Tag Archives: superannuation

The case for regulation

Taking unfashionable positions seems to be part of the job description for central bankers.
And the Reserve Bank of Australia was at it again yesterday.
The Abbott Government has been trying to endear itself to the business community by talking up its campaign to slash red tape, headlined by its so-called Repeal Day on March 26, when 10,000 pieces of legislation and regulation were put on the chopping block.
Few would quibble with the move to get the Dried Fruits Export Charges Act 1927, which set a levy of one-eighth of a penny for each pound of dried fruits exported, off the books.
But, as the RBA pointed out in its submission to Financial System Inquiry, the mania to be rid of regulation must have its limits.
Reflecting on the nation’s ability to endure the global financial crisis in much better shape than most other major developed economies, the Reserve Bank said Australia’s “sound prudential framework” had served it well, and saw no need for major change to current arrangements.
Many in the finance sector chafe under what they see as the unfair regulatory burden and capital requirements placed on Australian banks in complying with the terms of the international Basel III rules.
The rules were developed to help reduce the vulnerability of the global financial system to future credit shocks, including by increasing capital adequacy requirements for banks.
While the RBA and APRA are among those who successfully argued for some leeway in applying the new standards to take account of different business models and operating environments, Australian banks have nonetheless – like their overseas counterparts – had to increase the amount of capital on hand to help offset liabilities.
Often, regulation is seen as a dead-weight cost without any perceptible redeeming benefit.
In this it is like investing in education with the aim of boosting national productivity – the upfront cost is all-too apparent, while the pay-off is distant and rather nebulous: you know that a better educated and higher skilled workforce will be more productive, but credibly quantifying the effect is difficult.
That is why there was some benefit out of the gloom caused by the GFC. As the RBA said in its submission, it showed “that the costs imposed by effective regulation and supervision are more than outweighed by the costs of financial instability, even if that differential only usually becomes apparent after prolonged periods”.
That is, financial crises only happen every now and then, but when they do, the insurance of a robust financial system is worth the regular but relatively small cost of regulation.
In keeping with this “nothing good comes for free” theme, the RBA also backs the idea that the banks be charged a fee for the protection to depositors provided under the Financial Claims Scheme.
One of the key lessons the central bank draws from the GFC is that “the financial cycle is still with us”, meaning that risks have to be managed.
In its submission to the inquiry, the RBA made a number of other noteworthy observations and recommendations.
While much attention in recent years has been on competition in the mortgage market, the central bank said competition in small business lending was much weaker and deserved greater attention.
It also warned politicians off the idea of forcing superannuation funds to invest in certain sectors or asset classes, and questioned whether or not the fees and costs charged in managing retirement savings were reasonable.


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ABS to give full reckoning of household wealth

There are plenty of reasons why households tighten their belts or splurge out on an overseas holiday.

But until now, the National Accounts have only shone a light on part of the picture – income – when it comes to explaining spending and saving behaviour.

That will change from next month when, for the first time, the National Accounts will include a quarterly report on the Household Balance Sheet that incorporates the effect of house prices, shares, superannuation and other assets as well as income on household net worth.

This is of more than just academic interest.

As the Australian Bureau of Statistics itself has pointed out, non-financial assets are a huge piece of the puzzle when it comes to evaluating real household worth, because they are about two-thirds larger than the value of financial assets.

As the ABS coyly admitted, this was “a significant data gap”.

In an explanatory note announcing the change, the Australian Bureau of Statistics has presented an analysis of how household net worth plunged when the global financial crisis hit hard in the second half of 2008.

Between March 2008 and June 2009, it plunged from around $6 trillion to close to $5 trillion, with much of the decline stemming from falls in the value of land, shares and superannuation accounts rather than cuts to income.

The ABS has prepared a Household Balance Sheet chart that demonstrates how these losses will be captured by the new analysis (see below).

Household Balance Sheet

It shows the balance of household net savings and other measures of real net wealth plunged from around $200 billion in late 2007 to almost negative $500 billion in the December quarter of 2008.

As the ABS notes, “much of the decline in household net worth in December 2008 is explained by large real holding losses on land and financial assets”. That is, the plunge in house and share prices (and the flow on effect to superannuation accounts) sent household net worth into a tailspin.

Importantly, these “paper” losses had immediate effects on behaviour. Households tightened their belts, cutting back on spending and increasing saving.

This change in behaviour, along with a recovery in house prices, helped to quickly send the household balance sheet back into positive territory.

Since the plunge in the balance sheet in late 2008, there have been two other periods in which it has fallen into negative territory before recovering – early-to-mid 2010 and mid-2011.

What may concern policymakers and businesses that depend on households to spend, is that the ABS chart shows the Household Balance Sheet has again turned down and is close to zero.

Strengthening housing and share markets might turn that around, but elevated unemployment and flat real income growth won’t provide much support.

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