Banking on Capital: An Overview

Institute President Lindsay Smartt stepped up to the podium and welcomed guests and speakers, as well as acknowledging the traditional owners of the land. Before we knew it, the second Actuaries Institute Banking Seminar was off and running.

The overall theme of the conference was Banking on Capital and three plenary sessions brought this out in a variety of ways.

The first plenary “Bubble, Bubble: Toil or Trouble” provided industry insight on the complex dimensions of regulatory change. It also covered every Australians’ favourite topic – house prices.

The second “Branching into Banking” took a human capital angle and considered actuarial careers in banking through two shining examples.

The final plenary saved the best until last, featuring perspectives from FSI committee member Kevin Davis, the Chairman of APRA Wayne Byres, and Steven Münchenberg CEO of the Australian Bankers’ Association.

Plenary 1 – Bubble, Bubble: Toil or Trouble

After the President welcomed the opened the proceedings, the first session began with Shaun Dooley, Group Treasurer of NAB giving an overview of how the bank was adapting to the challenges of managing a bank balance sheet in a complex and evolving regulatory and business landscape. He provided the audience some insight into the many dimensions of regulatory change faced by the bank. These included elements related to capital, credit risk, liquidity, conduct risk.

Shaun focused on the Net Stable Funding Ratio (NSFR), one of the key liquidity metrics introduced as part of Basel III with compliance required by 1 January 2018. This particular metric focused on ensuring that the risks created from the overall maturity mismatch naturally present in bank balance sheets between short-term liabilities and longer term assets are well balanced. He brought into focus some of the system level challenges created by the metric, noting that recent research – highlighted to the international community by the Bank of England – that new money creation in the form of deposits appears to be driven more strongly by the creation of new lending than by the overall levels of deposit pricing. While some imperfect relationships exist between deposits and assets at a system level in Australia, this remains an area open for future research and will likely have important implications for future policy development.

Shaun concluded his discussion by highlighting that developing unquestionably strong banks in Australia moved well beyond simply bringing more capital into play. It extended to a multi‑dimensional view considering funding, liquidity, earnings, stress testing capabilities, reputation, management, conduct and fundamentally culture. All these are important pre-requisities for a resilient bank and more generally for a safer, stronger banking system.

Following Shaun’s presentation Peter Jolly, Global Head of Research in the Global Markets division of NAB talked about the broader economic landscape.  He presented a number of insights on every Australians’ favourite topic – house prices. Beginning by considering some views of the definitions of bubbles, he focused in on the key commonalities: assets that are above fundamental value, driven by excessive debt and poor lending standards.

In bringing this general definition to the Australian context he identified the major drivers as low mortgage rates improving affordability; foreign demand; and population growth outstripping the supply of dwellings. At present, it appears the latter two effects are beginning to wane. In taking a global perspective, Peter recognised that at times international investors did not recognise that Australia had a mix of property markets across a variety of cities, some of which have stabilised or adjusted to changing economic fortunes.

He noted that declines in houses prices are more than just a theorectically possibility when suitable historical views are taken into account – the 1890s, 1920s, and early 1990s all saw a decline in house. Overall though, household debt growth has been slowing in Australia relative to the recent past, and while households are more vulnerable to increases in rates, or interruption of their incomes there does not appear to be any trigger in the immediate or foreseeable future.

Together these two discussions gave a solid grounding in the significant challenges being faced from an industry perspective.

Plenary 2 – Branching into Banking

The next plenary moved the focus to human capital, rather than the traditional financial sort. Two highly experienced banking professionals – Nicolette Rubinsztein, a Director of Unisuper and Michael Cant the Executive General Manager of Corporate Financial Services for CBA – both of whom began with actuarial backgrounds reflected on their career journeys and their paths both into and within the banking world.

A variety of common threads emerged from their discussion. Nicolette highlighted what she saw as the four aspects that resulted in her move into banking: resilience, some luck, the opportunity to work flexibly and instinct.

In many ways both our plenary speakers followed similar careers: time in consulting; shifts into wealth management businesses; transitions to new employers partly due to acquisitions, and ultimately shifting into the banking divisions of their organisations from the world of funds and wealth management.

Adaptation and a willingness to continue learning were key in both stories. Michael highlighted the importance of learning in depth what many in the bank had simply ‘grown up’ with. He also highlighted the opportunity actuaries have to leverage and market existing skills. The key is to identify skills from your current area that are valuable in a potential role in new areas or to a prospective employer.

Nicolette noted the importance of the foundations of product management and strategy developed within previous roles. This knowledge facilitated the shift to banking through considering all aspects of a customers’ experience,from digital, communications, staff training and product structures. These skills allowed her to be successful in delivering change for customers across these areas.

These discussions highlighted both the opportunities in banks, as well as, the need to adapt and continue learning to be successful within them.

Plenary 3 – Foundations: Capital, Regulation and Policy

Our final speakers covered a relatively broad range of topics.

To begin with Kevin Davis, a Professor of Finance at both Melbourne and Monash Universities, as well as a panel member of the recent financial systems inquiry began by introducing us to the Australian market for Additional Tier 1 and Tier 2 capital instruments.

He highlighted many of the complexities surrounding these bail-in securities. Namely that the triggers for conversion to equity, a CET1/RWA ratio less than 5.125% or a regulatory declaration that an institute has reached a point of non‑viability, are highly complex to model. The paradigm shifts from the world of risk to a world of uncertainty. The world of uncertainty, as opposed to the world of risk, is characterised by people’s inability to understand, manage or quantify the possible outcome.

The Australian market in this space has grown at a somewhat astonishing pace with over $30bn in securities of these types being issued domestically. He noted that a variety of issues need to be considered surrounding these securities, in particular whether the predominately retail investor base taking on these securities really understand what they are getting into, and whether there are simpler and better ways to adapt the mix of capital banks have on issue.

Wayne Byres, the Chairman of the Australian Prudential Regulation Authority (APRA) looked at the question of Finding Success in Failure. He considered the nature of banking, and that unquestionably strong is not the same as invincible, and that while capital accumulation is – and remains – sensible, regulators still must be prepared for failure.

He contrasted two potential pathways when a failure occurs, the first orderly where it is rapidly anticipated, there is no loss to protected beneficiaries and in a sense no one notices. The second, disorderly consisting of surprise, significant losses, and disruption. As a regulator he highlighted that the goal, assuming failure at some point is a given, to be maximising the likelihood of orderly failures.

The ways to achieve this orderly approach include active supervision, the right powers and willingness to intervene, substantial planning and preparation while the bank is operating in a business as usual state, the ability of institutions to maintain critical functions, and beneficiary confidence in a strong backstop to encourage positive outcomes for the community.

Steven Münchenberg, the CEO of the Australian Bankers’ Association (ABA) brought the final discussion into the dimension of political risks. He noted the changing nature of the communities trust in large businesses and institutions. In particular, he noted three drivers: community views of banks shifting due to their failure to live up to their own standards; the rise of a section of the population who feel left behind in the existing economic system while banks remain highly profitable; and finally that a strong drive in some sections of politics driving this seemingly with a view to link the Prime Minister with the banks and use this to demonstrate that he is ‘out of touch’ with the day to day concerns of Australians.

The ABA and the banks in Australia have little opportunity to impact the latter two aspects of the public mood, however, can influence the first – ensuring strong standards are established and followed. That is where effort is being focused.

Final Thoughts

The 2016 Banking Seminar brought together a wide variety of views and served as a valuable forum for our speakers to bring out new and emerging ideas about the world of banking. It highlighted that an unquestionably strong banking system stretched well beyond simply raising capital levels, highlighted the varied career opportunities open to actuaries willing to continue to learn, and that a wide variety of challenges continue to be addressed in the banking sector.

As always, thank you to our speakers, the Actuaries Institute and the Banking Practice Committee in helping to deliver the event.

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