Andrew Frankling, CFA’s Post

The Bank Hybrid Security is dead. Where to now for interest yield? In September, APRA made a significant announcement to the Australian banking sector and the fixed income market with its proposal to remove Additional Tier 1 Capital from the capital structure of banks. What does this mean for investors? Discover the impacts and potential opportunities in William Fisher latest analysis by clicking on the image below: https://bit.ly/47PHqlO #FinanceNews #Investing #Banking

Often used, often misunderstood. Hybrids are a common feature of many client portfolios, particularly retail investors without access to OTC markets, but ask an investor to explain what a hybrid is and most probably couldn't answer. Investors sometimes perceive hybrids/AT1 the same as Tier 2 subordinated debt without appreciating the material risk and return composition differences. APRA wants to change that. Read more in William Fisher's article below.

Why is APRA trying to blow up the hybrid market? Under a plan that was never publicly canvassed, Australia’s banking regulator is trying to shut down the $40 billion listed hybrid market; substantially raise bank leverage and risks for depositors (and taxpayers); and make all smaller banks non-compliant with global best-practice regulations. This bureaucratic overreach will destroy a huge franked income sector beloved by self-managed super fund investors and retirees. The Australian Prudential Regulation Authority claims the proposal was motivated by the collapse of Credit Suisse, but this makes zero sense because its hybrids worked with speed and efficacy, just as they were intended to. Bankers say the scheme is motivated by the fact that APRA has lost the stomach to oversee a banking crisis that involves automatically converting listed hybrids into bank shares. In my meeting with APRA last year, that was the key anxiety. Regulators worry they will cop the blame for any retail losses. APRA is now putting its interests ahead of the depositors and taxpayers it is legislated to protect. Read more below... https://lnkd.in/gKuVhQ8u

"Private credit managers are the new banks." The rise of bank regulations and concerns around a 'liquidity mismatch' where banks lend longer than the deposit they hold, has seen private credit grow to a staggering 85% of all lending to US corporations. These same dynamics are at play in Australia #privatecredit #directlending #agriculturaldebt https://lnkd.in/gEUFMQPJ

Risk warning: the following post is my personal opinion and not necessarily the view of GHC Capital Markets Limited: As I flicked through The Telegraph this morning, I thought “here we go, 2007/8 again what’s happened now????” https://lnkd.in/e8aSwKiB As per the headline - any talk of a #banking crisis will really set things alight. Then I realised the article was a year old and followed the demise of SVB, which was banker to many of the #tech start ups. However, one thing the article did make me realise is how advisors seemingly ignore the other way that #retailinvestors can “bulletproof” against a banking collapse…while it mentions NS&I, Insignis Cash and Flagstone it didn’t mention the UK 🇬🇧 Gilt market as another alternative. As the “gatekeepers” to many people’s wealth, I rarely hear #wealthmanagers, #financialadvisors & #financialplanners talk about investing directly in Gilts. For a long time that made sense when rates were lower for longer, as was #inflation. Even then, it ignored the security aspect of gilts in terms of a breakdown in the financial/banking system. For the un-initiated, #government #debt, Gilts, are I.O.U #loans issued by the Government. #institutions and retail investors lend the government money in return for interest payment(s) and a “guarantee” that the loan will be repaid in full on a pre-determined date (or inflation adjusted returns). The “risk” with gilts is that the Government defaults - doesn’t have the ability to meet interest payments/repay the loan. Unlike the other options given in the article, there is daily pricing/movements so there is some volatility in values but this is (usually) nothing like the level of #equity volatility. Many an IFA I know have often asked me about gilts with little knowledge themselves. I suspect over the last year, more are aware of them than ever before. But you’d also be surprised at how many #financedirectors and #treasury departments in companies hadn’t thought how could I use this investment tool to better protect my cash, similarly trustees to charities. I’m not advocating that investing in gilts is right, but when the noise surrounding the demise of the City of London Corporation and the “Square Mile” as a financial services centre, is getting louder, it should be remembered that the London Stock Exchange does have a #market specifically for gilts and retail bonds (debt of companies) - ORB. https://lnkd.in/eBnPEjXR I’d like to think that all #diyinvestor platforms offer the facility for gilt #dealing, but after some of the “posts” on LinkedIn yesterday surrounding some platforms refusal to allow investors to deal in the listed shares of members of The Association of Investment Companies (AIC), then I’m nervous on that score. If they don’t, then #stockbrokers do. 👍🇬🇧

The resurgence of CRTs, a financial strategy where banks offload credit risk onto third-party investors. While proponents argue that CRTs help banks manage risk and facilitate lending, critics raise concerns about potential systemic risks. Potential Benefits of CRTs: Banks can reduce their exposure to credit risk, improving their financial stability. By transferring risk, banks can free up capital for new lending activities, stimulating economic growth. CRTs offer investors opportunities to diversify portfolios and potentially earn higher returns. Potential Risks of CRTs: Banks may become less cautious in their lending practices if they can easily offload risk. If a large number of CRTs fail, it could trigger a chain reaction of losses, destabilizing the financial system. The complexity of CRTs and the lack of transparency in the market can make it difficult for regulators to monitor and assess risks. Investors using leverage to buy CRTs can amplify risk, and concentration of risk in a few hands can be dangerous. Are existing regulations sufficient to mitigate the risks associated with CRTs? Should stricter regulations be implemented? How can transparency be improved in the CRT market to enable better risk assessment and pricing? What steps can investors take to assess the risks associated with CRTs and make informed investment decisions? What are the long-term implications of widespread use of CRTs on the financial system and the broader economy? In my opinion as the use of CRTs continues to grow, it will be crucial to regulate the use of these products by the financial institutions. Being highly cautious to avoid the concentration of risk between them as the firms selling those CRTs to the banks are also their primary borrowers for their transactions, in this way adding credit risk and increasing the loss in case of defaults. That could act as a domino effect within the financial system. Therefore a strong regulatory framework, increased transparency, and prudent investor behavior will be essential to ensure stability. #finance, #banking, #riskmanagement, #investment, #regulation https://lnkd.in/eZ72urBK

APRA recently confirmed that there will be an end to banks issuing quasi equity Hybrid bonds to retail investors. These structures are the lowest ranked interest bearing debt instruments issued by banks. For a long period APRA has been concerned that the risks were not well understood by retail investors. Some market participants are noting that there have not been any hiccups in the banks, so why should APRA have concerns? In many ways this highlights why APRA had to move. Credit investing should be focused on assessing risk and earning a return that is appropriate. It is not about lending money, hoping things will stay the same and that the borrower will repay. Some of those most vocal in their dismay are currently earning underwriting and exchange fees for placing and broking these instruments, or running a fund excessively exposed to Hybrids. The hybrid market investors, and advisors, took the view that the Australian Banks were unassailable; understanding and pricing for the inherent (rather than observed) risk was not important.  As we have learnt across the years in financial markets, regulation and rules will change, but investors with excess cash will continue to invest. As one door closes, investors will be quickly looking for the next door to open. Our credit offerings take a different approach. iPartners always aims to deliver a superior risk adjusted return based on fundamental credit analysis and global market awareness. Our suite of products include the Bond Income Fund, targeting a return of the RBA Cash rate +3-4%, with an 80% investment grade portfolio. That is the kind of return that wholesale investors in hybrids issued by comparable non-Aussie banks may be able to earn. The end of the hybrid market in Australia is not the end of the opportunity to earn solid floating rate returns. https://lnkd.in/g7gc7cCP

NBFIs now manage more assets than banks, but lighter regulation increases systemic risk. Non-banking financial institutions (NBFIs), such as investment funds, pension funds and private equity firms, control a staggering 41% of total EU financial assets. 📉 Why it matters - Recent events have shown how risks in NBFIs spill over and impact everyone: 🏦 The UK pension fund crisis (2022): Rising interest rates triggered a mass sell-off of government bonds (gilts), imposing huge losses on the leveraged pension funds and bringing the gilt market to the brink of collapse. 💸 The “dash for cash” during COVID-19: Investment funds rushed to sell assets, worsening market chaos and liquidity shortages. These incidents highlight how risks in the NBFI sector can create domino effects, impacting everyone, from small businesses to individual savers. ⚠️ The lesson - Differences between bank and non-bank regulation must be levelled up where risks are the same. That’s why Finance Watch recently responded to the European Commission’s consultation on NBFIs, calling for: 🔍 Enhanced transparency on the risks of NBFIs and their interconnectedness with banks. 📑Oversight for unregulated entities like family offices and sovereign wealth funds, where they pose risks to the stability of the financial system. 💪 System-wide stress tests to uncover hidden risks. 🌍 Better climate risk rules to stop vulnerabilities from migrating to unregulated areas. Finance Watch’s recommendations aim to reduce risks and ensure a safer, fairer financial system for all. 📖 Read our full response for more insights: https://lnkd.in/ewZinVKu #NoMoreCrises  #FinanceWatch #FinancialStability #Regulation #SustainableFinance #NBFI

Australia’s banking regulator, Australian Prudential Regulation Authority #APRA, is pushing to phase out #Additional #Tier 1 (#AT1) #bonds—highlighting concerns over their reliability after the Credit Suisse collapse. By 2032, banks will need to replace these #loss-#absorbing #instruments with cheaper and #more #dependable #capital, signaling a major rethink of post-2008 #risk strategies. This move is set to reshape how #Australian #banks meet #capital requirements. APRA’s two-month consultation is now open—this is a significant change that could impact the entire #financial landscape. 💬 What does this mean for the future of banking? Share your thoughts below! 👇 #Banking #Regulation #Finance #RiskManagement #APRA #CapitalRequirements #CoCo #basel3

Do you have Mutual Funds at the bank? Banks shrunk their product shelves over 2 years ago, leading to higher costs and less options for investors. When meeting with clients of the banks, we've often seen all-in costs (MER + Advisory Fee) well in excess of 2.50%. Consider a cheaper alternative from an independent wealth management firm.