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APRA on Loan Fraud, widgets, bad apples, juggling, kicking tyres, & doing the shuffle.......

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Hmmmm ?.........  hidden secrets ....dive into the ........ exotic & murky world of Australia's  BIG Banksters ....

... find out you will .....what these mind twisting  top secret Evil Bankster terms mean......

Banksters incentive based remuneration..............how you kick the tyres ....... are the tyres are worn out?......take up the slack.........spot-kick......have you hurt your toes? ...... pulling a numbers out of the air.......a finer sieve...... not our turf.....

........loans were made in error.......reckless or risky behaviour........substantial or systemic problem? —things might go wrong.

APRA: The risk that you see and respond to is seldom the one that kills you.


 

Economics References Committee - 09/08/2012 - Effects of the global financial crisis on the Australian banking sector

Senator WILLIAMS

Senator CAMERON:

CHAPMAN, Mr Keith, Executive General Manager, Diversified Institutions Division, Australian Prudential Regulation Authority

LITTRELL, Mr Charles, Executive General Manager, Policy Research and Statistic Division, Australian Prudential Regulation Authority

 

CHAIR: What disclosure rules apply to ADIs? Do they vary depending on whether they are listed companies, mutuals or things like that?

Mr Littrell : Yes. ......under the so-called pillar 3 rules, which concern disclosure, banks that are allowed to use more advanced methods of capital calculation have to provide a substantial amount of disclosure about the numbers underlying that capital calculation......

CHAIR: And things like executive and director remuneration? I know APRA has done some work on tying executive remuneration to risk and so forth.......

Mr Littrell : ...... In terms of APRA's additional rules, those are not so much about disclosure as they are about ensuring that the incentives built into remuneration are not encouraging undue risk taking. ......

Senator CAMERON: There have been many reports about the opaque nature of incentive schemes in business. Are you satisfied that there is transparency in executive bonus systems in the finance sector?

.........

Mr Littrell : In terms of public clarity, we are the wrong people to ask. That is very much an ASIC question. In terms of clarity to APRA supervisors, we can talk a bit about what we do to try to achieve that clarity.

Mr Chapman : In terms of our processes, we do not go through every contract of every executive. We are starting from the process of what has the board set in terms of targets, how they made sure that those bonus potentials are aligned to the risks, the sorts of clawback mechanisms they have if things go wrong.

We do not want to get into what happened in some of the US arrangements whereby people thought,
'The more loans I make the more I get paid.'
There has to be a control around that about the quality of loans and so on.

I would say we have a pretty good understanding—which is getting better, because it is only a new requirement—of the structures of remuneration for the key staff within the organisations.

I will not even attempt to claim that we go through every contract of every individual in that process, but we understand how they are set.

We understand who makes the decisions about what they get and we understand the clawback mechanisms and deferral arrangements to make sure that nobody gets a takeaway bonus before the risk that is associated with that takeaway bonus can actually eventuate.

Senator CAMERON: Do you do any auditing to check that what you have been told is correct?

Mr Chapman : As part of our normal supervision we do, as we do with every other thing—for want of better terminology—tyre kicking. For instance, they tell us there is a great framework here to do this, so we go and look at some of the examples in that process. On the remuneration side that is relatively new, so that process is not as well established as it is on credit risk—

Senator CAMERON: It is hard to kick too many tyres.

Mr Chapman : We have kicked some very big tyres, in checking what they have done, and we have seen some changes, if that is where you are heading, in some of those structures.

.......

Senator CAMERON: Did you use the phrase 'key executives'?

Mr Chapman : I did use the phrase 'key executives'. I must be careful here. The structure of the remuneration extends throughout the organisation in that it should be aligned to risk. The responsibility that we have started to focus on is what the board remuneration committee's responsibilities are for the remuneration of the top-level executives because that culture will then flow through the organisation.

To try to draw a distinction, if we had a loan manager in Condobolin, we would not expect the board remuneration committee of the bank to know anything about the details of what that person gets paid. We would expect the board remuneration committee of the bank to make decisions on the payments to the senior executive, one of whom would be responsible for that, but the remuneration structure throughout the bank would be structured around that person in Condobolin having a bonus that is structured around the risk to the institution as well as things like volume.

Senator CAMERON: Have you done any analysis of this? Is there an internal document that can be made available to this committee that outlines how you kick the tyres or if you have hurt your toes or whether the tyres are worn out? You are telling us that you are doing this. Is there anything we could have a look at?

Mr Chapman : We would not have anything specific on the remuneration structure.

.........

Senator CAMERON: The evidence we have had about some of the excess behaviour of banks has been at that lower level of remuneration, a mid-management type area. It seems to me the evidence we have had is that this is where pensioners are getting ripped off and small business people are getting ripped off.

There is a huge information asymmetry in the relationship between the bank and borrowers. This is a fundamental issue. APRA is saying: 'We have this under control. We're looking at it. We're monitoring it.'

I would like to have a clear understanding of how you are doing it, because something is not working. Either people are ignoring you or the APRA guidelines, or the guidelines are not working. That would be my view.

Mr Littrell : ......I am not going to tell you we have it all under control, but I can tell you that we and the industry pay more attention to that now than would have been the case five years ago. Over the next five years we will be getting that more under control.

Senator CAMERON: ....... Do we need to come and ask you if there is a problem, ......

Mr Chapman : .......I have flicked through some of the submissions and I can see some of the issues in the submissions that you are raising now, Senator. There is a potential difference here between what could have been fraudulent activity versus that which is enshrined in the remuneration structures of an institution.

Certainly some of the issues that appear to have been raised by submissions in the process we would suggest—if they are valid, and I am not making a qualitative judgement about that statement—look like fraud issues and should be taken up with the police rather than a prudential regulator.

.......we are a framework regulator. We cannot go and look at everything that happens in every institution. We try to start from the point of view of whether our policies are right and then we spot-kick down the bottom. If you were to ask me if we have sent someone to Condobolin, Sutherland or somewhere to look at what happens in individual branches, the answer is no.

Senator CAMERON: I am not asking that. What I would be looking at is the same as every other organisation or modern business does. They have key performance indicators, they have cultural issues, they have management checks and balances, and they have oversight and supervision, which is your job.

Your oversight and supervision, surely, must go back to the culture within the organisation. You cannot ignore that. You cannot ignore whether key performance indicators are in place in relation to the management systems.

Are there appropriate management systems in place? Is there training in place? Is there fraud detection in place? My view is, from the stuff we are getting, there is not enough. There may be some. You would have every bank that has appeared here answer questions about whether it is fraud—and you say to go to the police.

My view is there is an intermediate step. You have a responsibility, as APRA, to ensure that your oversight develops the appropriate culture where you do not need to call the police in. Am I wrong on that?

Mr Littrell : There are a great many people employed in the Australian financial services industry and they are around a lot of money. Neither we nor anyone else is going to be able to say there will never be misbehaviour in the financial services industry by the providers or the customers.

We can say to you that in terms of our role, which is ensuring the institutions are financially sound, we do have systems in place to give us good feedback about whether there is a substantial or systemic problem.

For example—again, pulling a number somewhat out of the air—let us say there are three million home loans and over 99 per cent of them were being paid back without, apparently, much difficulty.

Senator CAMERON: A lot of mortgage holders would say that is not true. Lots of them have difficulty.

Mr Littrell : Difficulty in the sense of collection, not in the sense of payment. From the point of view of the prudential regulator, some of those loans were made in error but not enough to threaten the solvency of the institutions—not even close. We could run similar sorts of things on credit cards or small business loans.

Senator CAMERON: Mr Littrell, that is not what I have asked you. ....... I basically asked you: is there a rule for APRA as the regulator to make sure there is a proper culture in place, that there are performance indicators in place, that the management systems are in place, that the fraud detection is in place? ....... I simply ask: is there a role for you guys in that?

Mr Littrell : ......The level at which we look is: are there issues that are large enough to threaten the solvency of the firm?

It is not at the level of: is this organisation never going to mistreat or somehow mess up a client relationship? That is a much finer sieve than we would apply in our supervision.

CHAIR: That would be more ASIC's role, in a sense, in terms of the consumer role.

Mr Littrell : Depending on the issue.

CHAIR: In terms of the financial institutions, ASIC has a responsibility. In that context of what you are talking about—correct me if I am wrong, but this is how I understand it—your job is to ensure the ongoing solvency of individual ADIs, effectively, and identifying risks to that.

Mr Littrell : The only consumer complaint that we respond to is, 'We did not get paid.' If you are an insurance policy holder and you did not get paid, that is our problem. If you are a depositor and you did not get paid, that is our problem. If you are super fund member and they are not giving you the money you are owed, that is our problem.

If you thought you did not get a good deal, then yes, it would be ASIC or maybe the ombudsman or some other people, but not us. We are much more focused on ensuring that the firms are sound, not on whether the individual gets a good or a bad deal.

CHAIR: And your oversight of executive remuneration also fits into that. Correct me if I am wrong, but my understanding is that you are looking for remuneration practices that encourage behaviour that is risky to the firm as opposed to inappropriate levels for an individual to receive or whatever. It encourages behaviour that we do not want to see in these businesses.

Mr Littrell : We certainly look for systems that will encourage reckless or risky behaviour. That certainly is in the benefit of the firm. I do observe that we have a lot of offshore examples showing that it is in the benefit of society too.

The worst thing a bank could do is hand out money without paying too much attention to the risk. It is very hard on the bank, but it is also not at all good for the borrower. The reason I raised that point before is that one of the questions we ask is: of the loans that are made by any given institution, what proportion end up more or less as expected, and what proportion end up not as expected?

In the Australian system, relative to most of our peer groups, we have quite a high proportion of loans that are extended and paid back more or less on time and more or less without hardship on the part of the borrower. That is a better system than not being conservative. But, again, we are getting into areas that are getting off our turf and into the turf of ASIC and others.

..........

CHAIR: No. And when Abacus appeared before us this morning I asked them whether they were having trouble sourcing funds through deposits, and they indicated that they were not. The issue for them was the cost that those funds came at. So I acknowledge that at this stage it is not yet causing a shortage of funds for those banks.

Mr Littrell : One of the issues is that we are seeing a shift in terms of trade between people who have money to put in banks and people who want to take money out of banks. So borrowings become more expensive, and people who make the deposits get paid more. From APRA's point of view, this is not a competitive problem. It is how much the banking sector takes out; it is not whether the depositors get a better deal or the borrowers get a better deal. And we have seen the whole world shift. People who have money are now getting a better deal than people who want money, and that is the case in Australia as well as everywhere else.

If the smaller ADIs run into the price problem on their funding, the natural response is to increase their lending price. This is a big issue because, while no-one particularly likes to lift their home loan rate, the fact is that if the core supply of what you need to make loans is costing you more, then you need to pass that cost through.

CHAIR: But in a competitive environment.......Nonetheless, we have seen an increase in concentration with the major banks, and factors like this make it harder for the major banks' competitors to compete on price, because their costs are going higher. It just seems that the way we are heading is making it harder for smaller ADIs to compete. ........

Mr Littrell : Again, let's go back to 2007 and 2008 and then look at now. The main factor in an increase in concentration is that the larger banks have acquired either firms or business from banks that are exiting the market. They have not taken much share away from the smaller players.

We sit here now and say that there is this concentration and that it is a problem. But I guarantee you that this is a much better problem to have than would have been the case had the major banks not had the capacity to pick up the slack.

........

The smaller players, in terms of their competition, are juggling funding costs, operating costs and capital access in an increasingly complex world that takes more systems development. There is a large international question about what the optimal size of banks in a banking system should be. It seems reasonably clear that it is possible to have banks that are too big, or certainly too complicated, to be managed safely. Thankfully we do not seem to have crossed that threshold here, but time will tell.

On the other hand, it is quite clear that you can have deposit takers that are too small to be competitive in the sense that they just do not have the heft and the ability to average out their costs in a way that would make them so.

.............

From APRA's point of view, our strategy has been that we want everyone in the system to be safe. So far—by good luck and good management between us and the industry—we have achieved that outcome. In terms of where this goes from here, we now do have a system that is more concentrated, but we still have a great absolute number of competitors.

CHAIR: As I said, it is a fact that it is more concentrated; the question of whether that is a competitive issue is debateable.

Senator WILLIAMS: ....... we have people coming to our offices with problems. Sadly, I get a fair few bank problems—too many; I think I get more than the lion's share of complaints that go to politicians. We have good contacts with each bank to work behind the scenes and try to solve those problems.

Do you have a government liaison officer whereby Senator Cameron—or any of us—could speak to someone from your operation to raise a problem or seek advice or whatever? Do you have such an officer?

Mr Littrell : The person to start with is our corporate secretary, who is on the website. We could send you the details. It is the same person you send questions on notice to.

Senator WILLIAMS: Yes. Often when you go to the website it is a long and exhaustive process to actually talk to someone.

Mr Littrell : But it is the same process as for Senate estimates questions. We do not have a parliamentary liaison officer per se.

Senator WILLIAMS: We have contacts with the banks all the time, and with Telstra, but obviously we cannot have that with you.

You spoke earlier about your policy of watching systems that encourage risky behaviour.

It is no secret that banks, large or small, set lending targets for their loans officers; it is just common knowledge. Then we hear of wrongdoings in the field of lending. Would those targets, in a quietening economy—with the amount of spending heading south instead of north, compared with perhaps pre-GFC—be a risky operation?

Could it lead to some wrongdoings when those loans officers have to meet those targets? It is probably how they get their pay rises, their bonuses or whatever. Do you understand what I am saying?

Mr Littrell : I would say there is a difference between risky and reckless. Banks do take risks, but what we are looking for is systems that encourage undue risk.

The situation you described, volume targets on risk products, is something that needs watching. Ideally, when you see those, you see them couched in a way that says, 'Yes, you do a volume target but you must meet our institution's risk framework.

So you have to bring us 17 widgets or whatever but only 17 widgets that comply with our policies.' The balance between incentive and recklessness is a hard one to manage.

Senator WILLIAMS: It is. History is a good teller—Hansard, I should say.

Mr Littrell : If you look at the progress of Australian banking for the last 30 years or so, the banks have got better at managing volume based targets but are they perfect? No. As I was saying before, it is something we have ramped up our attention to in the last couple of years.

There will always be an issue of: if you are giving people an incentive to go out and find business, particularly business like lending that has risk to it, there is a balance that has to be achieved. It is not always the case that balance will be hit properly.

Senator WILLIAMS: I want to take you to residential mortgage backed securities. Am I correct in saying it is the smaller operators, the smaller ADIs, that use this facility more so than the larger banks?

Mr Littrell : Proportionately, that is true. The large banks have large issues but not large in the context of their balance sheet.

Senator WILLIAMS: I found it concerning that one of our witnesses yesterday—a Ms Brailey from Western Australia—hinted that the $14 billion the Australian Office of Financial Management has spent buying residential mortgage backed securities could be $2 billion, I think the figure was.

She claimed it would be bad loans, non-performing loans, low-doc loans, no-doc loans that are not performing, not returning interest payments et cetera. Who scrutinises the quality of those loans that are sold off to the taxpayer?

Mr Littrell : That is a question for AOFM. We are not involved in that.

Senator WILLIAMS: I just thought I would ask you in case you were involved in it. Most have who we have been interviewing this week.

Mr Littrell : AOFM is not a prudentially regulated institution.

Senator WILLIAMS: No. We just do not know about the quality of loans that come out from banks, and I thought they may have something to do with you.

Mr Littrell : Again, the quality of the loans coming out of banks in Australia on average is quite high. What is happening in the AOFM portfolio, I have no way of forming a view on.

.........

Mr Chapman : It is possibly one you can ask Treasury to the extent—

Senator WILLIAMS: We asked Treasury. It is like the case Senator Cameron raised: tell the police. You go to the police and they say, 'We need a referral from ASIC before we would look at it.' One company says, 'It's not ours, see the police.' The police say, 'It's not ours, go back to them.' I can do the shuffle around the place.

Mr Chapman : As Charles said, we cannot really talk about what the AOFM has purchased but, in terms of the general issue of relationship mortgage backed securities, yes, there are different types of those that people can do. Some of them have in the past acknowledged they have been heavily into the low-doc or risky loans. They tend to sell at a higher yield than the ones that are into more stable standardised fully underwritten loans in the process.

Our banks have always written relatively little low-docs and now write even less in relative terms.

......

But it is still relatively little in the whole mortgage book. Again, it depends what the risk is with it. I think this comes back to the whole issue. If they do not do proper due diligence, then, yes, they might be providing risky loans to the bank balance sheet. But no banks in the business are deliberately trying to put their balance sheet at risk by writing as much rubbish as they can possibly write.

Senator WILLIAMS: It is sad that some of their loans officers—

Mr Chapman : But that comes back to behaviour within the context of the bank. Without going back to Senator Cameron's question again: it is the culture issue. If a bank had a culture of: we want to write business out of the bank as a whole and at all costs, regardless of risk, then we would be extremely concerned and be ratcheting up their capital considerably in that process if that is the business they wanted to be in. Banks are not in the business of writing that—things might go wrong.

The might be some bad apples in the process, but I am one hundred per cent confident that none of our major ADIs, which are the ones I particularly look at, have a culture of trying to put their balance sheets at risk by doing the wrong thing across the board.

..........

Senator WILLIAMS: But the problem I have seen in my lifetime is that, once the market is saturated with loans, one bank veers off in another direction into this sector and next the rest are following them: 'That bank is going to that sector. It's a bit dangerous but they are going to so we are going to meet them.' They get more dangerous and, about every 20 years, the wheels fall off the cart again.

..........

CHAIR: We have had evidence over the last two days—oral evidence from banks and others—that has indicated that that is entirely consistent with what you have just said. That is that the failure that occurred, particularly in North America, which kicked everything off, had as much to do with a lack of supervision as it had to do with the failure of regulation.

That is not to say that regulation was perfect and there was obviously a need to improve things. ........He says that Basel II allowed banks to overstate the true amount of their capital and understate their risks. The lack of supervision may well have been part of the problem with that.

Mr Littrell : ...... In Australia so far the banking system has demonstrated it can survive mild adversity, which is all we have really faced. The settings that we have in place are such that they could survive very much worse adversity. Yes, it is possible to get your capital requirements wrong. It is possible to not do your supervision properly but that is a risk that we see.

APRA : the risk that you see and respond to......... is seldom the one that kills you.


....Yodas ......off to bring back some more revealing & entertaining  knowledge .......

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Comments

  • doyla66
    doyla66 Wednesday, 28 November 2012

    What can I say Yoda. Another great one!

  • doyla66
    doyla66 Wednesday, 28 November 2012

    "THE MORE LOANS I MAKE THE MORE I GET PAID." This is why the corrupt banks give out so many fraudulent loans & 'fudge' the paperwork to 'make it fit', rather than refuse the loans.

    The more loans the Banks give out - the more money the Banks make.
    The more loans that the brokers do, the more money the brokers make!

    Mr Chapman of APRA shockingly confirms: "As part of our normal supervision we do.... TYRE KICKING."
    He also gives people the same old merry go round:'Go to the Police. go to ASIC, go to FOS, go elsewhere." 'Do the shuffle', as Senator Williams rightly points out. ASIC are even worse.

    Senator CAMERON: "The EVIDENCE we have had about some of the excess behaviour of banks has been at that lower level of remuneration, a mid-management type area. It seems to me the evidence we have had is that this is where pensioners are getting ripped off and small business people are getting ripped off."

  • Denise
    Denise Wednesday, 28 November 2012

    The Tyre Kicking method of regulation is precisely why we have a $57 Billion fraud on our hands! Get a Grip APRA. So you admit your chaps are responsible for this Bankster driven Sub Prime Racketeering fraud raging out of control and ruining the lives of a hundred thousand or more lives? Keep reading and blogging YODA and bring us more to be gobsmacked by!!!! [email protected]

  • doyla66
    doyla66 Wednesday, 28 November 2012

    Or alternatively lend on 300% LVR to an options trader. How much? More than 100 million! It's true.

  • doyla66
    doyla66 Wednesday, 28 November 2012

    Paladin Wholesale Funding - the Funder of Champions!!!!
    Straight from their website:
    100% LVR’s
    95% Land Loans.

  • doyla66
    doyla66 Wednesday, 28 November 2012

    Pass the Buck Time!!!

    WILLIAMS:"I found it concerning..Who scrutinises the quality of those loans that are sold off to the taxpayer?" Mr Littrell:"That is a question for AOFM. We are not involved in that...AOFM is not a prudentially regulated institution...What is happening in the AOFM portfolio, I have no way of forming a view on."

    Senator WILLIAMS: "No. We just do not know about the quality of loans that come out from banks, and I thought they may have something to do with you."

    Mr Chapman? "Our banks have always written relatively "little" low-docs and now write even less in relative terms....But no banks in the business are deliberately trying to put their balance sheet at risk by writing as much rubbish as they can possibly write...

    There might be some bad apples in the process, but I am "one hundred per cent"[100%] confident that none of our major ADIs, which are the ones I particularly look at, have a culture of trying to put their balance sheets at risk by doing "the wrong thing" across the board." [BS]

  • doyla66
    doyla66 Saturday, 01 December 2012

    Awesome! I loved it the first time around - live on camera!
    Turn up the heat!
    Capital is capital - why the different rules?
    Because Banks are backed by Government!
    Different strokes for different folks!
    Try using those different interpretations of capital on ASIC if your company crosses the magic line!

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