Finance Watch’s Post

Earlier this year the Labour party published their plans for financial services and are currently drafting further proposals. Hidden within the noise is exploration of alternative models for increased financial resilience including longer-term fixed rate mortgages. On the surface this is sensible and would avoid affordability challenges customers have faced re-mortgaging at higher rates over the past 18 months. However, this systemic change will no doubt pose a headache for bank treasuries navigating the complex IRRBB and funding implications. Policy makers need to promote a thriving and competitive sector so it is essential to ensure that mid and small tier banks can accommodate what is likely to be alterations in market preference. ALMIS International will be looking at this over the next year and we plan to offer a series of webinars/roundtables to discuss this with the industry. Please reach out if you would be interested in partaking in the discussion. 🤚 Another key point to note is "pursing a more joined up approach to regulation and supervision.. and building a more collaborative relationship with the EU". #ALM #Treausry #IRRBB #Banking

Superannuation funds are on the rise as APRA intensifies regulatory oversight. Chairperson John Lonsdale highlights the sector's rapid growth at a recent banking forum. https://lnkd.in/gQVeRWAi #fsonews #SuperannuationFunds #APRA #InvestmentStrategies

The Australian finance sector is undergoing a significant shift with the 𝐫𝐢𝐬𝐞 𝐨𝐟 𝐩𝐫𝐢𝐯𝐚𝐭𝐞 𝐜𝐫𝐞𝐝𝐢𝐭 𝐟𝐮𝐧𝐝𝐬, which are emerging as a formidable competitor to traditional banks. These funds offer more flexible and higher-yielding financing options, capturing a growing share of the market. Regulatory bodies like the Australian Prudential Regulation Authority (APRA) are closely monitoring this rapid growth and considering new measures to maintain financial stability. ⚖️ Investor interest in private credit is soaring, driven by its attractive returns in a low-interest-rate environment. This surge is intensifying competition for banks, prompting them to rethink their strategies. In response, banks are enhancing their credit offerings and seeking partnerships with private credit funds to stay ahead. Meanwhile, private credit funds continue to innovate, introducing new financial products and solutions to address gaps left by traditional banks. This shift underscores the necessity for banks to innovate and adapt to sustain their competitive edge in an evolving market. 𝐑𝐞𝐚𝐝 𝐌𝐨𝐫𝐞 > https://lnkd.in/eeRiNHEt https://lnkd.in/g_97UYCb

The Bank of England is proposing changes to its minimum requirement for own funds and eligible liabilities (MREL) framework to: ·      Simplify and consolidate the framework ·      Keep up to date with wider developments ·      Remain aligned with international standards ·      Adapt to lessons learned from implementation Key changes: ·      Restating UK CRR TLAC provisions in the MREL SoP: The Bank proposes consolidating the Total Loss-Absorbing Capacity (TLAC) and MREL regimes, simplifying requirements for firms ·      Updating indicative thresholds for stabilisation power resolution strategies: The total assets threshold for a bail-in preferred resolution strategy will be raised from £15bn–£25bn to £20bn–£30bn, reflecting nominal economic growth. This will provide smaller firms with more room to grow before potentially facing tighter regulatory requirements ·      Targeted changes to MREL calibration for transfer preferred resolution strategies: The Bank proposes setting MREL equal to the minimum capital requirement (MCR) for firms with a transfer preferred resolution strategy. This change is subject to the passage of the Bank Resolution (Recapitalisation) Bill and related legislation ·      Clarifying the measurement basis for MREL eligible liabilities: The Bank proposes using the accounting value of eligible liability instruments to measure MREL, promoting consistency and ensuring sufficient loss-absorbing capacity at all times ·      Emphasising the importance of effective processes and independent legal advice: The Bank is strengthening its expectations around firms' processes for managing MREL and obtaining independent legal advice on the eligibility of instruments Impact and implementation: ·      The proposed changes are expected to increase certainty and reduce compliance costs for firms ·      The Bank anticipates that the changes won't fundamentally alter the overall impact of its MREL policy ·      The proposed effective date for most changes is 1 January 2026 ·      The Bank is seeking feedback on these proposals by 15 January 2025 #BOE #MREL #BankingIndustry #ResolutionPlanning #FinancialStability #FinancialRegulation #BankingReform #UKFinance https://lnkd.in/evrYmezr

"But, 16 years later, some experts believe new risks are emerging. And this time, they are linked to highly indebted companies backed by private equity firms, which are part of the growing but opaque portion of the financial system known as the shadow banking sector. Shadow banking refers to financial firms that face little to no regulation compared with traditional lenders, and includes businesses such as hedge funds, private credit and private equity funds." "And in June, the financial policy committee highlighted risks related to the private equity industry more broadly: “Vulnerabilities from high leverage, opacity around valuations, variable risk management practices and strong interconnections with riskier credit markets mean the sector has the potential to generate losses for banks and institutional investors.” And Govt wants pension money piling into this?

Balancing Innovation and Risk in Private Credit With private credit offering higher returns and more flexible terms, how can we effectively balance the innovation in lending with the potential financial stability risks highlighted by the IMF?" The private credit market has grown to a $2 trillion industry, attracting investors with high returns and flexibility. This shift has seen private funds stepping in where traditional banks have pulled back, providing bespoke deals and direct lending solutions. However, the IMF warns of potential risks due to the sector's opacity. Infrequent valuations and unclear credit quality could threaten financial stability. Many borrowers in this market are highly leveraged, making them vulnerable to rising interest rates. The interconnectedness of private credit with the broader financial system is also a concern, with significant exposure through banks, pension funds, and insurers. The challenge lies in maintaining the innovative edge of private credit while mitigating potential risks through better transparency, valuation practices, and oversight. #Finance #PrivateCredit #Investment #FinancialStability #InnovationVsRisk

The proposed Bank Resolution (Recapitalisation) Bill in the UK aims to enhance the handling of small bank failures. Here are key ways it might impact such failures: - Introducing a new mechanism for the Bank of England to use funds from the Financial Services Compensation Scheme (FSCS) to cover costs associated with resolving a small bank, including recapitalization and bridge bank operating costs. - Enabling the use of resolution tools for small banks to protect financial stability while limiting risks to taxpayers. - Increasing depositor confidence by providing more options to manage small bank failures beyond the Bank Insolvency Procedure. - Allowing continuity of banking services in some cases of small bank failure, which may better serve the public interest compared to insolvency. - Recovering resolution costs through an ex-post levy on the banking sector, shifting the financial burden from taxpayers to the industry. - Addressing challenges from recent events like the failure of Silicon Valley Bank UK, where existing resolution mechanisms had limitations. Overall, the bill aims to offer more flexibility in handling small bank failures, potentially leading to improved outcomes for financial stability, customers, and public funds. #UKBanking #FinancialStability #BankResolution #FSCS #BankingSector #PublicFunds #DepositorConfidence

The case against investing in term deposits. Over many years, I have had a client base of organisations that generally love investing in term deposits, alongside investments in other asset classes. It's not hard to see why, given the attraction of the near certainty of the return of capital, clear returns and known repayment timeframes. But it's always good to test the counterargument for any investment thesis. (What follows is not investment advice but I hope it successfully challenges the idea that term deposit investing is “simple”.) Here are four disadvantages of investing in term deposits. Comparing the differing break terms across the providers takes substantial effort. (And then there is the the 31-day rule.) Setup/ AML/KYC requirements for deposits vary by bank. Whether this is a sign of competition or a way to protect market share is open for debate. But its effect on the people setting up banking relationships, say the staff at a charity, is clear: they generally do not deal with many banks in part because of all the time it can take. There may be over 80 ADIs taking money in Australia (i.e. ignoring subsidiaries and brands), but I have never seen a client invest with (say) ten of them. A third issue, which flows from the substantial time it can take to set up a new banking relationship, is that the opportunity cost of sticking with your incumbent providers can be significant, especially if no attempt is made to estimate it. Finally, term deposits are a challenging asset class because of the lack of a readily available and appropriate benchmark. This is largely due to the actual rates being offered to clients being significantly driven by the size of the proposed deposit and the nature of the depositor. #investing #banks Pieter K.

📰 ISS MI in the News According to data from ISS Market Intelligence, a recent article in The Globe and Mail revealed a shift in the fund industry over the past fifteen years. Independent fund companies used to hold 51% of net assets, while banks and credit unions only held 38%. However, as of March 2023, independents have decreased to 36.6%, while banks and credit unions have increased to 50.4%. Read more: https://hubs.li/Q02rK8fp0

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