Themes of 2013

A couple of stories setting the tone into 2014.  First to the layoffs at tinned fruit company SPC, killed by the high Aussie dollar and competition from China - much like the rest of Australia's non-resources economy, but also involving inefficient workplaces, stifling regulation and political interference:

FEDERAL cabinet has demanded new assurances from Coca-Cola Amatil to justify taxpayer aid for its fruit processing division in another sign of Tony Abbott's hard line on industry assistance.... 

....Cabinet remains broadly reluctant to give the company the cash it seeks and there is "no sense of urgency" to completing the deal, The Australian was told after yesterday revealing the deep concerns about the company's request for public funds (here)

....

...Over the next three years, Simplot will revamp Devonport and upgrade Echuca so that both plants are also efficient. Simplot managers and workers must also adopt the most flexible practices to make this work....So why wouldn't Coles and Woolworths do this for SPC? The simple problem is that the management and workers at SPC are not up to it, and their management and work practices belong to a totally different era. Worse still, SPC makes canned fruit, which consumers no longer want.

A substantial investment is therefore required in a new plant to package fruit in the way supermarket customers want to buy it....The government has appointed some excellent people to look at the SPC problem, but the panel includes Greg Combet. While the deep-seated problems at SPC are not Combet's fault, he played a role in the ALP industrial relations legislation that compounded SPC's problems. (here)

The other news item for which there may be more happening is the overvalued Aussie banks and the question of how much they will need in reserves going forward.  This week, suggesting likely future difficulties, the regulator APRA required the banks to increase their capital reserves.  This was mostly to do with implementation of Basel Committee on Banking Supervision requirements and may not be enough in the event of a sharp downturn:

"It'll be a relief," said Ric Spooner, a Sydney-based trader at broker CMC Markets. "And the actual buffer increase was probably at the lower end of expectations."(here)

Pure comedy

"He says bank directors have assured him that lending standards are being maintained"

Of course they are : )

So said chairman of the bank regulator, APRA, John Laker in a lecture.  John is to be commended for paying attention to risk of deterioration in lending standards as Australia's property boom explodes, but based on history how successful will he be? Link here. 

And in case you had any doubts as to how sensible Aussie banks are now being how about one which has chosen to expand into a sector which is facing the worst decline in a half century? 

Commonwealth Bank of Australia (CBA) is stepping up lending in shipping, a top bank official said, just as European rivals cut capital exposure to the seaborne sector.

Shipping has weighed heavily on its financiers, with the industry facing one of its worst downturns in decades.

Ship owners ordered large numbers of new vessels between 2007 and 2009, just as the global economy sank into its biggest crisis since the 1930s.

CBA, Australia's top lender by market value, is one of a few banks looking to expand its presence in shipping as it scents opportunities for business (here).

You couldn't maersk this up!

 (For those who missed the pun)

Banking regulation a damp squib

Heard the one about the regulator which loosened regulatory standards after pressure from industry lobbyists?  Sure you have!

Now presenting another example of regulatory capture, this time from the Australian Prudential and Regulatory Authority (APRA), responsible for setting banking standards and one of the three financial market regulators, along with ASIC and the RBA.  Or more accurately banking unstandards.  At a time when the Australian property bubble is bursting its last frothy bubbles and the securitisation industry attempts muted growth (having been responsible for the 2007-8 crisis), what better idea than to suggest that Aussie banks fill up their coffers with the toxic rubbish?!

Australian banks have stepped up their investments in residential mortgage-backed securities after regulators appeared to endorse their use towards a liquidity buffer. 

Bank treasuries have shown an increased interest in mortgage-backed bonds since August 8, when the Australian Prudential Regulation Authority published a discussion paper on Basel III liquidity reforms. 

Crucially, the paper stopped short of recommending that banks increase their holdings of high-quality liquid assets - limited to Australian government and semi-government bonds, as well as cash held at the central bank. 

That effectively gave banks a green light to increase their investments in higher-yielding assets that they can then use as collateral to access a cash facility at the Reserve Bank of Australia.(here)

And what do industry participants have to say about this move?

One banker in Sydney said regulators were being "quite soft" by not pushing lenders towards greater holdings of Australian Commonwealth Government bonds and semi-government paper... 

"If there is one thing Australian banks know, it is the domestic mortgage market.... So, banks feel very comfortable holding its RMBS," said the banker.

Oh dear! Let's hope they do a better job than Freddie Mac, AIG, Fannie May, Bear Stearns, Lehman Brothers, JP Morgan and Citibank...!