The man who could blow-up the US economy

Xi Jinping is without question the most powerful leader of China since Mao Tse-Tung

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Xi Jinping’s Titles

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The most important title is General Secretary of the Central Committee of the Communist Party, a position he has held for 5 years.

Xi has been aggressively consolidating power around himself since taking office in late 2012. Like his predecessors, he heads the party and the military. (The US president only takes on the role of commander-in-chief of the military.) But Xi has also made himself head of several “commissions” or “leading groups” that are secretive party agencies, but essentially have the final say on everything from economic reforms to state security to cyberspace affairs.

Xi Jinping’s Wealth

So just how rich is Xi Jinping? Actually no assets are directly traceable to Xi and his immediate family, but authoritative sources estimate that his wider family, including his sister Qi Qiaoqiao and husband, Deng Jiamusi, and daughter Zhang Yannan, have business and real estate interests valued at several billion dollars, accumulated without the help of the most powerful family member. It is worth noting that Chinese corporate and real estate disclosure rules, as well as a propaganda system, bans media discussion of leaders’ personal details and removes them from the internet. However, throughout Xi Jinping’s career, there has never been any hint of corruption in either business or politics, and he is widely respected for his efforts to stamp out corruption at all levels of government and business in China.

Of course, where you are the paramount leader of China, all that Power is worth unlimited money.

Gold Reserves

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China holds only 2.2% of its foreign reserves in Gold

China’s Foreign Reserves

China's foreign exchange reserves rose by less than USD 1 billion to a 12-month high of USD 3.109 trillion at the end of October 2017, compared with an increase of USD 17 billion in September and missing market expectations of a USD 9.5 billion gain to USD 3.118 trillion. It was the first time that the country's reserves have climbed for nine months in a row since June 2014, as tighter regulations and a stronger yuan discouraged capital outflows. Meanwhile, the value of gold reserves fell to USD 75.238 billion at the end of October, from USD 76.005 billion at end-September. Foreign Exchange Reserves in China averaged 939039.28 USD Million from 1980 until 2017, reaching an all-time high of 3,993,212.72 USD Million in June of 2014 and a record low of 2262 USD Million in December of 1980.

That is almost 4,000 Billion USD Dollars or 4 Trillion US Dollars

In 2016, US GDP was $18.5 trillion but the US government debt is $20 trillion, and that is just the Federal Government

China holds $1.24 trillion of US government debt. The US Trade Deficit with China was $347 billion in 2016

Let’s have a look at the Chinese Currency

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The renminbi (Ab.: RMB; Chinese: 人民币; pinyin:  rénmínbì; literally: "people's currency"; sign: ; code: CNY) is the official currency of the People's Republic of China. The yuan (Chinese: 元; pinyin: yuán) is the basic unit of the renminbi, but is also used to refer to the Chinese currency generally, especially in international contexts where "Chinese yuan" is widely used to refer to the renminbi. The distinction between the terms renminbi and yuan is similar to that between sterling and pound, which respectively refer to the British currency and its primary unit. One yuan is subdivided into 10 jiao (Chinese: 角; pinyin: jiǎo), and a jiao in turn is subdivided into 10 fen (Chinese: 分; pinyin: fēn). The renminbi is issued by the People's Bank of China, the monetary authority of China.

Until 2005, the value of the renminbi was pegged to the US dollar. As China pursued its transition from central planning to a market economy, and increased its participation in foreign trade, the renminbi was devalued to increase the competitiveness of Chinese industry. It has previously been claimed that the renminbi's official exchange rate was undervalued by as much as 37.5% against its purchasing power parity. More recently, however, appreciation actions by the Chinese government, as well as quantitative easing measures taken by the American Federal Reserve and other major central banks, have caused the renminbi to be within as little as 8% of its equilibrium value by the second half of 2012. Since 2006, the renminbi exchange rate has been allowed to float in a narrow margin around a fixed base rate determined with reference to a basket of world currencies. The Chinese government has announced that it will gradually increase the flexibility of the exchange rate. As a result of the rapid internationalization of the renminbi, it became the world's 8th most traded currency in 2013, and 5th by 2015.

On 1 October 2016, the RMB became the first emerging market currency to be included in the IMF's special drawing rights basket, the basket of currencies used by the IMF (reserve currency).

What’s the best way for China to start a Trade War with the USA?

China has long harboured thoughts of being a world superpower. Militarily, it has surpassed Russia, but is a long way behind the USA.

Unfortunately uncertainty and insecurity go hand-in-hand. The world seems full of insecurity right now — no better represented than by the looming threat of a trade war between Australia's largest and third largest trading partners.

One of Australia's leading independent economists, Saul Eslake, what a trade war between China and the United States would mean for Australia.

He's normally quite conservative with his commentary but on this occasion he actually said to me: "We just have to hope that it doesn't happen." He made this comment just after Trump was elected 12 months ago

Global economy already struggling

The world hasn't yet recovered fully from the collapse of the Wall Street investment firm Lehman Brothers on September 15, 2008. That single event was the catalyst for a credit crunch that ultimately led to the global financial crisis.

Despite countless politicians telling us everything will be okay, a seemingly endless developed-world property boom and, of course, cheap money (from ultra-low interest rates), the world economy continues to sputter along.

Everything is not OK.

The whole concept of a superpower trade war wouldn't even be a possibility if we were in — for want of a better word — "normal" economic times.

It's a possibility now, though, because President Donald Trump has laid much of the blame on China.

He's made a link between China allegedly manipulating its currency and many of America's (and indeed the world's) economic woes.

What many Americans in the rust belt know is that right now there aren't enough jobs to go around, but Mr Trump has promised to fix that — via, potentially, a trade war with China.

What exactly is a trade war?

A trade war usually involves a series of tit-for-tat trade restrictions imposed on "warring" countries which normally trade freely with one another.

Murphy's Law forecast

What happens if everything that can go wrong for Australia's economy does so all at once in 2017? asks Michael Janda.

Restrictions can include measures such as tariffs (taxes) and quotas (volume limits) on imported goods.

The idea is to significantly weaken another country's export revenue, and encourage consumers to buy from local manufacturers rather than their overseas competitors.

For example, why would you buy a fridge made in China when you could buy a cheaper one built and designed in the United States?

Right now Chinese fridges are cheaper, partly because Chinese unit labour costs are cheaper, but whack a big fat tariff on those imports and the tables (or should I say fridges) will turn.

Likely trigger point for trade war is close

This is where it gets interesting, if it hasn't reached that point for you already.

As such, everything and everyone that could be negatively affected by President Trump’s promised policies are manoeuvring into position to avoid being hurt or left worse off in any way.

As far as China is concerned, the country is right now attempting to prop up its currency to avoid it sinking further against the US dollar — think Weekend at Bernie's — something its aware Mr Trump is watching.

Why do countries push their currencies down in the first place? Largely to make their exports more competitive.

If you don't have to hand over as much money in the currency exchange because your currency is worth more than the country's currency you're buying from, you're financially better off and you're more likely to want to buy goods from that country.

Having a competitive exchange rate can be a real advantage.

The Chinese yuan has been slowly depreciating. China argues it's a by-product of trying too hard to keep the currency from rising but Mr Trump isn't buying it and he's vowed to do something about it.

Both Westpac's head of market strategy Robert Rennie and academic Mr Eslake believe Mr Trump will use the exchange rate of 7 renminbi (RMB) to $US1 as the trigger to declare China a "currency manipulator". The exchange rate currently sits between 6.90 and 6.95.

The higher this number, the less valuable the yuan is compared to the US dollar.

Once he declares China a currency manipulator, he essentially has a mandate to impose huge trade restrictions on the country.

We already know that could include imposing tariffs of up to 45 per cent on all goods imported from the world's second largest economy.

How will Australia be affected?

The obvious question then is how could all of this affect Australia?

To give you two very broad examples of what might happen in the event that the renminbi continues to fall against the USD dollar, to 7 renminbi and beyond.

Firstly Australia's exports, and therefore GDP, could take a big hit because China is Australia's largest trading partner.

If China's economy takes a hit from US tariffs being imposed on its exports it will have no choice but to "balance the books" and import less itself.

Right now Australia's export sector is riding on the back of higher-than-expected prices for iron ore, coal and natural gas, but that's expected to fall back — quite abruptly it's thought — sometime between now and the middle of the year.

If that coincides with a significant reduction in the volume of exports China is willing to take from Australia, we could see a few sweaty palms down in Canberra.

Secondly, one way China is trying to stop its currency from falling to 7 renminbi to $US1 is by selling US treasuries and foreign currency reserves.

It's a sneaky little move central banks like to make. You see, by hoarding other country's currencies, it means that when your currency is falling, you can pull them out and sell big quantities of them in an attempt to lower their value — and raise your currency's value.

The problem is the more the People's Bank of China does this, the harder Chinese commercial banks find it to source yuan for themselves.

This raises the cost of their borrowing, and, as such, they're often forced to lift interest rates to compensate for that.

Of course, if Chinese banks are forced to raise interest rates, so will banks in south-east Asia and eventually here in Australia.

It will also have a dampening effect on the Chinese economy, which will in turn hurt Australia.

The silver lining on the cloud

If that all sounds a bit grim, there is a silver lining.

Anecdotally it appears China is doing everything in its power to stop the yuan falling too far against the greenback. So far it's actually working.

What's scary is how close the exchange rate is to a level that numerous commentators have predicted Mr Trump will use as a trigger to start a trade war with Australia's largest trading partner.

All we can do now is watch and wait.

What would China do if Trump crossed the Red Line?

This is very hard to predict. However, if I were Xi Jinping, I would devalue the Chinese currency by 50%.

Game on! The mother of all trade wars and a huge global stock market crash.

There would only be one winner – CHINA!

 

Peter A Worcester BA BSC FIAA

18 November 2017

 

Peter's blog

Australia's banks - between a rock and a hard place?

Are Australia’s big 4 Banks Caught between the Rock of Basel III and a Hard Place of their own making?

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The Rock is Basel III. It effectively restricts the banks of to making loans to Corporations rated below AA-

The Hard Place of the Bank’s own making is that the have replaced the friendly bank manager with a computer algorithm. Hence, in Australia in the last 10 years “Low Doc Home Loans” have increased from 1% to 10% of all new home loans!

If you want to know the best guy in the game, send me an email to peter@worcester.com.au

Basel III

Basel III is divided into three main areas:

  1. Regulatory capital,
  2. Stress Testing, and
  3. Asset and liability management, which can also be described as “liquidity management”

—The minimum Tier 1 Capital increases from 4% in Basel II to 6%, applicable in 2015, over RWAs. This 6% is composed of 4.5% of CET1, plus an extra 1.5% of Additional Tier 1 (AT1).all times by the bank. This ratio is calculated as follows:

Tier 2 Capital

Tier 2 capital is the secondary component of bank capital, in addition to Tier 1 capital, that makes up a bank's required reserves. Tier 2 capital is designated as supplementary capital, and is composed of items such as revaluation reserves, undisclosed reserves, hybrid instruments and subordinated term debt. In the calculation of a bank's reserve requirements , Tier 2 capital is considered less secure than Tier 1 Capital, and in the United States, the overall bank capital requirement is partially based on the weighted risk of a bank's assets.

The second component is general provisions. These are losses a bank may have of an as yet undetermined amount. The total general provision amount allowed is 1.25% of the bank's risk-weighted assets (RWA).

— The third element is hybrid capital instruments that have mixed characteristics of both debt and equity instruments. Preferred stock is an example of hybrid instruments. A bank may include hybrid instruments in its Tier 2 capital as long as the assets are sufficiently similar to equity so losses can be taken on the face value of the instrument without triggering liquidation of the bank.

—  The final component of Tier 2 capital under U.S. regulations is subordinated term debt with a minimum original term of five years or more. The debt is subordinated in regard to ordinary bank depositors and other loans and securities that constitute higher-ranking senior debt.

Most countries, including the United States, do not allow undisclosed reserves, which are profits not stated in a bank's reserve, to be used to meet reserve requirements.

Tier 3 Capital

Tier 3 capital is tertiary capital held by banks to meet part of their market risks that includes a greater variety of debt than tier 1 and tier 2 capitals. Tier 3 capital debts may include a greater number of subordinated issues, undisclosed reserves and general loss reserves compared to tier 2 capital

Tier 3 capital is used to support market risk, commodities risk and foreign currency risk. To qualify as tier 3 capital, assets must be limited to 250% of a bank’s tier 1 capital, be unsecured, subordinated and have a minimum maturity of 2 years.

BASEL III STRESS TESTING

Two different approaches


Basel III and stress testing as implemented in the United States both rely on projections of losses in an extreme scenario to evaluate the adequacy of an individual bank's capital. Both measures require the estimation of statistical models. However, the two measures differ in some fundamental ways.

The internal ratings based (IRB) and advanced IRB require banks to use historical data to estimate the level of losses on an asset that should be exceeded only once every 1,000 years. These extreme loss estimates are then used to derive risk weights that are applied to each asset (or more generally, each exposure). The risk-weighted assets are then summed to calculate the denominator of the Basel III ratios. In effect, Basel III derives a generic severely adverse scenario for each portfolio category from that category's own (recent) past experience.

In contrast, the calculation of the various measures of capital used in Basel III is a mechanical calculation. Each of the capital measures calculates capital as the sum of certain balance sheet items (such as common equity and retained earnings) minus certain other items (such as certain intangible assets).

The stress tests begin with several different regulatory measures of capital adequacy, including a Basel III measure in recent tests. However, rather than relying exclusively on current balance sheet information, the stress tests project future book capital under each of several different scenarios. The estimates of the change in accounting capital are based in part on estimates of each bank's losses in each portfolio given a particular scenario. However, given that the stress tests are forward looking, they also include estimates of each bank's likely earnings, called their pre-provision net revenue (PPNR).

This brief summary suggests that stress tests may add incremental value in two situations. First, accounting measures of capital may deviate significantly from economic values. Basel III relies entirely on accounting values, whereas the stress tests can reveal unrecognized losses by measuring losses that would be recognized in the future.

Second, although supervisors should be concerned about the full range of risks facing banks, they may at times have good reasons to be especially concerned about a subset of risks. Basel III's risk measures provide information about a broad range of risks while the current stress tests can provide information about subsets of risk. One way of considering this is to think of the two tests as casting light on banks' risk exposures. Basel III casts a dim light over a wide range of possible scenarios. Basel III's use of historical loss distribution data allows it to estimate a lower bound on once-in-1,000-year losses across a wide variety of scenarios. However, Basel III cannot say anything about what may happen in any particular scenario. In contrast, each individual stress test casts a very bright light, but only on one particular scenario. Scenarios similar to the one being tested are likely to produce similar results, but that outcome is not guaranteed. Still, there is no reason to expect that any given scenario will be predictive of the results of a very different stress scenario.

Using stress tests to identify losses
 

Many large banks experienced significant liquidity problems in late 2008 as investors became concerned about their financial condition, despite the fact that most banks continued to report capital ratios well above supervisory minimums. One could argue that the problem was that the United States had not yet adopted Basel II, therefore, it was underestimating the riskiness of banks assets. The problem with this claim is that U.S. banks generally showed higher capital ratios under Basel II than Basel I. Rather, the problem was that many investors were concerned that bank asset values were overstated, which implied that their capital ratios were also overstated.

The 2009 concerns about overstated asset values were a problem that could be addressed by a stress test, but not by any version of the Basel ratios. The key to identifying overstated asset values is for the stress scenario to last sufficiently long and be sufficiently adverse so that current problem assets cannot recover in value. The Supervisory Capital Assessment Program (SCAP) in 2009 set out a two-year scenario, explicitly for the purpose of capturing "a large portion of losses from positions held as of the end of 2008". It also specified a sufficiently adverse scenario such that asset values were unlikely to recover. The resulting estimates appear to have had some credibility in financial markets and helped restore confidence in U.S. banks.

Although stress testing was helpful in identifying as yet unrecognized losses in 2009, the tests are unlikely to make as big a contribution in a future crisis. In part, this is because the Financial Accounting Standards Board is likely to change the accounting rules to require earlier loss recognition, as discussed in a previous “Notes from the Vault”. Another reason is that the SCAP took place in almost ideal conditions for the supervisors to run a stress test designed to identify unrecognized losses. Conditions were ideal in that the stress test was unlikely substantially to reduce market confidence in banks from its depressed level in early 2009, and the supervisors had a credible mechanism for dealing with capital deficiencies revealed by the stress tests in the form of the Capital Purchase Program of the Troubled Asset Relief Program (TARP). If either or both of these conditions are not met next time, supervisors may be less likely to test scenarios that could reveal large, unrecognized losses.

Using stress tests to mitigate moral hazard

The credit risk measures in Basel III are likely to contain both random errors and estimates that may be biased down. Stress tests differ from Basel III in a variety of ways that could mitigate the adverse effects of those cases where Basel III underestimates credit risk.

— The process of obtaining Basel III risk weights is likely to result in a large number of random errors. The standardized approach of Basel III is a one-size-fits-all model based on supervisory judgment that is unlikely to match perfectly the riskiness of all the individual portfolio items in any bank at any given point in time. The IRB approaches are intended to be more sensitive to each bank's risk exposure, but the Bank of England's Andrew Halding estimates that some banks could have over 200,000 Basel III risk buckets. Inevitably, estimating all of the parameters needed for these buckets will give rise to both over- and underestimates of risk. Stress test loss estimates will also contain random errors, but these errors are unlikely to be perfectly correlated with the Basel III errors. As a result, stress tests can mitigate some of the bad incentives created by Basel III random errors that understate risk.

—An analogous problem with the Basel III IRB risk weights specifically is that they are estimated by banks that have an incentive to produce lower risk estimates. To be sure, banks must obtain supervisory approval for their models, but supervisors cannot review all of the choices made by a bank in developing its Basel III models. The stress tests also rely in part on estimates supplied by the banks, as well as on estimates from the Federal Reserve's independent models. Additionally, the supervisory stress tests are conducted at all large banks at the same time, which facilitates supervisory comparisons across banks. As a result, the stress tests put supervisors in a better position to identify banks that appear to be lowballing their risk estimates. Moreover, the stress tests are only a part of the Comprehensive Capital Analysis and Review (CCAR). A bank that passes the stress test portion may nevertheless fail the overall CCAR if its stress models are found to be unsatisfactory.

Using stress tests to go beyond recent historical experience

The risk estimates from Basel III are based on relatively recent experience, in part because in many cases banks and supervisors have data covering only the last two decades. The data do not include some potentially relevant high loss scenarios. For example, prior to the recent crisis, the United States had not experienced a nationwide downturn in housing prices since the 1930s. The limited data on credit history is a problem that may potentially be mitigated with stress tests using a scenario that has not been observed in the recent data. Of course, data limitations may also affect the parameters in the stress test model, for example, by making it difficult to identify nonlinear relationships between the stress scenario parameters and credit losses. Supervisors may be able partially to compensate for parameters that likely underestimate risk by making the scenario even more adverse (such as specifying a 20 percent housing price decline to obtain estimates of the likely losses from a 10 percent decline).

—Another supervisory concern that lies outside recent experience is that of a large increase in the level and slope of the term structure. A reasonable concern is that banks have become vulnerable to such an increase, given that the United States is entering the sixth year of a monetary policy regime at the zero lower bound. Basel III currently lacks a charge for interest rate risk.

Concluding comments

—The existing stress tests have the potential to mitigate weaknesses in Basel III's measurement of capital and credit risk.

—Second, the success of the stress tests depends upon their design and the specific scenarios being tested. The tests can also easily be designed to avoid revealing weaknesses in banks' capital adequacy. All that the supervisors need to do is structure the tests so that they do not measure losses in the weaker parts of the portfolio or design a "stress" scenario that fails to stress the weaker parts.

—For example, the European Union conducted stress tests in 2010 and 2011 that "significantly underestimate problems in the financial sector," according to Moody’s Enam Ahmed and co-auhors, only to be followed within months by the failure of banks that had passed the EU's most recent stress test.

Banks will have to comply with two new ratios:

  1. Liquidity Coverage Ratio (LCR)
  2. Net Stable Funding Ratio (NSFR)

LCR: high-quality highly-liquid assets available must exceed the net cash outflows of the next 30 days:

High-quality highly-liquid assets:

Level 1 assets: Recognized at 100%: cash, sovereign debt of countries weighted at 0% (which include the PIIGS as they are part of the Eurozone), deposit at central bank. Level 1 assets shall account for at least 60% of the “high-quality highly liquid assets”

Level 2A assets: Recognized at 85% and must not represent more than 40% of the assets: sovereign debt weighted at 20% (countries rated below AA-), corporate bonds and covered bonds rated at least AA-

Level 2B assets (introduced Jan, 2013): non-financial corporate bonds rated between BBB- and A+, with a haircut of 50%; certain unencumbered equities, with a haircut of 50%; and certain residential mortgage-backed securities (RMBS), with a haircut of 25%.

The Level 2B assets will not be eligible for more than 15% of the “high-quality highly liquid assets” and a total level 2 assets will not be eligible for more than 40% of the “high-quality highly liquid assets”

Changes from January 2013 provide:

  • To some extent, lesser cost of carry for banks on “high-quality highly-liquid assets” but still limited because of the 50% haircut and 15% limitation
  • Improvement for the financing of investment graded companies (BBB and above) by banks through bonds, which will remain in competition with residential mortgage-backed securities (RBMS) with lesser haircut and whose markets is restored with these new provisions
  • —Level 1 assets remain at least 60% of the “high-quality highly-liquid assets”, which means that concentration risks and cost of carry remain.
  • Net cash outflows = cash outflows – cash inflows

Cash outflows:

  • 100% of any repayment in the next 30 days
  • —3% (on Jan 6, 2013 decreased from 5%) of retail banking deposits
  • 40% (on Jan 6, 2013 decreased from 75%) of deposits from non-financial corporates and public sector entities
  • 100% of deposits from other financial institutions
  • Between 0% and 15% of secured funding backed with “high quality highly-liquid” assets
  • 10% of credit lines to corporates, sovereign and public sector
  • 30% (on Jan 6, 2013 decreased from 100%) of liquidity lines (back-up, swing lines) to corporates, sovereign and public sector
  • 100% of credit lines to other regulated financial institutions
  • 0% of secured funding from central banks maturing within 30 day days (prior to Jan 6, 2013 the figure was 25%)

Cash inflows:

  • 50% of loan repayments by non-financial counterparties (it is considered that banks, even in difficult times, will have no choice than to renew at least 50% of the maturing loans)
  • 100% of loan repayments by financial institutions
  • 100% of bonds’ repayments (whoever the issuers)

Changes from Jan 2013 provide:

  • —The new computation of net cash outflows will free hundreds of billion euros of “high-quality highly-liquid assets” requirements
  • —Theoretically the changes from Jan 2013 are particularly good news for banks with large corporate activities

The LCR shall be fulfilled at any time, absent a period of stress. The purpose of this ratio is to offer a mattress of liquidity under such periods. The Basel Committee expressly mentions that, during a period of financial stress banks may use their “high-quality highly-liquid assets” as a mattress, thereby allowing it to fall under 100%. Initially the Committee planned the LCR should be in force from Jan 1, 2015 but the schedule has changed: The ration should be at least 60% on Jan 1, 2015, 70% on Jan 1, 2016, and exceed 100% from Jan 1, 2019. As of December 31 2010 more than 95% of the banks already had a LCR exceeding 65% and most banks with major activities in corporate banking was ranging between 60% to 80%.

NSFR: long-term financial resources must exceed long-term commitments (long term = and more than 1 year):

Stable funding:

  • equity and any liability maturing after one year
  • —90% of retail deposits
  • —50% of deposits from non-financial corporates and public entities

— Long-term uses:

  • —5% of long-term sovereign debt or equivalent with 0%-Basel II Standard approach risk-weighting (see comment above for LCR) with a residual maturity above 1 year
  • —20% of non-financial corporate or covered bonds at least rated AA- with a residual maturity above 1 year
  • —50% of non-financial corporate or covered bonds at least rated between A- and A+ with a residual maturity above 1 year
  • —50% of loans to non-financial corporates or public sector
  • —65% of residential mortgage with a residual maturity above 1 year
  • —5% of undrawn credit and liquidity facilities

Acce ss to central bank liquidity is not considered by Basel III ratios

—Overall, Basel III aims to sharply deleverage the economy threatening economic growth at the same time as the debt crisis puts a pressure on governments to spend less. There is also some level of naivety in the provisions of the definition of “high-quality highly liquid” assets, which banks shall hold abundantly in their balance sheets to face their short term liquidity commitments. In fact the banks are pushed to hold huge amounts of sovereign debt…

—The need to deleverage the economy is obvious however the way Basel III is designed has led to that the corporate sector to a large extent must rely solely on funding and hedging from outside of the banking sector. The basic role of the banks to redistribute financial risk and fund trade has in fact seized.

In summary, banks will be a lot safer under Basle iii. However, corporates will be forced to issue bonds direct to the retail market, either directly or indirectly.  Retail investors will seize these bonds, chasing higher yields.

THAT’S THE ROCK OF BASEL III. LET’S NOW LOOK AT THE HARD PLACE OF THE BANK’S OWN MAKING

Remember the friendly old bank manager of our parent’s and grand-parent’s days?

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He, and it was usually a male in those days, knew you and your family very well. He knew if you were good for a housing loan even if “YOU DID NOT TICK ALL THE BOXES”

Today, in the age of computer algorithms, the computer determines “IF YOU ARE ELIGIBLE FOR A LOAN SECURED BY A FIRST MORTGAGE”

The computer can fail you for many reasons:

  • —Imperfect credit record,
  • —Late payments on credit cards, and
  • —Income which is not taxable due to carried forward tax losses from your business operating via a trust structure.

All the banks care about are your tax returns, and the notice you get back from the tax office.

Hence in the last decade in Australia, “LOW DOC HOME LOANS” have increased from 1% to 10% of all new home loans.

If you need help in this area, I can recommend you to the perfect individual.

Peter A Worcester BA BSc FIAA MAICD

2 October 2017