Media Release PDF

Media contact details:

Prof Deborah Ralston
Director
Australian Centre for Financial Studies
T: +61 3 9666 1050
info@australiancentre.com.au

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The World in Crisis: Insights from Six Shadow Financial Regulatory Committees

Posted on December 9, 2011
Filed Under ANZSFRC, Banking, Financial Institutions and Markets, Event News, Funds Management & Superannuation, Insurance, Policy, Publications | Leave a Comment

The six Shadow Financial Regulatory Committees (SFRC) of Asia, Australia – New Zealand, Europe, Japan, Latin America and the United States have together published an online book, “The World in Crisis: Insights from Six Shadow Financial Regulatory Committees“. This book aims to inform financial policy makers around the world and other players in the global financial marketplace. The insights ideally would be helpful in preparing for or avoiding future financial crises.

In different chapters, members of the SFRC provide different regional perspectives on the Global Financial Crisis and Financial Regulation. The Committees discuss how the crisis evolved in each of their countries or region, lessons learned, reform measures adopted or not adopted to date and propose ways in which cross-country coordination of financial regulatory policies may help prevent future crises, or at least minimise their severity.

The book begins with an Executive Summary of the chapters, followed by a statement adopted by the six Shadow Committees at a joint meeting in Washington, D.C. on October 22 – 24, 2011 on the current economic and financial crisis in the Eurozone countries, applying relevant lessons from the individual chapters. The Australia-NZ Shadow Committee chapter was prepared by Profs Christine Brown (Monash University), Prof Kevin Davis (Australian Centre for Financial Studies and University of Melbourne), Prof Mervyn Lewis (University of  South Australia) and Prof David Mayes (University of Auckland).

At the joint meeting in Washington, D.C. , the six committees discussed the impact of the financial crisis on countries in their regions, relevant lessons and policies to adopt. Presenters and Commenters include:

• ASLI DEMIRGUC-KUNT, World Bank
  
• LUC LAEVEN, International Monetary Fund
• JEREMY GOH, Asian Shadow Financial Regulatory Committee
• HARALD A. BENINK, Europe Shadow Financial Regulatory Committee 
• MASAYA SAKURAGAWA, Japanese Shadow Financial Regulatory Committee 
• LILIANA ROJAS-SUAREZ, Latin America Shadow Financial Regulatory Committee 
• GEORGE G. KAUFMAN, US Shadow Financial Regulatory Committee
• KEVIN DAVIS, Australia-New Zealand Shadow Financial Regulatory Committee

Click image to watch video on C-SPAN video library

Download e-book

More about the Australia – New Zealand Shadow Financial Regulatory Committee

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Should banks be compelled to pass on interest rate cuts?

Posted on December 6, 2011
Filed Under ACFS Commentary, Banking, Financial Institutions and Markets, Media Watch, Publications | Leave a Comment

Published in The Conversation, 6 December 2011

As Reserve Bank of Australia board members gather today to ponder Australia’s cash rate, financial markets are having a bet each way the RBA will cut rates amid the release of data reflecting a softening in key non-mining sectors of the Australian economy, but more favourable inflation figures. But these days, Australian home owners can no longer rely on their banks to pass on the joy. So The Conversation asked: should banks be compelled to pass on interest rate cuts – yes or no?

Kevin Davis, Research Director for the Australian Centre for Financial Studies, and Professor of Finance at the University of Melbourne says no.

No, because…

Read full article

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The contagion effect: how much will Australian banks be buffeted by Europe?

Posted on November 25, 2011
Filed Under ACFS Commentary, Banking, Financial Institutions and Markets, Funds Management & Superannuation, Media Watch, Publications | Leave a Comment

Published in The Conversation, 24 November 2011

Westpac chief executive Gail Kelly this week warned about Australian banks are vulnerable to “the contagion effect” of Europe’s ongoing financial woes, after the Commonwealth Bank of Australia delayed a Euro-denominated fund raising issue.

Professor Kevin Davis, Research Director at the Australian Centre for Financial Studies explains contagion and what could be in store for Australian banks.

What was it that the CBA planned to do and why is the significance of delaying it?

The CBA planned to do a covered bond issue in Europe – that’s a new facility available to Australian banks that is different from “traditional” securitisation and which is commonly used in Europe and is quite attractive to European investors. It’s only been available to Australian banks for a couple of months.

But one of the issues the banks are facing is the unsettled state of financial markets, particularly in Europe, with investors wary about lending funds to banks – even when they are secured against very good assets like the Australian mortgages involved here.

Although Australian banks have had a fairly large presence as borrowers in Europe, I think everybody is looked at suspiciously at any new security issues into the market the moment. Even though Australia’s four major banks are among only nine banks in the world that have AA ratings, when you get into a situation of general uncertainty, as you saw during the global financial crisis, markets just dry up. Investors aren’t confident about the safety of any assets….

So what does this lack of confidence mean for Australian banks?

Are we likely to see the same sort of credit crunch experienced in 2008-2009?

Is the term contagion alarmist or reasonable? And what does contagion actually mean?

Read full article

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Media Release: Self-managed super funds change the game: KPMG/ACFS

Posted on November 24, 2011
Filed Under Contracted Research and Consulting, Funds Management & Superannuation, Media Release, Publications, Sponsorship Support | Leave a Comment

For immediate release 24 November 2011

• Scale not necessarily delivering economies
• Institutional funds need to be more competitive

The extraordinary growth in self-managed super funds to June 2011 has potentially limited the growth of assets within superannuation institutions and will continue to do so, according to research conducted by KPMG and The Australian Centre for Financial Studies (ACFS).

The report: Superannuation trends and implications examines performance and challenges in the Australian superannuation sector from 2000 – 2011, a period marked by the impact of the global financial crisis and government changes to administration delivery and member choice¹.

KPMG and ACFS found the growth of the self-managed super fund segment since 2000, and the ageing Australian population, provide the greatest threat to the future of superannuation institutions.   The self-managed fund segment increased by 461 percent and the industry funds segment by 410 percent, against a more somber growth in retail funds of 177 percent, and public sector funds, 100 percent².

“Many superannuation institutions face increased rollovers to self-managed superannuation funds and increased benefit payments at the same time their contribution inflows slow. This perfect storm potentially threatens their future viability,” said Sean Hill, head of KPMG’s superannuation group.

Institutional funds are struggling to reduce member costs despite the phenomenal growth in the average size of superannuation institutions in recent years.  “As superannuation funds increase in size, trustees should be able to exploit economies of scale and reduce costs.  However, only in 2009 did costs per member decrease, before rising slightly the following year,” said Professor Deborah Ralston, Director ACFS.

The report found that superannuation institutions that fail to adapt and respond to changing landscape face the prospect of negative funds flow, diminishing assets and terminal decline.

“Superannuation institutions need to recognise that their growth strategy, which may have been successful over the last decade, may no longer be appropriate,” Sean Hill said.

“They must review the competitiveness of their offering, particularly with regard to fees and cost, consider alternatives to organic growth and, formulate a strategy and transition plan specifically in relation to the upcoming Stronger Super reforms,” he added.

KPMG and ACFS cite the attractiveness of the self-managed super fund segment to members as the single greatest challenge to institutional funds.  “The popularity of self-managed funds could potentially lead to the decline in institutional funds as more members transfer benefits and contributions to self-managed funds.  As their assets diminish, superannuation institutions’ operating costs per member will increase, thereby perpetuating a vicious cycle,” Professor Ralston said.

The growth options for superannuation institutions are limited but achievable provided they can reduce costs per member. “This may be achieved through an increased focus on operational efficiency, or by merging with a larger, more efficient institution,” Mr Hill said.

1. A KPMG-ACFS Monograph, Superannuation trends and implications, September 2011
2. Growth measured by the change in nominal assets.

Download Full Report from KPMG website

Further information:
Professor Deborah Ralston
Director, ACFS
03 96661010
Deborah.ralston@australiancentre.com.au

Mr Sean Hill
Partner, KPMG
03 9288 6948
seanhill@kpmg.com.au

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Media Release: Global Pension Index warns Australia needs more reform

Posted on October 11, 2011
Filed Under Contracted Research and Consulting, Funds Management & Superannuation, Media Release, Melbourne Mercer Global Pension Index, Policy, Research Review | Leave a Comment

For immediate release 7pm, 11 October 2011 (AESDT)

• Melbourne Mercer Global Pension Index expands to include 16 countries and 50% of the world population
• Netherlands continues to top ranking
• Australia jumps back up to 2nd from 4th

Australia’s retirement income system has jumped up the ranks in a global comparison of pension systems. However, it still needs significant reform to help Australians secure enough retirement savings and to financially support an ageing population according to the 2011 Melbourne Mercer Global Pension Index.

According to the Melbourne Mercer Global Pension Index many of the world’s retirement systems are under significant stress and even the world’s most advanced retirement income systems require ongoing reform to ensure they’re robust enough to support a rapidly ageing population.

Australia has regained its ranking as second in the world, after dropping to fourth in 2010.  Netherlands holds its position as number one with Switzerland making up the top three.

There is no perfect retirement income system according to the index.  No country received an A grade, and 10 countries received either a C (major risks or shortcomings) or a D (major weaknesses and omissions).  But this index can provide valuable lessons and insights into how countries are grappling with the economic and social challenges of an ageing population.

Mercer Senior Partner and author of the report, David Knox, said, in these uncertain economic and political times the risk of governments not being able to financially support their ageing population is becoming more of a reality unless some significant pension reform is made now.

“The best pension systems adopt a multi-pillar approach to spread these long term risks between governments, employers and individuals. It also forms the basis of the analysis undertaken in this report. Such an approach is also particularly relevant in periods of economic uncertainty, as we are now facing,” he said.

Australia’s index value increased from 72.9 in 2010 to 75.0 in 2011 due primarily to a real increase in the size of the age pension and higher net household saving rate, but fell short of being the best in the world due to lower levels of adequacy.

“Australia is very much in reach of becoming the first in the world to receive an A-Grade score if we can address the issue of adequacy by raising the level of compulsory savings via superannuation and continue reforms to reduce costs,” said Dr Knox.

“Our superannuation system is in the middle of significant reform, some of which is likely to boost our score in the index in the future but our current B-Grade is an important reminder that our world-class retirement savings system is in danger of failing us unless we take action now,” he said.

The overall index value for the Australian system could be increased by:

• Raising the level of mandatory contributions to improve the level of benefits whilst also increasing the level of household savings;
• Introducing a requirement that part of the retirement benefit must be taken as an income stream;
• Increasing the labour force participation rate amongst older workers;
• Increasing the pension age as life expectancy continues to increase; and
• Reducing the costs of the system by encouraging greater efficiency.

The Index is in its third year and has grown from 11 to 16 countries, now covering over half of the world’s population.  It objectively looks at both the publicly funded and private components of a system as well as personal assets and savings outside the pension system.  It is produced by Mercer and the Australian Centre for Financial Studies and funded by the Victorian State Government.  It is based on more than 40 indicators grouped into three sub-indices: adequacy, sustainability and integrity.

Dr Knox said, “Each country has to consider its own social, economic, political, cultural and historical circumstances, but despite the differences in the history and development of each country’s system there are some common challenges around the world.”

Common global challenges include:

• Increasing the state pension age and/or retirement age to reflect increasing life expectancy, both now and in the future, and thereby reduce the level of costs of the publicly financed pension pillar;
• Promoting higher labour force participation at older ages including the provision of phased retirement;
• Encouraging or requiring higher levels of private saving, both within and beyond the pension system, to reduce the future dependence on the public pension;
• Increasing the coverage of employees and/or the self-employed in the private pension system, recognising that many individuals will not save for the future without an element of compulsion or automatic enrolment; and
• Reducing the leakage of funds from the retirement savings system prior to retirement thereby ensuring the funds saved, often with the associated taxation support, are used for the provision of retirement income.

Professor Deborah Ralston, Director of the Australian Centre for Financial Studies said the Melbourne Mercer Global Pension Index remains critical for governments, industry and academia with an ageing population a top priority for government’s the world over.

“Once again, this third edition of the Melbourne Mercer Global Pension Index highlights the areas of policy debate in pensions around the world.  The on-going difficulty of developing systems that provide an adequate level of retirement income and yet maintain sustainability, especially in countries with an ageing population, warrants further research and discussion world wide.  We hope the Index will make a contribution to that end.”

Results by Overall Index Value

About the Australian Centre for Financial Studies
The Australian Centre for Financial Studies (ACFS) is a not-for-profit consortium of Monash University, RMIT University, the University of Melbourne and Finsia (Financial Services Institute of Australasia) which was established in 2005 with seed funding from the Victorian Government. Funding for ACFS is also derived from corporate sponsorship and through research partnerships.
The mission of the ACFS is to build links between academics, practitioners and government in the finance community to enhance research, practice, education and the reputation of Australia’s financial institutions and universities, and of Australia as a financial centre.
For more information, visit www.australiancentre.com.au

About Mercer
Mercer is a global leader in human resource consulting, outsourcing and investment services. Mercer works with clients to solve their most complex benefit and human capital issues, designing and helping manage health, retirement and other benefits. It is a leader in benefit outsourcing. Mercer’s investment services include investment consulting and multi-manager investment management. Mercer’s 20,000 employees are based in more than 40 countries. The company is a wholly owned subsidiary of Marsh & McLennan Companies, Inc., which lists its stock (ticker symbol: MMC) on the New York and Chicago stock exchanges.
For more information, visit www.mercer.com.au

FACT SHEET – METHODOLOGY

• The first Melbourne Mercer Global Pension Index was created in 2009 with 11 countries ranked.  There are now 16 countries in the index that represent a diversity of experience and pension systems and are reflective of the considerable range of approaches selected around the world.
• Each country is given a score between 0 and 100. The overall index value represents the weighted average of the three sub-indices – adequacy, sustainability and integrity.
• More than 40 indicators of desirable factors in all retirement income systems were used to score each country
• Weightings used for index value are:
  • 40% for the adequacy sub-index
  • 35% for the sustainability sub-index
  • 25% for the integrity sub-index.
• The countries that do well in adequacy have an above average base pension to relieve poverty; a good net replacement rate which allows for all the “compulsory” pillars and a system that requires the benefits to be taken as an income stream
• The countries that do well in sustainability have good pension coverage (normally through some form of compulsion or auto-enrolment); a high level of pension assets compared to GDP; a level of mandatory contributions, and a relatively low level of government debt.
• Several countries do well with integrity due to the presence of comprehensive regulation protecting members and a robust regulator.
• In 2011 a new chapter has been introduced called – The Gold Standard – which outlines how countries can achieve an A grade ranking.

Download Media Release PDF

More information on www.globalpensionindex.com

Media Contact:
Professor Deborah Ralston – Director ACFS
+61 3 9666 1010 / +61 419 650318 /deborah.ralston@australiancentre.com.au

Laura Searle – Media Consultant to Mercer – Buchan
+61 3 9866 4722 / +61 (0) 450 403 321/  lsearle@buchanwe.com.au

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Can ‘living wills’ protect the banking system?

Posted on October 8, 2011
Filed Under ACFS Commentary, Banking, Financial Institutions and Markets, Media Watch, Publications | Leave a Comment

Published in The Conversation, 7 October 2011

Professor Kevin Davis, Research Director at the Australian Centre for Financial Studies explains the concept of “living wills” – a basic plan of how a bank could be pulled apart without damaging the broader industry.

What do living wills mean for banks?

One of the things that came out of the global financial crisis was general recognition that the powers of the regulators to resolve a troubled financial institution are not as good as they should be, so that when large banks get into difficulty we find there are all sorts of problems in them making a smooth and graceful exit from the industry……

Read full article

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The Vickers Report – Implications for Australia

Posted on September 30, 2011
Filed Under Banking, Financial Institutions and Markets, Financial Regulation Discussion Paper Series, Publications | Leave a Comment

FRDP 2011-04
September 27, 2011

In this Australian Centre for Financial Studies Financial Regulation Discussion Paper, Professor Kevin Davis outlines key recommendations of the recently released UK Independent Commission on Banking, and considers their relevance to Australia.

The final report of the UK Independent Commission on Banking (Vickers Report, 2011) was released on September 12, 2011, and recommends a number of significant changes in the structure and regulation of banking in Britain. While some are driven by issues specific to Britain, the question arises of how other countries, such as Australia, should react to the Report’s more general proposals.

At the risk of oversimplifying (and more detail is given in the Appendix), the proposals can be grouped into three main types.

• Banking sector structure – involving operational and legal separation via “retail ring-fencing” of what are sometimes referred to as “utility” and “casino” banking activities.
• Increased capital requirements for larger more systemically important banks
• Greater failure management powers for regulators and protection of depositors.

Retail Ring-fencing

The structural separation proposal reflects a long-standing idea that “narrow banking” has merit – by virtue of limiting risk-spillovers from other activities typically undertaken within a bank with a broader range of activities[1].  The Vickers report argues that benefits of retail ring-fencing include: insulating vital retail banking services from global shocks; making resolution of troubled banks easier; and facilitating banking competition by allowing different regulatory approaches to domestic retail banking and global wholesale/investment banking approaches. Within the “broad bank”, only the ring-fenced bank would be able to provide basic retail banking services, it would be separately capitalized, and have independent directors. While it would be able to share operational services with, and access financial services from, other parts of the broad bank it would be precluded from a range of “non-basic” financial activities.

Can such a separation be done without imposing excessive social costs? Would it have the benefits claimed? Australian experience is potentially relevant here.

Not too many years ago (until changes to the Banking Act in 1989), the major Australian banks operated as structurally separate – but operationally integrated[2]  – Savings and Trading Banks with the former historically having been effectively limited to taking deposits from individuals and making housing loans. The State Government owned (and Trustee) Savings Banks were the only Savings Banks allowed to provide payments (checking) services until legislative changes in 1984. While a return to the (very) heavy regulation of those days (which prompted growth of alternative non-bank institutions) needs to be avoided, the historical record does suggest that structural separation is feasible, and not necessarily excessively costly. The continued profitable operation of specialist retail ADIs (credit unions and building societies) also suggests that retail ring-fencing is a viable option.

The history also suggests that limiting the activities of ring-fenced institutions has merit – if it prevents them moving into areas outside their particular expertise and without adequate governance and risk management capabilities. The demise of the State Banks of Victoria and of South Australia at the start of the 1990s, arising from expansion into investment banking type activities are good examples.

But retail ring-fencing in the modern financial sector can create complications. A major growth area for banks is wealth management, involving provision of financial advice to individuals and creation of financial products such as managed funds, margin loans etc for use by those individuals. Where these activities would fit is unclear.

More relevant is the issue of dealing with imbalances in the demand for and supply of funds from the “ring-fenced” retail clientele. While the nationwide branch networks of banks create a form of internal capital market able to smooth out geographical liquidity imbalances, it is far from clear that in aggregate there is a “natural” balance between household loan demand and deposit supply. Indeed, retail loan demand generally far outstrips deposit supply, such that ring-fenced banks would need to obtain funds from other sources, such as via securitizations or loans from their parents or affiliates – thereby indirectly creating counterparty exposures to their “casino” banking activities.

These issues do not seem insoluble, but would require careful regulatory consideration. Such a separation would, most likely, involve limitation of the Financial Claims Scheme deposit insurance to the retail-ring-fenced bank.

It is also worth noting that, some fifteen years ago, the Australian Financial System Inquiry (Wallis, 1997) considered the issue of financial conglomerates. While their focus was more upon entities combining banking, insurance, funds management and securities activities, rather than different types of banking activities, their preference (p346) was for use of a Non-Operating Holding Company structure as the best method for effecting prudentially desired separation. Their Recommendation 49 to permit such a structure was subsequently facilitated by legislation in 2007 and Macquarie Bank converted to such a structure in that year.

Capital Requirements and Loss Absorbency

The Vickers report proposes higher capital requirements for large retail ring-fenced banks, and particularly for non-ring-fenced systemically important banks. An important consideration arises here of whether this is a matter best dealt with via regulation (such as implied under the Basel III proposals for SIFIs) or via supervision. In Australia, APRA operates a graduated approach to supervisory intensity of individual institutions based upon its PAIRS and SOARS framework. In principle, assessments of the severity of micro and macro – prudential risks arising from that framework can lead to imposition of higher, and tailored, capital requirements for SIFIs, rather than a specified regulatory requirement of “x” per cent.

Compliance with international standards suggests that there is limited scope for not adopting the Basel III regulatory proposals for large banks. However, the Vickers structural separation proposal would, arguably, enable a supervisory approach towards the retail ring-fenced entity while applying Basel III regulatory requirements to the non-ring-fenced entities.

Failure Management Powers

The Vickers report proposes the implementation of “depositor preference” arrangements for the ring-fenced bank whereby depositors are senior to all other claimants in the event of bank liquidation. Australia is one of a relatively small number of countries where depositor preference already exists – although it is in the process of being slightly weakened to enable issuance of “covered bonds”, and its rationale somewhat reduced since the introduction of deposit insurance via the Financial Claims Scheme.

Depositor preference arguably increases the cost of other (wholesale market) funding for banks – because of its subordinated status in bank liquidation. In this regard, the Vickers proposals of structural separation and limitation of depositor preference to the retail-ring-fenced bank would provide the opportunity for Australia to remove depositor preference from the non-ring-fenced banks.

Another of the Vickers proposals is to provide the authorities with “bail-in” powers, such that long-term unsecured debt (“bail-in” debt) of a bank requiring resolution could be subject to some degree of write down by the authorities[3].  Such powers may enable an open resolution to take place rather than having to place the bank into liquidation. The dilemma with such a power is the uncertainty it may create unless potential bail-in arrangements are clearly specified, and thus the consequences for the costs of debt.

While “bail-in” debt seems unlikely to garner much support in Australia, it is worth noting that New Zealand, having decided against continuation of explicit deposit insurance after the end of 2011, is considering such arrangements as part of the Open Bank Resolution proposals on which the Reserve Bank of New Zealand is currently consulting. A particularly noteworthy feature of those proposals is that “bailing-in” or “haircuts” would also apply to depositors. (Deposits would be written down to some level consistent with the solvency of the bank, and the remaining balances government guaranteed to prevent outflows while the open resolution (eg by takeover by another bank) was effected). Since New Zealanders can place funds in the parent Australian banks (in AUD) and get the protection of the Financial Claims Scheme, any preference for doing so, rather than maintaining deposits at risk in the New Zealand banks in any future period of uncertainty, may create additional liquidity problems for the NZ banks.

[1]In the USA, a variant of this view has been incorporated into the Dodd-Frank Act passed in July 2010 through incorporation of the Volcker Rule (requiring prohibition of proprietary trading and sponsorship of hedge and private equity funds by banks).
[2]For example, cash deposits would be conducted through the same teller and go into the same till regardless of whether the account to be credited was at the Savings or Trading Bank!
[3]“Bail-in” debt is different to contingent capital (which has also been proposed as a regulatory requirement) in that the latter involves specific defined trigger events at which the debt converts to equity according to pre-specified arrangements.

This FRDP was prepared by Kevin Davis, Research Director, Australian Centre for Financial Studies and Professor of Finance, University of Melbourne.
info@australiancentre.com.au

Download extended version of paper

The Financial Regulation Discussion Paper Series provides independent analysis and commentary on current issues in Financial Regulation with the objective of promoting constructive dialogue among academics, industry practitioners, policymakers and regulators and contributing to excellence in Australian financial system regulation. More in this series

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Financial Preparedness for Life Events: Looking Beyond Superannuation

Posted on September 21, 2011
Filed Under Banking, Financial Institutions and Markets, Contracted Research and Consulting, Funds Management & Superannuation, Insurance, Media Release, Policy, Publications | Leave a Comment

Abacus, the industry body for the Australian mutual financial services sector, and the Australian Centre for Financial Studies (ACFS) have released the research report, “Private Saving: The Role of Life Event Products” on behalf of the Friendly Societies of Australia.

Households often have inadequate savings and insurance to cover even the most common and predictable of possible life events such as education, health, housing, and retirement each of which may have a major financial impact and for which they have not adequately provisioned. The ACFS report notes that this lack of financial preparedness is not merely income-based but reflects inadequate information and behavioural biases which are sometimes reinforced by well-meaning Government regulation.

“In recent times we in Australia have had a laudable focus on superannuation, which is a great way to save for retirement, but there are other life cycle events which we also need to prepare for, such as ill health and the education of children” said ACFS Director and report co-author Professor Deborah Ralston.

“A mix of other products – some of which do not currently enjoy the same sort of tax incentives as superannuation – are worthy inclusions in a robust and sustainable portfolio” said Professor Ralston.

The report notes that “the tax incentives given for superannuation may have impeded the development and growth of other financial products well suited for non-retirement life event preparation.” Long-established life cycle savings products offered by Australian Friendly Societies do not enjoy the same tax-incentives as superannuation. According to the report, these existing “products have the potential to raise private savings levels and assist individuals to prepare for life cycle events without the need for complex and on-going financial advice.”

Louise Petschler, CEO of Abacus Australian Mutuals, commended the research and encouraged individuals and their financial advisors to look at the various forms of friendly society insurance bonds as a straight-forward way of saving for expected future events such as children’s education, aged-care accommodation and funerals as well as for supplementing other savings.
“Friendly society bonds are a great tool to help secure your financial future,” said Ms Petschler.

“Encouraging short to medium-term savings is the good way to build a savings culture in Australia, and will have positive flow on effects to longer term financial goals.

“Friendly society products can help households save for the practical life challenges of most Australians – educating your kids, safeguarding your family’s health and boosting housing affordability for first home buyers,” said Ms Petschler.

The report authors encourage Government to strengthen incentives to use insurance bonds for delivery of targeted social benefits and to encourage financial literacy and personal financial responsibility. “Australian policy makers have failed to appreciate the opportunity that life event savings schemes offer, … as a consequence, such products receive far less favourable tax treatment in Australia”, than in other leading markets, said the report.

Report co-author and ACFS Research Director Prof Kevin Davis stated that “with insurance bonds tax concessions, or government co-contributions, can be provided effectively and without complexity”. He noted that the sector was prudentially supervised by the Australian Prudential Regulatory Authority (APRA) and that the long-term nature of the modern insurance bond contract enables risk reduction benefits from “time diversification”.

About Abacus – Australian Mutuals
Abacus – Australian Mutuals is the industry body for the Australian mutual financial services sector, a strong alliance of mutual building societies, credit unions and friendly societies.
The mutual sector has combined assets of some $83 billion, offering Australians a competitive alternative to banks and access to a range of savings, investment, loan and insurance products. Unlike banks, profits are not paid to external shareholders, but put back into better products and services for the over 5.5 million members (customers) and their communities.

As the official industry body, Abacus delivers a strong, united and clear voice for the mutual financial services sector as it brings together the strength and professionalism of its 128 member institutions. All are united in that they are all mutual organisations and have closely aligned values, including: cooperation, trust, integrity, care for members, professionalism and ethical practice.

Abacus is owned by its member institutions: 108 credit unions and mutual building societies and represents 18 friendly societies though the Friendly Societies of Australia.

About ACFS
The Australian Centre for Financial Studies (ACFS) facilitates industry-relevant and rigorous research and consulting, thought leadership and independent commentary.  Drawing on expertise from academia, industry and government, the Centre promotes excellence in financial services.  The Centre specialises in leading edge finance and investment research, aiming to boost the global credentials of Australia’s finance industry; bridging the gap between research and industry and supporting  Australia and Melbourne as an international centre for finance practice, research and education.

The Centre provides access to and links between academics, finance practitioners and government and draws on expertise and experience from across these groups, to facilitate knowledge creation and transfer. ACFS (previously known as the Melbourne Centre for Financial Studies) is a not-for-profit consortium of Monash University, the University of Melbourne, RMIT University and Finsia having commenced in 2005 with seed funding from the Victorian Government.  Across the consortium partners ACFS has links with over 100 finance academics and over 200 postgraduate students engaged in finance research.

Media Release PDF | Full Report PDF

Media contact details:

Prof Deborah Ralston
Director
Australian Centre for Financial Studies
T: +61 3 9666 1050
info@australiancentre.com.au

Mark Degotardi
Head of Public Affairs, Abacus – Australian Mutuals
T: +612 8299 9053
info@abacus.org.au
www.abacus.org.au

Prof Kevin Davis
Research Director
Australian Centre for Financial Studies
T: +61 3 9666 1050
info@australiancentre.com.au

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ACFS Boardroom Briefing: Indonesia – Giant in the Making

Posted on September 6, 2011
Filed Under Event News, Funds Management & Superannuation | Leave a Comment

Presentation by Mandiri Investasi
Monday, September 5 2011
Event sponsor: AFM Investment Partners

Summary:

Speakers from Mandiri Investasi suggested that Indonesia is one of the most misunderstood countries in the world. For instance, Indonesia has experienced continuous growth since 2001. There has been “no lingering crisis” rather just “growth and democratisation”.

Indonesia’s stock market is roughly ¼ the market capitalisation of the ASX. There is much scope for growth in financial services with the debt to GDP ratio at only 27%. This for instance represents a credit penetration rate little more than half that of China and Brazil. This low leverage is also seen as one of the reasons for Indonesia’s strong growth throughout the global financial crisis.

However, Indonesia’s future may be to become one of the largest Islamic Financial Services market in the world. Presently Islamic Syariah bonds account for only 5.3% of issuance in the AUD77bn Indonesian Government Bond Market. Two reasons were cited for the slow take off Sharia-compliant financial services. Firstly, the market is difficult to standardise given differing interpretations from Middle Eastern and Malaysian jurisdictions. And secondly, liquidity is low in such products because a prevalent view that trading may not be sharia-compliant.

Like any emerging market Indonesia has to address corporate governance and corruption issues. The establishment of a new Corruption Watchdog and a successful counter-terrorism campaign in recent years have allayed fears.

With continued high population growth and greater foreign investment inflow, Indonesia is expected to return to its pre-1998 trend of above 6%pa economic growth rates. It is expected to continue growing after China has slowed due to a younger more fertile population.

Inflation is significantly a function of food and oil prices which are capped by government subsidies, although government involvement in these two sectors is likely to be wound back over the next decade.

Major growth sectors are expected to be those that cater to growing population, higher intra-country trade and higher income levels. Being a massive archipelago, much infrastructure spending will go to building new ports.

Mr. Priyo Santoso, Chief Investment Officer of Mandiri Investasi suggested that for investors seeking a defensive source of alpha, Indonesia should be considered. With larger US pension funds now looking at funds devoted to China and India, Santoso foresaw a future trend for dedicated Indonesian-specialist funds.

Notes taken by David Michell, ACFS

Presentation PDF

About ACFS Boardroom Briefings
To promote excellence in financial services and boost Australia’s global credentials, ACFS draws on its international network of experts to present relevant and unique speakers to the Australian finance sector. Boardroom Briefings are invitation-only events run for selected stakeholders such as sponsors, partners and supporters, where they have the opportunity to interact more intimately with the speaker to conduct a more targeted discussion.

Contact details:
Australian Centre for Financial Studies
T: +61 3 9666 1050
info@australiancentre.com.au

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Future Directions for Financial Services

Posted on September 3, 2011
Filed Under Banking, Financial Institutions and Markets, Funds Management & Superannuation, Publications | Leave a Comment

Leadership Series 2011 – Financial Services Council Deloitte Lunch
Friday September 2, 2011
Speaker: Jeremy Duffield, Chairman, Australian Centre for Financial Studies

Speech highlights:

• Jeremy Duffield fears that the focus on the immediate, the current economic climate and regulatory consultation and implementation, has meant that there has not been enough analysis of the likely impact of the end of the commodity cycle.
• He highlighted that now more than ever “financial services are a joint product between government and the private sector”.
• Duffield’s concern about the government ”trying to take hold of the reigns of industry innovation” has been widely reported.
• He cited the Melbourne Mercer Global Pension Index, developed by the Australian Centre for Financial Studies and Mercer, which “confirms we have one of the best retirement systems in the world”
• “we’re squarely behind Bill Shorten’s big push to take super contributions up to 12%.”
• As a market veteran, Duffield was able to recall the period to 1980 when the “Dow Jones Average had made no net progress over the past 13 years”. However, the silver lining with the current volatile environment is that equity valuations are cheap.
• Duffield concluded with a broader comment about the role played by financial services in society and how a lack of consensus on societal objectives can harm everyone.

“If we’re to live in this beneficent social compact where we benefit from a private delivery of what is seen as a social outcome, we must focus on meeting the government’s objectives, as well as our consumers’ and our own. And we must accept compromise to maintain the integrity and cohesiveness of the effort. We cannot afford the hard-edged political divisions and failures to act that are hurting the US and Japan so badly.”

Full Speech PDF | About Jeremy Duffield

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Message from the Director – September 2011

Posted on September 2, 2011
Filed Under ACFS eNewsletter, Message from the Director | Leave a Comment

On behalf of the Australian Centre for Financial Studies (ACFS) team, I would like to thank all of our supporters for their support of our bid for the Centre of Excellence for International Finance and Regulation (CIFR). Although the Monash University led bid of which ACFS was a key component was unsuccessful, we did provide a well-developed and cohesive submission, proudly endorsed and supported by the Victorian Government as well as 45 national and international key industry partners. That support reflected the breadth and diversity of the ACFS linkages and was vital in demonstrating the capability and credibility of our bid.

We were very heartened by this high level of support and we look forward to maintaining and building on our existing relationships and in developing new avenues for partnership between industry and academe.

ACFS would also like to congratulate the members of winning CIFR bid led by University of New South Wales, and congratulate John Trowbridge who has been appointed as interim Director of the Centre for International Finance and Regulation.  It is indeed a very exciting and challenging time ahead for John and his team. ACFS is pleased to note that we currently work with a number of the winning consortium members individually.

Again, thank you to all of you who have provided formal and informal support for our Centre. We look forward to building on our strengths as we move forward. 

Deborah Ralston
Director

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ACFS welcomes appointment of Research Director to the Australian Competition Tribunal

Posted on August 24, 2011
Filed Under ACFS Governance, General News | Leave a Comment

The Board and Director of the Australian Centre for Financial Studies are delighted with the announcement of the appointment of ACFS Research Director Professor Kevin Davis as a new part-time member of the Australian Competition Tribunal for a term of five years.

The Australian Competition Tribunal is an independent statutory tribunal that hears applications for authorisation of company mergers and acquisitions which would otherwise be prohibited under the Competition and Consumer Act 2010 (CCA).  The Tribunal also considers appeals on certain Australian Competition and Consumer Commission (ACCC) decisions, including decisions to grant or refuse merger clearances, reviews of decisions under Part IIIA of the CCA (national access regime), and other authorisation decisions made by the ACCC. Hon Justice John Mansfield AM of the Federal Court will be the new part-time President of the Australian Competition Tribunal. The Australian Competition Tribunal now consists of a part-time President, three Deputy Presidents and nine part-time members.

View Media Release

Contact details:
Professor Kevin Davis
Research Director, Australian Centre for Financial Studies and
Professor of Finance, University of Melbourne
W: +61 3 9666 1050
info@australiancentre.com.au

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The Australian Financial System in the 2000s

Posted on August 19, 2011
Filed Under Banking, Financial Institutions and Markets, Funds Management & Superannuation, Insurance, Publications, Research Review | Leave a Comment

Paper prepared for the Reserve Bank of Australia Annual Conference, August 2011

RBA’s Economic Group holds an annual Conference, and the theme for 2011 was “The Australian Economy in the 2000s“. At the start of each decade, the RBA conference reflects on the ten years past to highlight and discuss various aspects of the Australian Economy. In the paper, Prof Kevin Davis reviews the Australian financial system in the 2000s, and draws some comparisons with predecessor “The Australian Financial System in the 1990s” written by Marianne Gizycki and Philip Lowe, Reserve Bank of Australia ten years ago.

Abstract
The Global Financial Crisis (GFC) occupied only a quarter of the decade of the 2000s but, because of its severity and implications for future financial sector development, dominates the decade. The Australian financial system coped relatively well with the GFC, raising the question of whether there was something special about its structure and prior evolution which explains that experience. This paper reviews Australian financial sector performance and development over the decade, before providing a more detailed overview of the Australian GFC experience and its implications and considering explanations for the Australian financial sector resilience.

Introduction
The Australian (and global) financial system entered the first decade of the millennium preparing for a systems crisis, in the form of the Y2K computer scare, which on January 1, 2000 passed without event. But towards the end of the decade, the financial sector was faced with, arguably, its most serious systemic crisis ever which the Australian financial system and economy weathered relatively well compared to advanced nations of northern hemisphere. While that Global Financial Crisis (GFC) occupied only one-quarter of the decade (from mid 2007), it prompts the questions which this review of the decade must seek to answer. Was there something about the structure and evolution of the Australian financial system which explained its resilience in the face of the crisis? Was that resilience due to lower risk taking by the banking sector in the lead up to the crisis; did the distribution of risk within the financial system facilitate adjustment to the shocks encountered; and what role can be attributed to regulatory responses following the onset of the crisis?

In order to place the developments of the 2000s in context, this paper is structured as follows. First, overall macro-economic and flow of funds trends are reviewed. Second, the overall picture of financial sector growth and structure in the 2000s is briefly reviewed in section 2. Then, because of the important role of regulation in financial sector evolution section 3 examines the major regulatory developments and influences on the financial sector prior to the GFC. Section 4 then examines important developments in the financial sector in more detail. Section 5 outlines how the GFC affected the Australian financial markets and regulatory responses to that. Section 6 discusses the fall-out from the GFC in terms of financial regulation and section 7 draws on the prior discussion to address the questions posed above regarding Australian financial sector resilience. Section 8 focuses upon end of decade issues and section 9 concludes.

The paper is written by Professor Kevin Davis, Research Director of the Australian Centre for Financial Studies. Kevin is also a Professor of Finance at the University of Melbourne

Read full paper

Other RBA 2011 Conference Papers

Contact details:

Professor Kevin Davis
Research Director, Australian Centre for Financial Studies and
Professor of Finance, University of Melbourne
T: +61 3 9666 1050
info@australiancentre.com.au

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Response to the Exposure Draft of the 2011 Strategic Roadmap for Australian Research Infrastructure

Posted on July 22, 2011
Filed Under Inquiry Submissions, Policy, Research Review | Leave a Comment

Submission to the Australian Government, Department of Innovation, Industry, Science and Research

Prof Kevin Davis (ACFS), in collaboration with Dr Maurice Peat (University of Sydney) and Prof Stephen Taylor (University of Technology, Sydney), provided feedback on the Exposure Draft of the 2011 Strategic Roadmap for Australian Research Infrastructure.

The 2011 Strategic Roadmap for Australian Research Infrastructure will be developed to inform future decisions on where Australia should make strategic infrastructure investments to further develop its research capacity and improve innovation outcomes over the next five to ten years.

The 2011 Roadmap aims to consider new and emerging areas of research which may require different types of infrastructure in the future, and determine whether the current mix of Capability areas continues to meet researchers’ needs.

In their Response, Prof Kevin Davis and co-authors proposes a new capability area entry for the Roadmap – Mechanisms of Economic Activity, including the role of the financial sector, and tools require for the management of this activity. The Response emphasizes the importance of the proposed research area considered in its own right and not as a sub-branch of the culture and communities capability area.

“The Financial services industry is the largest sector in the economy in terms of contribution to GDP…… Innovation in the design and regulation of economic mechanisms (markets and financial institutions), supported and enhanced by eResearch infrastructure, has the potential to deliver substantial social and economic benefits.”

The Response also details the strategic impact, challenges, assumptions and key research infrastructure requirements of the proposed capability devoted to economic and financial research. Examples of government support into the mechanisms of economic activity capability area include, the recent substantial co-investment by the Federal and NSW governments to establish a national “Centre for International Finance and Regulation” (CIFR); and the Victorian government’s seed funding and continuous support for the Australian Centre for Financial Studies (ACFS).

View the full Submission

View other ACFS Submissions

Contact details:

Professor Kevin Davis
Research Director, Australian Centre for Financial Studies and
Professor of Finance, University of Melbourne
W: +61 3 9666 1050
info@australiancentre.com.au

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16th Melbourne Money and Finance Conference – Retail and Household Finance: Current Issues

Posted on July 18, 2011
Filed Under Banking, Financial Institutions and Markets, Event News, Funds Management & Superannuation, Insurance, Policy, Publications, Research Review | Leave a Comment

At this long-running by-invitation annual Conference much of the value is in the discussion. Around the theme of Retail and Household Finance, 12 original papers were presented, critiqued by discussants, then discussed under the Chatham House Rule.

To ensure a well-rounded discussion, delegates are invited from across the financial services industry, academe, and governmental and regulatory bodies. Papers have also been selected to represent a breadth of issues in the industry, presented by leading researchers from diverse backgrounds. The interaction with leaders from different aspects of the industry has long been highly regarded by delegates and is a reason why many attend annually.

The theme this year Retail and Household Finance was selected due to its current relevance, as reflected in the number of recent inquiries and the range of regulatory proposals relevant to this theme. Researchers this year cautioned policy-makers about future banking regulation saying “Competition is not a word in the Basel lexicon”. Despite a call for a rethink of the “fundamental philosophy of financial services”, most discussion focused on the unintended consequences of recent consumer financial regulation. For instance, requirements for responsible financial advice may lead to fewer people receiving advice as advisors exit unprofitable areas. Also, moral suasion by politicians can be counter-productive e.g. ending mortgage exit fees could lead to the benefit of large banks over small.

A key driver of consumer finance is the ability of individuals, when faced with choice, to assess basic statements about risk and their behaviours. A number of papers discussed different aspects of behavioural finance. Based on a survey conducted at the Conference about top issues in Retail and Household Finance, issues identified for top research priority concerns financial literacy and consumer welfare such as, education and quality control of financial advisors, effective communication of financial products and risks to the community, financial innovations for low income earners, and adequacy of retirement savings and post-retirement products.

After the conference, with insights from discussions, papers are edited for publication in JASSA, Finsia’s quarterly Journal of Applied Finance, for the benefit of the wider financial community. Papers, presentations and discussant notes are also available online on the ACFS website.

Since inception, ACFS, and previously MCFS, has been hosting the Melbourne Money and Finance Conference. The Conference exemplifies the Centre’s work in the industry as a thought leader by enabling contribution to public debate and policy outcomes, and by facilitating linkages between research and industry to promote collaboration and excellence in financial services.

View Conference program and publications

Contact details:
Australian Centre for Financial Studies
T: +61 3 9666 1050
info@australiancentre.com.au

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ACFS Submission to the Natural Disaster Insurance Review Issues Paper

Posted on July 13, 2011
Filed Under Event News, Inquiry Submissions, Insurance, Policy | Leave a Comment

Submission to NDIR Issues Paper, based on feedback from the ACFS Disaster Insurance Inquiry Twilight Forum

The Natural Disaster Insurance Review released an Issues Paper and identified three alternative models to improve access to flood cover for home insurance. It also considered whether any new arrangements for flood insurance for homes might be extended to contents, strata title buildings and small business.

In crafting the response to the Issues Paper, ACFS hosted a discussion panel, Disaster Insurance Inquiry Twilight Forum, with the following speakers and panellists:

• Mr John Trowbridge (NDIR Panel Chairman and APRA)
• Prof John Freebairn (University of Melbourne)
• Nicholas Hossack, (Australian Bankers’ Association)
• Prof Bob Officer (Acorn Capital)
• Mike Vine (Standard & Poor’s)
• Moderater: Prof Kevin Davis (ACFS)

The discussion was well rounded and frank with panellists and members of the floor with opinions from different aspects of the issue. Forum participants spanned a wide range of backgrounds and organisations such as universities, regulatory departments, key industry bodies, insurance and financial services corporations, as well as NPOs. ACFS was able to extract insights from the forum into a submission to NDIR.

View the full Submission

This Submission was prepared by Kevin Davis, Research Director, Australian Centre for Financial Studies and Professor of Finance, University of Melbourne.

View other ACFS Submissions

Contact details:
Professor Kevin Davis
Research Director, Australian Centre for Financial Studies and
Professor of Finance, University of Melbourne
W: +61 3 9666 1050
info@australiancentre.com.au

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Deposit Insurance – Getting the Financial Claims Scheme Settled

Posted on June 8, 2011
Filed Under Banking, Financial Institutions and Markets, Financial Regulation Discussion Paper Series, Insurance, Policy, Publications | Leave a Comment

FRDP 2011-03
June 5, 2011

In this Australian Centre for Financial Studies Financial Regulation Discussion Paper, Professor Kevin Davis reviews the proposed changes to the Financial Claims Scheme which were released in May 2011. He argues that the absence of an ex-ante risk based insurance fee is justified given the “closed resolution” nature of the scheme, and the priority given to APRA in the unlikely event that the scheme is activated. However, the existence of the scheme arguably generates competitive benefits for ADIs, relative to other non-ADIs competing for retail funds, due to perceptions of greater safety. Whether such benefits are offset by costs to ADIs from prudential regulation, or whether some fee is warranted on competitive neutrality grounds is an unanswered question.

The only surprise in the proposed changes to the Financial Claims Scheme (FCS) is why the Government took so long to reach, and announce, those plans. The existing cap of $1 million had to be reviewed by October 2011, and procrastination has done little other than add the slight complexity of how to deal with term deposits which run over that date.

Most of the suggestions by the Council of Financial Regulators for changes to the FCS are relatively straightforward and uncontroversial. But the proposed size of the cap and the financing of the scheme will no doubt evoke debate.

The straightforward changes include the following.

First, deposits in foreign branches of Australian banks are not covered by the scheme. International practice varies on this score, but the recent Icelandic experience cautions against countries taking on such exposures. More generally, international regulatory pressures seem likely to lead to most international expansion being by way of separately capitalized subsidiaries (covered by the host country deposit insurance scheme). In that case, deposit insurance arrangements for foreign branches become a non-issue.

Second, coverage will not apply to foreign currency deposits. Individuals holding such deposits are presumably not unsophisticated investors whom the scheme is designed to protect.

Third, foreign bank branches will not be covered, unlike Australian subsidiaries of foreign banks which are incorporated, separately capitalized and supervised by APRA). Since their licenses are premised on them not dealing with typical retail customers (they are not permitted to accept deposit accounts with initial balances of less than $250,000), exclusion from a scheme which involves a cap on insured deposits of no greater than that amount is again, a non-issue.

Fourth, since the insured cap is meant to apply to total deposits of an individual at one bank, a coverage issue arises when an agent (such as a trustee) operates one account on behalf of a number of individuals. The proposals, sensibly, advocate “looking through” the account to identify the ultimate owners, with the proposed cap applying to each.

The first issue which will generate debate relates to the proposed size of the cap. Perhaps the most surprising aspect of the debate will be the absence of proposals by banks and other ADIs to lower the cap on insured deposits below the $100,000 to $250,000 range suggested by the Council of Financial Regulators.

My how times change! When the FCS was originally mooted with a suggested cap of $50,000, the banks lobbied hard to have the cap reduced to $20,000. In the event, the Global Financial Crisis (GFC) intervened and the scheme was introduced with a cap of $1 million. At $50,000, almost all retail depositors are fully covered, but the GFC has led to a general increase in coverage levels internationally, and the proposed range is not inconsistent with that found elsewhere.

Smaller institutions, such as credit unions, can be expected to lobby for retention of the $1 million cap. Explicit government protection removes some of the competitive disadvantage they feel they face from the perceived implicit government protection which, it can be argued, the large banks gain from their size. Since no up front fees are proposed as part of the scheme, the larger the cap the better from their perspective.

The issue of fees will no doubt generate some debate. An ex-post funding approach is to be maintained, whereby levies on other ADIs would be made should APRA pay out depositors of a failed ADI and not recoup those funds from the realization of the failed ADI’s assets.

Some will argue that ex-post funding of the scheme is inappropriate, due to moral hazard concerns, and that an ex-ante risk-based fee scheme should be used. These arguments have limited weight given the specific nature of the scheme.

First, the moral hazard concern is that depositor protection reduces depositor monitoring of bank risk taking and enables excessive risk taking by ADIs without the penalty of needing to pay higher deposit interest rates reflecting that risk.

Really! The notion that retail depositors have the expertise and ability to assess the riskiness of even small ADIs is laughable. Even sophisticated analysts who might provide such information to depositors do not have a good track record in this regard. Risk-based capital requirements and APRA supervision (and its flexibility to adjust capital (and liquidity) requirements for individual ADIs) are one reason to think that moral hazard concerns are not a major issue. Another is that market discipline by wholesale providers of funds to banks, who are not covered by the scheme, is unaffected by the nature of the deposit insurance arrangements. Arrangements which create moral hazard need to be avoided, but this is not one of them. In fact, it can be argued that since the alternative to an explicit, limited cap, insurance scheme is depositor perceptions of a complete implicit government guarantee, such a scheme reduces moral hazard.

The main effects of protection are to reduce uninformed runs and panics, and enable ADIs to raise funds at “risk-free” interest rates. Hence this is clearly of benefit to those ADIs covered by the scheme, and to which we shall return shortly.

The second concern – that an ex-ante risk-based fee scheme is needed – ignores how the FCS operates.

First, it is a closed resolution scheme, meaning that it only comes into operation when APRA applies to wind up an ADI or, where under the revised proposals, a statutory manager has been appointed and all hope lost of an alternative to winding-up).

Who believes that APRA and the Government will ever let a bank or other ADI, fail in that way, rather than finding some method of open resolution for troubled institutions such as a take-over or merger? In other words, the FCS book of procedures is highly unlikely to ever be taken off the shelf and the FCS activated.

Second, even if the scheme is activated, it is extremely unlikely that ex-post levies on other institutions will be necessary. The reason is that, upon failure, APRA pays out insured depositors and then stands at the very front of the queue for compensation from the liquidation of the failed ADI’s assets. It is the uninsured deposits and other claimants who lose. Only if total assets were not enough to cover the insured deposits would APRA need to impose a levy.

In general, this is extremely unlikely – although it obviously depends on the size of the cap and the structure of the ADI’s balance sheet. If all deposits were insured (ie. an unlimited cap) and there were no other creditors, then APRA could face a shortfall. But that is clearly not the case with larger banks who have substantial other funding sources. A modest cap ($100,000 – 250,000) would likely ensure that smaller ADIs have a buffer of uninsured deposits which bear the losses.

(It might be argued that not giving APRA priority in liquidation would increase APRA’s incentive to resolve troubled institutions before a liquidation situation is reached. In practice, the reputational cost to APRA of not monitoring ADI capital positions and acting rapidly enough to prevent a liquidation situation would appear to make the priority issue one of second-order importance).   

So, a risk-based ex-ante fee has little to justify it. But there is, arguably, a case for some form of charge as a requirement of competitive neutrality between ADIs and other institutions seeking to raise funds from retail customers. Because the FCS provides an aura of government protection for retail deposits not available to other financial institutions, ADIs benefit in two ways. One is the reduced likelihood of depositor runs which enables them to undertake greater liquidity creation than would otherwise be the case (ie. by using short term deposits to make long term loans while holding lower levels of liquid assets). The second benefit is the ability to raise retail funds at lower interest cost than their non-ADI competitors.

Banks and other ADIs will no doubt argue that they do already pay via capital and  liquidity requirements and through other regulation and supervision imposts. That may be so, but whether it is on balance adequate to offset the competitive advantages of explicit and implicit government protection is far from obvious. Whether the cap should be set at the proposed lower end of $100,000 or the upper end of $250,000 should perhaps be considered primarily in the context of how much it distorts competition in the market for retail funds between ADIs and other non-prudentially regulated institutions.

On the other hand, if individuals perceive that their deposits in ADIs have an implicit government guarantee regardless of their size, the size of the cap is largely irrelevant. It will be interesting to see if researchers can answer that question about perceptions by analysis of the behavior of depositors with $1 million or more over the last few years.

This FRDP was prepared by Kevin Davis, Research Director, Australian Centre for Financial Studies and Professor of Finance, University of Melbourne.
info@australiancentre.com.au

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The Financial Regulation Discussion Paper Series provides independent analysis and commentary on current issues in Financial Regulation with the objective of promoting constructive dialogue among academics, industry practitioners, policymakers and regulators and contributing to excellence in Australian financial system regulation. More in this series

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Basel III Liquidity Options

Posted on June 2, 2011
Filed Under Banking, Financial Institutions and Markets, Financial Regulation Discussion Paper Series, Policy, Publications | Leave a Comment

FRDP 2011-02
May 28, 2011

In this ACFS Discussion Paper, Professor Kevin Davis examines the new Basel Liquidity Requirements announced at the end of 2010, focusing primarily on the liquidity coverage ratio (LCR) requirement. The underlying philosophy of the approach can be questioned, partly because it aims to deal with both systemic stress and individual bank stress using the one policy instrument. The “Australian solution” to the shortage of high quality liquid assets (HQLA), involving a fee based liquidity facility at the Reserve Bank, also raises a number of tricky questions about determination of an appropriate fee and may require a review of system wide liquidity management arrangements.  While some details remain to be determined, and the implementation date is relatively long distant, the impact on Australian banks and the financial market is likely to be substantial.

It is generally accepted that the forthcoming introduction of liquidity requirements as part of Basel III^[1] poses significant issues for Australian banks. In particular, there is a shortage of government debt available to be held to enable compliance with the Liquidity Coverage Ratio (LCR) requirement. The proposed “Australian solution” to this problem changes the approach to ensuring liquidity crises are avoided in a subtle, but significant, way, and may have broader implications for system-wide cash management arrangements. The Net Stable Funding Ratio (NSFR) requirement also has the potential to affect the structural development of Australian financial markets, given the current high reliance on overseas wholesale debt markets.

The Basel III LCR and NSFR requirements have been introduced as one response to the Global Financial Crisis experience in which banks, worldwide, experienced liquidity crises. Holdings of marketable private sector securities turned out to be not very marketable, and lines of credit and short term funding dried up. A vicious cycle of asset sales to meet funding shortages led to asset price declines, inducing collateral and margin calls and further funding problems.

That experience demonstrates the third of the problems associated with liquidity. The first problem is that liquidity is hard to define, although most analysts would point to a liquid asset as being one which can be converted into cash (the ultimate liquid asset) quickly and without risk of significant loss of market value. Second, it is even harder to measure. And third, it is likely to disappear just when it is needed most. It is not an inherent, immutable property of a financial asset, but one subject to the fallacy of composition. An asset may be liquid for any individual holder, but not if all holders are attempting to use that property simultaneously.

The Basel Committee^[2] has defined bank liquidity as follows. “Liquidity is the ability of a bank to fund increases in assets and meet obligations as they come due, without incurring unacceptable losses.” Such liquidity risk arises from the key role of banks as liquidity providers by funding longer term assets with shorter term (often at call) liabilities.

Their approach has been to announce the gradual introduction of two minimum requirements, one aimed at short-term crisis situations and the other focused on longer term funding.^[3] Although not strongly emphasized, the former focuses primarily on system wide liquidity crises (reflected in the use of a stressed scenario involving “a combined idiosyncratic and market-wide shock” (bcbs188, para 17) and the latter on individual bank difficulties involving “an extended firm-specific stress scenario” (bcbs188, para 125).

The LCR Requirement

The LCR requires banks to hold an amount of high quality liquid assets (HQLA) sufficient to enable the bank to cope with fund outflows over a one month stress period. The scenario envisaged for cash outflows draws on the experience of the Global Financial Crisis, and assigns varying “run-off” factors to different classes of funding, allows for limited inflows of funds (such as from contractual repayments on loans), and assumes limited outflows of funds associated with the need to maintain some level of lending and credit extensions. Given the complexity of bank operations, including collateralized funding, off-balance sheet activities and derivatives transactions, there is a long list of categories of transactions for which quantitative assumptions about run-off factors to derive the denominator of the LCR must be made.

Because avoiding asset price fire-sale declines is critical, only assets whose price is not sensitive to credit risk concerns are suitable for inclusion in HQLA (the numerator of LCR). The Basel Committee adopts a two tier approach to the LCR with level one assets (essentially sovereign debt and Central Bank liabilities) being required to account for at least 60 per cent of HQLA. Level 2 assets can include highly rated (AA- or better) corporate (non financial institution) and covered bonds and some other assets (with a 15 per cent haircut to market value applied).

The Basel Committee also suggests that HQLA should be eligible for use as collateral in accessing Central Bank liquidity facilities. Because of the system-wide stress scenario used, securities issued by other banks or financial institutions are not included in HQLA because these would be likely to be facing losses in market value.

Ultimately, these criteria for eligibility mean that Australian government and semi-government debt have been designated by the Australian authorities as the only currently available assets meeting the LCR.^[4] While the Reserve Bank accepts residential mortgage backed securities as collateral for repurchase agreements, these are issued by other financial institutions. Similarly, despite a large Kangaroo Bond market (AUD securities issued in Australia by foreign entities), the depth of the secondary market in these securities, and demonstrated resilience, is deemed inadequate. While the Federal Government has recently announced plans to allow limited issuance of covered bonds, it will (hopefully) be some time before there is any evidence of how prices of such securities will cope in a time of stress (and their consequent suitability as level 2 HQLA).

The Australian dilemma is that, even with a shift of the government budget into deficit for some foreseeable future, past years of surpluses mean that there is unlikely to be sufficient Federal or State government debt to meet bank LCR demands. While, in aggregate, there may be enough debt on issue, the demands of other fixed interest investors (both domestic and foreign) mean that there will be strong competition – pushing government yields down. Good for the government, but not for the holders!

The response has been to obtain Basel approval for the “Australian solution” (also relevant for a few other countries in good fiscal shape). This involves banks being able to meet their LCR “gap” by inclusion of liquidity facilities which they obtain, for a “fair” fee from the RBA.

An Assessment of the LCR Requirement

The approach adopted places the onus for liquidity insurance upon the banking sector and private financial markets. The LCR approach does not envisage the banking system relying (at least initially) upon the safety valve of RBA liquidity provision via repurchase agreements etc. The logic of the approach can be questioned, in so far as it applies to system wide crisis scenarios rather than individual bank difficulties.

Consider a situation in which a liquidity crisis occurs and banks respond by selling their holdings of government securities. Such widespread action will push the prices of those securities down and their yields up, which is unlikely to be a desirable outcome in such a situation from the perspective of the RBA. Consequently, there is likely to be RBA operations in the cash market to inject liquidity by purchasing government debt or by repurchase agreements based on those or other eligible securities.

Consequently, the merits of an approach which assumes that the market can ensure enough liquidity in a crisis situation seems contradictory to the likely outcome, when the only ultimate provider of liquidity – the Central Bank – is likely to have to act. To the extent that this is the case, the exclusion of other repo-eligible securities from the LCR calculation can be questioned.

To the extent that the LCR is aimed at ensuring individual bank liquidity adequacy in a time of individual stress, there are also some questions which should be posed. First, are requirements based on a system-wide stress scenario appropriate? Second, the exclusion of a range of private sector assets from the calculation seems less warranted since their values would be little impacted by sales by one bank only.

The dilemma here is that the LCR appears to be one instrument aimed at achieving two objectives – one being individual bank liquidity adequacy in a single-name stress situation and the other being system wide liquidity adequacy in a generalized crisis scenario. A long standing tenet of policy formulation is that at least as many instruments are required as there are objectives if those objectives are to be fully met, rather than being constrained by a trade-off.

A number of other important issues arise from the planned implementation of the LCR.

Deposit Insurance Coverage:
The stress scenario gives a very low “run-off” rate to insured deposits. The more is insured deposit funding, the lower will be the hypothetical scenario cash outflow and thus the lower required HQLA holdings. The higher is the “cap” decided upon for the Financial Claims Scheme (currently $1 million and to be re-set by October 2011) the higher will be the proportion of deposits which fall into this category.

The Australian solution:
There is a fundamental difference in the underlying philosophy implied by the solution to a shortage of HQLA of allowing banks to fill a LCR gap through contracted liquidity facilities at the RBA. Specifically, it allows for liquidity requirements to be met partially by having in place arrangements for tapping this RBA liquidity safety valve – rather than requiring liquidity protection to be purely by way of bank sales of liquid assets into the private markets.

The ultimate, aggregate, outcome may not be too different. If instead, in the absence of that facility, all banks are unloading government securities in a crisis and pushing prices down and yields up, the RBA may be compelled to step into the market as a buyer to meet its interest rate targets.^[5] Aggregate liquidity would be increased, as would have been the case where the liquidity facility approach applied. While the adjustment process may be different, it is not apparent that the outcome would be different to a situation where repo-eligible securities are allowed to be counted to meet the LCR.

Where an individual bank faces a “name” crisis, it may be able to sell non HQLA assets without creating “fire sale” conditions. Consequently, the need for that bank to tap the liquidity facility is likely to be reduced, and the likelihood of RBA liquidity injection is reduced. But nevertheless, there is a fundamental change away from requiring basic liquidity protection solely by private provision.

This raises two possible alternatives. One is that other private sector securities which are “repo-eligible” at the RBA could be included in LCR eligible assets. The Basel Committee provides for the option for “level 2” assets to be included with a minimum 15 per cent haircut, and that haircut could be increased if it was thought appropriate to allow some available assets (mortgage backed securities, Kangaroo bonds) to count as level 2 assets.

Another option is that banks could build up their holdings of Exchange Settlement Accounts at the RBA – because these also count towards the LCR. Currently the RBA pays interest on these at 25 basis points below the target cash rate, and the banks minimize ESA balances accordingly. This raises the question of the pricing of the proposed liquidity facility.

Pricing of the RBA liquidity facility

The Australian solution requires that a fee be set for the liquidity facility which is “fair” – in the sense that there is no benefit/cost from using the facility (and holding eligible non-HQLA assets as potential collateral) relative to holding additional HQLA to meet the LCR requirement. There are two fundamental problems here. One is that the counterfactual involves setting a fee which is related to the credit-risk adjusted yield of additional holdings of level 1 and 2 HQLA, when there are none of the latter for which a yield is available.

The second problem is that a fundamental simultaneity problem exists, as follows. The reason for the safety valve facility is that the cost to banks of acquiring HQLA beyond some level is seen as prohibitive, given the stock available. As banks attempt to increase their holdings of government debt, their demand will drive down its yield relative to other investments. Wherever the liquidity facility fee is set will affect the relative use of the liquidity requirement versus holding HQLA, with the latter in turn affecting the cost to banks of using HQLA. The Figure below illustrates. The opportunity cost to banks of holding more government debt (the additional risk adjusted yield foregone on alternative private debt) is shown as increasing in their holdings of HQLA (because the higher bank demand for government debt drives down its relative yield). If the liquidity facility fee is set at Fee_a, HQLA holdings will be at HQLA_a, if it is set at Fee_b the holdings will be at HQLA_b etc. Thus there is no unique fee level.

Exchange Settlement Account Arrangements and the Liquidity Facility Fee

A further complicating feature arises from the ability of banks to use Exchange Settlement Account (ESA) balances to meet the LCR requirement. Currently the RBA pays 25 basis points below the cash rate, and banks manage their liquidity to keep minimal ESA holdings (lending surplus funds to other banks overnight at the cash rate). Conceivably, and ignoring the simultaneity discussed above, it may not be possible for the RBA to always charge a sufficiently low fee for its liquidity facility so as to make that more attractive than building up ESA balances.

Consider, for example, the situation where a bank holds repo-eligible RMBS to support the liquidity facility.  Because there is a haircut given to level 2 assets of at least 15 per cent, $100 of HQLA would require (say) $120 of holdings of level 2 assets. The fee for the liquidity facility should thus be for a facility of $120 and would reduce the net return on the $120 of repo-eligible assets backing that to of a government bond rate equivalent. The consideration for the bank is whether it would prefer to hold $120 of assets earning (net of the liquidity facility fee) the government bond rate compared to the alternative of $100 in its ESA account earning the cash rate less 25 basis points and another $20 in higher yielding private sector assets. The slope of the yield curve (long term v short term rates) and size of credit spreads (for private sector securities over government rates) are relevant factors in this calculation.

While these arrangements remain to be determined, if there is a build up of bank ESA balances (rather than holding other assets), the RBA’s cash rate target would see it acquiring additional assets from the banks (such as government securities) and potentially aggravating the shortage of HQLA.

The implication is that the whole structure of arrangements for system liquidity management may need to be reexamined.

[1] Basel Committee on Banking Supervision Basel III: International framework for liquidity risk measurement, standards and monitoring,  December 2010, http://www.bis.org/publ/bcbs188.pdf

[2] Basel Committee on Banking Supervision, Principles for Sound Liquidity Risk Management and Supervision, September 2008, http://www.bis.org/publ/bcbs144.htm

[3] After an observation period commencing in 2011, the LCR would apply from 1 January 2015 and the NSF from 1 January 2018.

[4]APRA “APRA clarifies implementation of global liquidity standards in Australia” Media Release 11-03, 28 February 2011.  http://www.apra.gov.au/media-releases/11_03.cfm

[5] Even if the crisis is a “flight to quality” with non-banks increasing their demand for government debt in exchange for bank deposits, the consequent liquidity adjustments of banks may create a need for RBA injection of liquidity.

This FRDP was prepared by Kevin Davis, Research Director, Australian Centre for Financial Studies and Professor of Finance, University of Melbourne.
info@australiancentre.com.au

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Rethinking investor protection – the case for more regulatory intervention

Posted on May 3, 2011
Filed Under Banking, Financial Institutions and Markets, Event News, Funds Management & Superannuation, Insurance, Media Release | Leave a Comment

Martin Wheatley last night made a strong case for greater regulatory intervention in retail and wholesale financial products in his International Distinguished Lecture to the Australian Centre for Financial Studies.

Martin Wheatley, CEO Securities and Futures Commission, Hong Kong and CEO designate of the UK Financial Conduct Authority (FCA) last night delivered a thoughtful presentation entitled “Rethinking investor protection”.

He stated that “the global financial crisis had precipitated regulatory actions in immediate response to the massive problems that threatened to bring down the global financial systems.” Then Wheatley noted that governments and regulators are now taking “a more considered approach to reforms”.

In the words of Wheatley, soon to be one of the UK’s most powerful regulators, “pivotal to the reform process” will be “enhancing investor protection regimes”.

Wheatley acknowledged that “black letter” rules are not the perfect solution, but he noted that “you can’t legislate ethical behaviour”.

And “to rebuild investor confidence and to tackle the challenges posed by product markets featuring a much broader spectrum of complexity” will require “greater use of judgement, a forward-looking perspective, and pre-emptive actions to stem any potential build-up of risk before significant damage is done”.  
Mr Wheatley concluded that “financial markets are about managing and pricing risk, not its elimination”.

Host of the International Distinguished Lecturer, ACFS Director Prof Deborah Ralston remarked that “in a period of global re-regulation it is important for Australian financial service firms, academics and policy-makers to pay close attention to developments major financial centres like London.” She went on to say that while “the UK’s emerging regulatory model appears to have taken on some of Australia’s better features”, that this was “no reason for complacency.”

About the ACFS-KPMG International Distinguished Lecture Series
The International Distinguished Lecture Series provides thought leadership to the Australian finance and business communities on matters of contemporary global importance.

The Series is sponsored by KPMG and has hosted key international leaders such as:

• Mr Mervyn King, Governor of The Bank of England – “Through the Looking Glass: Reform of the International Institutions.”
• Dr. Robert Joss, Dean of Stanford Business School and former CEO of Westpac Banking Corporation – “Modern Finance and Its Leadership Challenges”
• John Fraser, Chairman and CEO of UBS Global Asset Management – ”A Tumultuous Year or so – Some Observations on the Turmoil in the Financial Markets, Policy Settings and Regulatory Implications”
• Jaime Caruana, General Manager, Bank for International Settlements – “Grappling with Systemic Risk”.

Download media release | Download transcript

Media contact details:
Professor Deborah Ralston
Director, Australian Centre for Financial Studies
(03) 9666 1050
info@australiancentre.com.au

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Self Managed is the Key

Posted on April 20, 2011
Filed Under ACFS Commentary, Funds Management & Superannuation, Policy, Publications | Leave a Comment

Professor Kevin Davis, Research Director of the Australian Centre for Financial Studies ponders about the ramifications of the Government’s decision to exclude SMSF investors from the compensation arrangements for losses due to the Trio/Astarra failure .

There has been an immediate clamor for a protection scheme to be created for self managed super funds (SMSFs) following the Government’s exclusion of SMSF investors from the compensation arrangements for losses due to the failure of Trio/Astarra. That decision is a good one, but does raise a number of issues worthy of consideration.

The Government decision was based on the provisions of part 23 of the SIS Act (1993) which provides discretion to compensate members of prudentially regulated funds for losses due to fraud, and levy other funds to finance such payments. In the review of Financial System Guarantees in 2004, the issue of protection of superannuation was considered, but viewed as being of a different nature to protection of bank depositors etc.

The reason was that (except for defined benefit funds) the fund does not make a promise of a defined amount reliant upon the balance sheet strength of the agent operating the fund, such that failure of that agent would mean that the promise was broken. Super fund members are collectively the owners of the assets of the fund and bear the market risk (both upside and downside) associated with the value of the assets.

The risk members face which does warrant prudential concern is that of possible fraud, including non-arms length investments by the fund trustees, which diminish the value of fund assets. Ideally, APRA oversight of regulated funds limits the likelihood of these outcomes, and the Treasurer’s discretion to compensate for losses due to fraud etc. provides an adequate level of protection.

But SMSF come in all shapes and sizes, ranging from “really” self managed, where the member-trustee does virtually everything (although self-audit is not permitted), to virtual complete outsourcing. Stockbrokers and financial advisers provide platforms which provide accounting, advising, transactions, taxation, custody services and arrangements, such that the member-trustee’s role is effectively that of a signatory acknowledging ultimate responsibility.

This variety of arrangements does produce potential risks, but a one sized approach to regulatory protection won’t fit all. For the “really” self managed, the benefits of independent control and decision making come with (and should come with) the risk that those decisions might turn out to be pretty bad. There is no case for government compensation for investment losses, such as arising from fraud associated with issuers of securities or managed funds in which the SMSF has invested.

Where such investors suffer losses, they are in the same position as other investors in those assets, and the appropriate policy is that of supervision and enforcement by ASIC to reduce the prevalence of such losses.

A prevalence of such losses among SMSFs may suggest that there may be an argument that those with inadequate financial expertise should not be allowed to self-manage retirement balances which receive substantial tax-concessions from government. But that is a proposition which would raise many hackles.

At the other end of the spectrum, there is the possibility that outsourcing of SMSF functions to a “full service” provider creates risks. These could include the risk that commission payments by manufacturers of financial products induce advisers to promote inappropriate products. Ideally reforms under the Future of Financial Advice legislation will reduce that risk.

But if such risks are viewed as substantial, the solution is not to develop a scheme applying to all SMSFs. It is a problem arising from the possibility that some providers of SMSF platforms may fail in a way which creates losses to their clients. Thus if a protection scheme is thought to be warranted, it would be some form of insurance scheme involving those providers, rather than SMSF’s directly.

Ultimately, those insurance costs would be passed on to members of SMSF’s using such services. The dilemma is that this relative pricing effect could induce some individuals to go the “really self managed” route, with its attendant risks.

Maybe there is some case for limiting the scope for individuals to go the “really self managed” route unless they can demonstrate the requisite expertise!

This Commentary is written by Professor Kevin Davis, Research Director of the Australian Centre for Financial Studies. Kevin is also a Professor of Finance at the University of Melbourne.

info@australiancentre.com.au

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ACFS Banking Panel: Is this the dawn of a new era in Banking?

Posted on April 15, 2011
Filed Under Banking, Financial Institutions and Markets, Event News, Policy | Leave a Comment

Yesterday, ACFS held a Banking Panel with a number of industry heavyweights , in conjunction with the Economic Society of Australia and sponsored by PricewaterhouseCoopers.

The event was sparked by debate arising fom the long-running Senate Economics Committee Inquiry into Competition within the Australian Banking Sector. Over a hundred submissions were received by the Committee from a wide range of organisations and individuals. There were many questions that needed to be addressed.

Prof Kevin Davis, Research Director ACFS, led a panel discussion to shed some light on the debate. Invited panellists were key players of the industry with their own points of view:

• Michael Ullmer, Deputy Chief Executive Officer, National Australia Bank;
• Ian Harper, Director, Deloitte Access Economics;
• Steven Münchenberg, Chief Executive Officer, Australian Bankers’ Association; and
• Graeme Samuel AC, Chairman, Australian Competition and Consumer Commission.

The panel attracted a 150-strong audience from all strata of the industry.

In summary:

Outgoing ACCC Chairman Graeme Samuel was passionate in expressing his thoughts on current commentary about the Commission’s recent decisions. He defended the proposed reforms for price signalling to remove any loopholes and technicalities in illegal cartel behaviours; and cited rigorous due diligence in granting permission for the takeovers of BankWest by CBA and St. George by Westpac during the GFC.

CEO of the Australian Bankers Association Steve Munchenberg was candid about the negative perceptions of banks and its impact on politics and regulation. He recognised as foremost importance that banks must step up to do things that would convince the public that banks are concerned about customer interests. He referred to recent heat on banks raising rates beyond the Reserve Bank adjustments to the cash rate.

Outgoing NAB Group Deputy CEO Michael Ullmer noted that his bank’s strong growth in new accounts indicated that competition between banks was alive and well. He challenged advocates of account portability to look at the cost-benefit trade-off of the implementation.

Prof Ian Harper of Deloitte Access Economics renewed his call for a new “root and branch inquiry into the Australian financial system”.  This should be prerequisite to any major reforms to the banking industry. He also cautioned that effects of the GFC are still to be felt across the industry. This was agreed by Ullmer,  referring to banks continuing at relatively high level of liquidity reserves compared to pre-GFC.

View event info

View ACFS submission to the Inquiry

Contact details:
Australian Centre for Financial Studies
T: +61 3 9666 1050
info@australiancentre.com.au

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The Future of Australian Bank Funding Report released by the Australian Centre for Financial Studies (ACFS) and KPMG identifies many issues for banks and government in relation to bank funding and questions the sustainability of current funding models of the major banks

Posted on April 6, 2011
Filed Under Banking, Financial Institutions and Markets, Contracted Research and Consulting, Funds Management & Superannuation, Media Release, Policy, Publications, Research Review | Leave a Comment

Bank funding models are unlikely to substantially change and regulatory intervention will make little difference, according to the Report.

The ACFS/KPMG Report examines the difference in funding patterns between major and second tier banks and the heavy reliance of the major Australian banks, in particular on wholesale funding, much of it from overseas.

Future options for bank funding structure are limited by two main factors: the ongoing national balance of payments position, with the banks being a main conduit for financing the current account deficit, and the significant ongoing flow of household savings into superannuation funds.

Currently the major banks effectively fund Australia’s large and longstanding balance of payments current account deficit by borrowing offshore, and, then lending on-balance sheet to Australian companies.

Detailed analysis of the true cost of funding Australian mortgages is difficult given the geographical and operational diversity of the major banks, but the Australian banking system is exposed to several features that influence perceptions of risk. These relate to the heavy reliance of banks on wholesale funding, the domination of the four majors with similar funding patterns and a relatively high reliance on residential property as an asset class.

The ACFS/KPMG Report draws attention to the relative tax disadvantage of deposits compared to superannuation as a further factor affecting bank funding. Professor Deborah Ralston, Director of ACFS, notes that

“as the Henry Review identified, there is a considerable discrepancy in the tax incentives accorded to different forms of saving.  As a consequence, this leads to some distortion in personal savings patterns and makes it more difficult for banks to increase the proportion of retail funding sources.”

The report acknowledges that the management of funding risk is now a fundamental part of planning and risk management for banks, and finding new ways to diversify funding sources is a key focus.

The report also suggests that given the need for banks to meet new net stable funding (NSF) ratio requirements, use of covered bonds as a stable funding source is an attractive proposition, which may help recycle household savings via superannuation funds back to the banking sector.

ACFS Research Director, Professor Kevin Davis added

“While Australian banks weathered the recent Global Financial Crisis with distinction the international liquidity drain during the GFC highlighted the reliance of our banks on offshore funding. Given that the taxpayer was required to support our banks at that time it is important that lessons from that time are well learnt.”

About the ACFS-KPMG Monograph The Future of Bank Funding
The Australian Centre for Financial Studies (ACFS) and KPMG are pleased to publish the ACFS-KPMG Monograph The Future of Bank Funding and see this type of research as central to the mission of both firms. The monograph is the first outcome from a research partnership between ACFS and KPMG.

ACFS and KPMG gratefully acknowledge the industry participants who so obligingly contributed their time and thoughts to this monograph.

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Media contact details:
Professor Deborah Ralston
Director, Australian Centre for Financial Studies
(03) 9666 1050
info@australiancentre.com.au

Professor Kevin Davis
Research Director, Australian Centre for Financial Studies
(03) 9666 1050
info@australiancentre.com.au

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US economic recovery to be retarded by headwinds, leading American economist Dr Martin Feldstein tells ACFS audiences

Posted on March 18, 2011
Filed Under Banking, Financial Institutions and Markets, Event News, Media Release, Policy | Leave a Comment

In addresses this week to the Australian Centre for Financial Studies in Melbourne and Sydney, renowned Harvard academic Dr Martin Feldstein said that it was unlikely that the United States would achieve growth much above 2% in 2011. Recent consumption-led growth was unsustainable due to pent up demand and a run down in savings.

Moreover, Dr Feldstein identified four headwinds to US economic recovery in 2011.

1. The withdrawal of fiscal stimulus. As the stimulus had been “badly designed” and poorly targeted the detraction from growth would be less than feared. However, the individual states are also cutting back spending and raising taxes.
2. Rising oil prices. A $US30 per barrel price increase could take ¾% off GDP.
3. House prices across are falling again. 30% of all homes with mortgages are underwater with negative equity. More people are likely to walk away from their homes.
4. A major period of refinancing of non-prime regional commercial real estate is likely to require significant write-downs and may stress the undercapitalised community bank sector.

A former chief economic advisor to President Ronald Reagan and a member of President Obama’s Economic Recovery Advisory Board, Dr Feldstein identified a major medium term risk as rising real interest rates. At 1% US real rates may be unsustainably low and could rise as high as 3% given the rising public debt and the need for continuing offshore funding of US deficits.

Dr Feldstein stated that, contrary to popular wisdom, the US could not expect to inflate its way out of its problem as most of its debt is short term; higher inflation would very quickly be reflected in higher market interest rates. Moreover, the issue for US with China may not be China’s trade surplus. Rather a greater issue within five years may be when wages and consumer spending rise, and savings rates fall, that China could move into deficit and no longer be a net buyer of US government securities.

Dr Feldstein said there was some reason to be optimistic about US public debt. He detected a growing bipartisan resolve in Washington to reduce subsidies and strip out costs from health care and social security. However, further quantitative easing (“QE3”) was unlikely except in the case of “a massive downturn”.

In conclusion, Dr Feldstein noted that in the US “the failure of supervisors to do their jobs” was “a key reason” for the financial crisis but he was encouraged by reforms concentrating US bank supervision with the Federal Reserve.

ACFS Director Prof Deborah Ralston stated that “we are delighted to welcome a visitor of Dr Feldstein’s calibre.  As an outstanding academic and one of the world’s 10 most influential economists, he brings keen insight to public debate.” Part of the ACFS brief is to elevate the contribution of finance academics to public policy in Australia.

About the Speaker:
He is currently the George F. Baker Professor of Economics at Harvard University, and the president emeritus of the National Bureau of Economic Research (NBER). He served as President and Chief Executive Officer of the NBER from 1978 through 2008. From 1982 to 1984, Dr Feldstein served as chairman of the Council of Economic Advisers and as chief economic advisor to President Ronald Reagan.  He has also been a member of the Washington-based financial advisory body the Group of Thirty since 2003.

He is among the 10 most influential economists in the world according to IDEAS/RePEc. He is the author of more than 300 research articles in economics and is known primarily for his work on macroeconomics and public finance. He has pioneered much of the research on the working mechanism and sustainability of public pension systems.

“On February 6, 2009, Dr Feldstein was announced as one of U.S. President Obama’s advisors on the President’s Economic Recovery Advisory Board”. “A well-known figure on the Harvard campus, Dr Feldstein taught the introductory economics class “Social Analysis 10: Principles of Economics“ (commonly referred to as “Ec 10″ by Harvard students) for twenty years …. Ec 10 was routinely the largest class at Harvard.” ( Source: Wikipedia)

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Media contact details:
Professor Deborah Ralston
Director, Australian Centre for Financial Studies
(03) 9666 1050
info@australiancentre.com.au

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Jeremy Duffield appointed Chair of the Australian Centre for Financial Studies

Posted on March 8, 2011
Filed Under ACFS Governance, Media Release | Leave a Comment

The Board of Management of the Australian Centre for Financial Studies (ACFS) is pleased to announce that Jeremy Duffield has agreed to become its new non-executive Chairman effective immediately.

Jeremy retired in December as Chairman of Vanguard Investments Australia after a 30-year career at The Vanguard Group.  He founded Vanguard in Australia in 1996. It now manages over an $80 billion investment portfolio.

Duffield is currently a member of the Australia Financial Centre Task Force. He was previously deputy chairman of the Investment and Financial Services Association Limited (IFSA) and served on the Federal Government’s Financial Sector Advisory Council (FSAC), and on the Advisory Board of the Financial Literacy Foundation.

“We are absolutely delighted that Jeremy has decided to join us at a time of great opportunity and challenge for our Centre”, said Professor Deborah Ralston, Director of ACFS.

Duffield is widely admired for successfully transplanting Vanguard’s indexed investment products, its process and its culture to Australia and for making Australia a base for export of financial services into the Asia-Pacific region.  Furthermore, Duffield is credited as an architect of Vanguard’s retail strategy in the US in its early days and was until he retired a key advisor to current management on global strategy.

“Jeremy’s great depth of experience in financial services as well as his international industry and policy-maker connections will be invaluable to the Australian Centre in achieving and exceeding its ambitious goals” added Ralston.

Duffield takes over the chairman role from Syd Bone, Chief Executive Officer of CP2 who continues as the Centre’s deputy chairman with a special focus on building ACFS connections in Sydney. In announcing his own decision Bone noted that the timing was right and that “I am very happy to be able to hand the baton as chairman over to Jeremy while continuing to work with him on key ACFS agendas.”

Ralston commented that “this is a win-win outcome for all concerned. We greatly appreciate all that Syd has done for us as chairman over two years and are grateful that he will be able to continue the work with us on strategic issues and as our representative in Sydney.”

Ralston concluded, “Furthermore I believe that Jeremy’s strong and current connection with US industry and academic circles will help ACFS in raising the bar on academic research quality particularly around investment markets performance.

ACFS is committed to ongoing enhancement of both the quality of Australian financial and business research, as measured by the Excellence in Research in Australia framework, and also to raising its effectiveness as an aid to the international competitiveness of Australian financial services business.

ACFS was established six years ago with the mission to provide a bridge between the academic community, government and the financial services industry. ACFS is known as the publisher of the Melbourne Mercer Global Pension Index, as producer of the annual Melbourne Financial Services Symposium and as a generator high quality research and comment across banking, insurance and funds management.

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Media contact details:
Professor Deborah Ralston
Director, Australian Centre for Financial Studies
(03) 9666 1050
info@australiancentre.com.au

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Off-Market Share Repurchases: Policies Wanted!

Posted on March 4, 2011
Filed Under Banking, Financial Institutions and Markets, Financial Regulation Discussion Paper Series, Policy, Publications | Leave a Comment

FRDP 2011 – 01
March 3, 2011

In this ACFS Discussion Paper, Professor Kevin Davis notes a resurgence of interest in (and controversy about) off-market share repurchases and asks what has happened to changes proposed in 2009 to the tax treatment of such transactions. Of two major proposed changes, one has significant merit and warrants introduction, while the merits and benefits of the other is less obvious.

Off-market share repurchases (buy-backs) have been a significant form of corporate capital management in Australia in recent years. Between 1996 and 2008 there were over 80 such buybacks which returned around $27 billion of cash to participating shareholders. While there was little activity during 2009 and 2010, there are expectations of considerable use of buybacks during 2011, with BHP having announced a $5 billion buyback in February, and Woolworths having completed a $700 million buyback in October 2010.

These transactions are not without their critics, with the main issue of contention being whether they involve equitable treatment of shareholders (and an associated question of whether they are consistent with legal requirements for such treatment). The reason for these concerns lies in the way such transactions are structured enabling substantial tax benefits to be passed to shareholders who participate in the buyback. While that appears to disadvantage non-participating shareholders, competition for these tax benefits leads to the buyback price determined in the tender process being below the current market share price, which is a benefit to non-participants.

In May 2009, a Board of Taxation study of off-market repurchases(1)  was released by the then Assistant Treasurer, with an announcement that the Government planned to introduce legislation to implement the six recommendations of the study. Two of those recommendations were particularly significant, and would have substantially changed the way in which such transactions are conducted – and most likely have reduced their attractiveness to companies and shareholders as a way of distributing surplus cash and franking credits.

A Treasury discussion paper(2) outlining possible legislative changes was released on June 1, 2009, however, no legislative action has yet occurred on this front and buybacks are still operating under the old arrangements.

At least one of two major changes proposed then has merit, and should be implemented as soon as possible, while the other is more contentious.

Off-market buybacks are conducted as tender offers in which the payment made by the company comprises a small amount of capital repayment with the remainder taking the form of a franked dividend. Tax rulings mean that participants in the buyback thus get substantial tax benefits from a capital loss (their purchase price less the small capital repayment component) and from dividend franking credits attached to the dividend component.

Consequently, such buybacks occur at less than the current market price of the shares through competition in the tender for the associated tax benefits arising from selling into the tender. They are particularly attractive to shareholders on zero or low income tax rates (such as superannuation funds), and there is much attention paid to the prospect of such buybacks in the financial advice industry. For shareholders on high marginal tax rates, participation is not worthwhile. (While the capital loss for tax purposes is valuable, there is additional tax to be paid on franked dividends, which makes selling at a below-market price unattractive).

This tax-based discrimination against shareholders on high tax rates has led to concerns about equitable treatment of shareholders and the consistency of such buybacks with requirements that companies should treat all shareholders equally. In effect, the argument is that valuable franking credits are being syphoned to one group of shareholders to the detriment of others.

The shortcoming of this argument is that non-participating shareholders benefit from the below-market price at which shares are repurchased from participants. Thus, both participants and non-participants benefit at the expense of the taxpayer from the realisation, rather than deferral of tax benefits available to the company and its shareholders.

This prompts two questions, answers to both of which would have been affected by the lost tax changes. First, why is there this unusual tax treatment allowing participants substantial capital losses for tax purposes? Second, are the benefits equitably shared between participating and non-participating shareholders?

One of the proposed tax changes was to remove the ability of participating shareholders to claim a tax loss for tax purposes. That would have substantially reduced the appeal of off-market buybacks and led to much lower repurchase price discounts to market price for those which occurred.

Is that an appropriate change? Arguably not. The existing tax treatment can be thought of as equivalent to a partial wind-up of the company involving return of capital (which should not be taxed) and retained earnings (and associated franking credits). Even though the current shareholder may not have contributed capital, having bought shares on-market from previous holders at a higher price than the original issue price, those individuals would have paid capital gains tax on receipts – some part of which correspond to the return of capital in the buyback. But that interpretation is open to challenge and this question warrants greater analysis and discussion.

The second proposed change was to remove the 14 per cent maximum discount to current market price which the ATO effectively imposes on buyback prices. Almost all recent buybacks are constrained by that maximum discount, as is obvious by the substantial scaling back of applications.

Recent research(3) indicates that without the constraint the average discount would have been around 21 per cent. Non-participating shareholders would thus have been better off – because shares were bought back at lower prices.

The 14 per cent discount limit (seemingly plucked out of the air by the ATO) thus means that the distribution of the total tax benefits is biased towards participants in the buyback. Even though these are low tax rate investors, many of them are self managed superannuation funds of well endowed investors.

Removing the 14 per cent discount limit thus is an obvious policy change which should be resurrected from wherever it is languishing. The other proposal (to preclude capital loss tax claims) is in a different category, and warrants further debate. Of course, if it were to be implemented, the 14 per cent limit would, because of the reduced attractiveness of buybacks, most likely become irrelevant.

With the resuscitation of corporate interests in off-market buybacks, it is important to clarify the tax arrangements sooner rather than later, and resolve debates about equitable treatment of shareholders which will otherwise resurface.

This FRDP was prepared by Kevin Davis, Research Director, Australian Centre for Financial Studies and Professor of Finance, University of Melbourne.
info@australiancentre.com.au

(1) The Board of Taxation The Tax Treatment of  Off-Market Share Buybacks, June 2008
http://www.taxboard.gov.au/content/content.aspx?doc=reviews_and_consultations/off_market_share_buybacks/default.htm&pageid=007
(2) The Treasury, Discussion Paper: Improving the taxation treatment of off-market share buybacks
http://www.treasury.gov.au/documents/1550/PDF/Discussion_Paper_off_market_share_buybacks.pdf
(3) Christine Brown and Kevin Davis Tax Heterogeneity and Stock Supply Elasticity: Evidence from Australian Off-Market Repurchases.

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The Financial Regulation Discussion Paper Series provides independent analysis and commentary on current issues in Financial Regulation with the objective of promoting constructive dialogue among academics, industry practitioners, policymakers and regulators and contributing to excellence in Australian financial system regulation. More in this series

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ACFS announces winners of Investment Stewardship Awards & Victorian Innovation in Funds Management Award at Melbourne Financial Services Symposium Gala Dinner

Posted on March 1, 2011
Filed Under Event News, Funds Management & Superannuation, Media Release, Melbourne Financial Services Symposium | Leave a Comment

Both VFMC Investment Stewardship Awards for a Fund Manager and a Super Fund Awards were presented by CEO of Victorian Funds Management Corporation Justin Arter at the 2011 MFSS Gala Dinner last night.

The winner of the 2011 VFMC Investment Stewardship Award for Investment Managers is Goldman Sachs Asset Management & Partners Australia.

The judges felt that Goldman Sachs Asset Management & Partners Australia met all of the selection criteria, combining consistent top quartile performance with a rigorous discounted cash-flow valuation and portfolio construction process risk-adjusted for ESG considerations. ACFS Director Prof Deborah Ralston remarked that “in a market where there is now an array of specialist advisors advising on all aspects of risk, including ESG, our winner does much of this research itself. This firm has demonstrated a high degree of engagement with both investors and companies in which they invest, and have been excellent stewards of their clients money while taking into account the long term.”

The winner of the 2011 VFMC Investment Stewardship Award for Superannuation Funds is Care Super.

ACFS Director Prof Deborah Ralston commented that “CareSuper have long demonstrated good stewardship”. An early signatory of the PRI they are ranked in the top quartile Asset Owners by the United Nations’ Principles for Responsible Investment (UNPRI). “They have consistently ranked in the top quartile of its peer group of funds over 1, 3, 5 and 10 years. And Care is renowned for its service quality”. She also noted recent product innovation with an ASX 200 investment option and by offering enhanced income protection insurance to members

Ralston added, “Pleasingly, we had a record number of entries this year and each of our finalists in both categories of the Investment Stewardship Award is a current signatory to the UNPRI. It is clear that among the best investment managers and super funds, the UNPRI is now a base standard. Furthermore, sustainable investing is not a passive process. Most of our finalists were also able to demonstrate a track record of direct and indirect engagement with companies and assets in which they invest”.

Finally, a number of our finalists were able to demonstrate that their performance of the past 3 years has been enhanced by decisions that flowed directly from implementation of the PR.

The winner of the Victorian Innovation in Funds Management Award is La Trobe Financial Services with their Pooled Australian Mortgages Fund. The Award was presented by the Honourable Kim Wells MP, Treasurer of Victoria.

In acknowledging the winner Prof Ralston noted “they could not be more Victorian in their pedigree, having been established in the Latrobe Valley in the 1950s. LaTrobe is 100% owned by the son of its founder and the fund submitted for the Award has been in operation for two decades.”

“It is different to many other mortgage funds in that it did not freeze redemptions in 2008/09, and this has assisted it to outperform all peers over 1, 3 and 5 years. Despite the recent issues in mortgage investments during the GFC, no investor with La Trobe has lost funds.”

“The core of its innovation is that since 2004, it has had in place a 12 month term for initial investment which has kept out hot money inflow and outflow. This attention to basics is admirable.

“La Trobe is a true boutique in the sense that it operates in a niche of good quality, but non-standard, high margin, not easily securitized loans. In the competitive global world of investing, innovation is a key to productivity growth and to sustainable business.”

Judges decided to offer a special commendation to Wingate Asset Management which is owned by its managers in partnership with Australian Unity and Wingate Group.

Wingate is still small but the judges were impressed by the risk-controlled option-based implementation strategy employed by the management. “This strategy is one of the most innovative seen in recent years and appears to be validated to date by solid performance.”

“The productive investment of our domestic superannuation and savings will be critical to the ability Australians to continue to grow our wealth and to protect our standard of living in retirement. And if we are also able to export that expertise by managing other people’s money from here, then all the better.”

“It is desirable that such well paid skilled work is done close to the source of that saving and that is one reason that the Victorian government kindly sponsors the Innovation in Funds Management Award.

Background

The MFSS Investment Stewardship Award is sponsored by Victorian Funds Management Corporation with one each provided for separate Investment Manager and Superannuation Funds categories. Applicants for the 2011 VFMC Investment Stewardship Award were assessed on their investment performance, governance, risk management, investment philosophy, service quality, and product innovation, and critically the degree to which they actively embedded consideration environmental, social and governance factors into their investment processes.

Applications for the Innovation in Funds Management Award sponsored by the Victorian Government were invited from Fund Managers that: Were established in Victoria; Are predominantly owned and managed by the management team; Can demonstrate a three year investment track record.

Applications for both awards were screened under strictest confidentiality, by Judging Panels of experienced finance professionals both chaired by highly respected industry veteran John Gall. 2011 MFSS sponsors were NOT eligible to apply.

The Melbourne Financial Services Symposium (MFSS) is hosted by ACFS on behalf of the Victorian financial services community. The Symposium together with the Gala Dinner is considered the premier annual event for the Funds Management industry in Melbourne and was held on Tuesday 1 March at Park Hyatt Melbourne. Dinner speaker was Else Bos, Deputy-chairman Executive Committee, Chief Institutional Business at PGGM, Netherlands.

For more details on the MFSS: www.melbournefinancialservicessymposium.com.au/

Media contact details:
Professor Deborah Ralston
Director, Australian Centre for Financial Studies
(03) 9666 1050
info@australiancentre.com.au

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ACFS announces Finalists for the Melbourne Financial Services Symposium Investment Stewardship Award – Superannuation Fund category

Posted on February 1, 2011
Filed Under Event News, Funds Management & Superannuation, Media Release, Melbourne Financial Services Symposium | Leave a Comment

The prestigious annual Melbourne Financial Services Symposium (MFSS) Investment Stewardship Award recognises long term responsible investment achievement and is sponsored by the Victorian Funds Management Corporation (VFMC).

Finalists for the MFSS 2011 Investment Stewardship Award for Superannuation Funds are:

• Australian Ethical Investment;
• CareSuper;
• Cbus; and
  
• Christian Super

Announcing the finalists Professor Deborah Ralston, Director, Australian Centre for Financial Studies remarked that “each of the Award nominees demonstrates all of the qualities that our expert judging panel consider make them excellent stewards of their member’s retirement savings”.

Prof Ralston stated that each applicant for the Investment Stewardship Award was assessed on their application of environmental, social and governance factors in the areas of investment process, governance, risk management, investment philosophy, service quality, and product innovation.

Ralston ended by noting the special role played by superannuation funds in the lives of their members. “Stretching as it does into retirement, often the relationship between fund and member is the individual’s longest relationship outside of family. Not only is it incumbent on a super fund to maximise returns for the member to live comfortably in retirement, it is the fund’s duty to ensure that those funds are invested responsibly with the long term in mind.”

Investment Stewardship Award winners will be announced on the night of the Gala Dinner of the MFSS on Tuesday 1 March 2011. The dinner will provide an opportunity for the successful superannuation fund to be showcased to industry peers and members as an exemplar of all-round excellence in funds management.

Background

Awards are given for separate Superannuation Fund and Investment Manager categories.

The 2010 Super fund category winner was Cbus, recognising its robust governance structure and very strong membership servicing and communication culture.

The 2010 Investment Manager category winner was AVIVA Investment Management, recognising integrated sustainability into its investment decision making process and ownership.  It also demonstrated strong core values of integrity, teamwork, innovation and performance which delivered long term value to its clients.

The 2010 judging panel awarded a “Commendation” to UCA Fund Management for their integration of UNPRI in all their processes.

• Applications were screened under strictest confidentiality, by a Judging Panel of experienced finance professionals chaired by John Gall.

The independent judging panel assessed applicants against the following criteria using the application of ESG factors as a benchmark:

• Investment performance;
• Governance;
• Risk management;
• Investment philosophy;
• Service quality; and
• Product innovation.

MFSS 2010 sponsors were NOT eligible to apply.

The Melbourne Financial Services Symposium (MFSS) is hosted by the Australian Centre for Financial Studies (ACFS) on behalf of the Victorian financial services community. The Symposium together with the Gala Dinner is considered the premier annual event for the Funds Management industry in Melbourne. In 2011, it runs as a half day program plus Gala Dinner on Tuesday 1 March at the Park Hyatt Melbourne.

MFSS 2011 program speakers include:

• Else F. Bos, Deputy-chairman Executive Committee, Chief Institutional Business PGGM Investments (The Netherlands);
• Jane Diplock AO, Chairman of the Executive Committee, IOSCO and Chairman of the Securities Commission (New Zealand);
• Jonathan Green, Head of Investment Facilities, NSW Treasury Corporation; (Australia)
• Dr Danyelle Guyatt, Global Head of Research, Responsible Investment, Mercer (United Kingdom); and
• Stephen Hiscock, Managing Director, SG Hiscock & Partners (Australia)

For more details on the MFSS program: www.melbournefinancialservicessymposium.com.au/

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Media contact details:
Professor Deborah Ralston
Director, Australian Centre for Financial Studies
(03) 9666 1050
info@australiancentre.com.au

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ACFS announces Finalists for the Melbourne Financial Services Symposium Investment Stewardship Award – Investment Manager category

Posted on February 1, 2011
Filed Under Event News, Funds Management & Superannuation, Media Release, Melbourne Financial Services Symposium | Leave a Comment

The prestigious annual Melbourne Financial Services Symposium (MFSS) Investment Stewardship Award recognises long term responsible investment achievement and is proudly sponsored by the Victorian Funds Management Corporation (VFMC).

Finalists for the MFSS 2011 Investment Stewardship Award for Investment Managers are:

• Australian Ethical Investment;
• Aviva Investors Australia;
• Colonial First State Global Asset Management;
• Goldman Sachs Asset Management & Partners Australia
• Lend Lease Investment Management Australia; and
• UCA Funds Management
  

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ACFS announces finalists for the 2011 Melbourne Financial Services Symposium Victorian Innovation in Funds Management Award

Posted on January 31, 2011
Filed Under Event News, Funds Management & Superannuation, Media Release, Melbourne Financial Services Symposium | Leave a Comment

The esteemed annual Melbourne Financial Services Symposium (MFSS) Innovation in Funds Management Award recognises the many smaller Victorian based, owned, and operated Fund Managers. It is sponsored by the Victorian Government with a view to showcasing Melbourne’s innovative and dynamic funds management sector, an important sector of Victoria’s financial services market.

Finalists for the MFSS 2011 Victorian Innovation in Funds Management Award are:

• Contango Asset Management;
• Intrinsic Investment Management;
• La Trobe Capital and Mortgage Corporation;
• SG Hiscock & Company; and
• Wingate Asset Management.

In announcing the finalists Professor Deborah Ralston, Director, Australian Centre for Financial Studies remarked that “each of the Award nominees exhibits all of the qualities that our expert judging panel consider make them innovative and all would be worthy winners”.

Prof Ralston noted that each applicant for the Innovation in Funds Management Award was assessed on the degree to which they have innovated with their Business Model, Investment Processes, Investment Products, development of new Skills, in addressing Risk, and may have supported Innovative Activities in the Broader Community.

Key criteria for consideration in this Award are that the funds:

• Were established in Victoria;
• Are predominantly owned and managed by the management team; and
• Can demonstrate a three year investment track record.

The winner will be the fund that best demonstrates successful innovation in practice.

The MFSS Innovation in Funds Management Award winner for 2011 will be announced on the night of the Gala Dinner of the Melbourne Financial Services Symposium on Tuesday 1 March 2011. The dinner will provide an opportunity for the successful fund to be showcased to industry peers as an exemplar of all-round excellence in funds management.

Background

Previous winners include Intrinsic Investment Management in 2010, SG Hiscock and Company in 2009 and Warakirri Asset Management in 2008.

• Applications were screened under strictest confidentiality, by a Judging Panel of experienced finance professionals chaired by John Gall.
• The independent judging panel will recommend making the Award to the applicants which best demonstrates innovation that can be seen to have made a meaningful contribution to the performance of the Fund. The following aspects will be assessed:
  • Innovation in Business Model;
  • Innovation in Investment Processes;
  • Innovation in Investment Products;
  • Contribution to Innovation Skills and Development in the Industry;
  • Support of Innovative Activities in the Broader Community; and
  • Innovation in Risk Management.

MFSS 2011 sponsors were NOT eligible to apply.

The Melbourne Financial Services Symposium (MFSS) is hosted by the Australian Centre for Financial Studies (ACFS) on behalf of the Victorian financial services community.  The Symposium together with the Gala Dinner is considered the premier annual event for the Funds Management industry in Melbourne.   In 2011, it runs as a half day program plus Gala Dinner on Tuesday 1 March at the Park Hyatt Melbourne.

Confirmed MFSS 2011 program speakers include:

• Else F. Bos, Deputy-Chairman, Executive Committee, Chief Institutional Business, PGGM Investments (The Netherlands) (Dinner speaker);
• Jane Diplock AO, Chairman of the Executive Committee, IOSCO and Chairman of the Securities Commission (New Zealand);
• Jonathan Green, Head of Investment Facilities, NSW Treasury Corporation; (Australia)
• Dr Danyelle Guyatt, Global Head of Research, Responsible Investment, Mercer (UK); and
• Stephen Hiscock, Managing Director, SG Hiscock & Partners (Australia).

For more details on the MFSS program: www.melbournefinancialservicessymposium.com.au/

Download PDF

Media contact details:
Professor Deborah Ralston
Director, Australian Centre for Financial Studies
(03) 9666 1050
info@australiancentre.com.au

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