But The Sheep Don’t Scatter: Banks Say “Sophisticated” Customers Have “Less Stable” Deposits

10 Jul

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Here is a shining example of bankers’ true attitude towards depositors.

In the Australian Prudential Regulation Authority (APRA) document titled ‘Implementing Basel III Liquidity Reforms In Australia’ (pdf here), the very important topic of “cash outflows” or “deposit run-off” is discussed at length.

Unsophisticated common people like you and me call it a “bank run”.

In the section titled ‘Other matters raised in submissions’, we learn that bankers consider the deposits of “financially sophisticated” customers to be “less stable” (my emphasis added):

4.2.1 Cash outflows

Retail and qualifying small and medium enterprises (SME) deposit run-off

Within the LCR [Liquidity Coverage Ratio], retail deposit balances are classified as either ‘stable’ or ‘less stable’. Stable deposit balances are those that are considered to have the lowest propensity to be withdrawn during times of stress…

Comments received

Submissions [from banks] suggested including client relationship characteristics, such as the term of a relationship, the number of products and the use of a relationship manager, to assist categorisation of the deposit. They also proposed that dormant accounts be classified as stable due to their expected inactivity in a stress event and that self-managed super fund (SMSF) deposits be eligible to be classified as stable deposits as the trustee overseeing the SMSF deposit account is not necessarily a financially sophisticated individual.

APRA - Implementing Basel III Liquidity Reforms in Australia, page 17

APRA – Implementing Basel III Liquidity Reforms in Australia, page 17

In other words, “financially sophisticated” people won’t be stupid enough to keep their money in the bank if a crisis looms on the horizon. Their deposits are “less stable”.

People who are “not necessarily financially sophisticated” will leave their money in the bank. Their deposits are “stable”.

Somewhat amusingly (to this blogger), the bankers want to classify the deposits of Self-Managed Super Fund trustees in the same “stable” category as “dormant” accounts. They consider SMSF trustees to be idiots — “not necessarily financially sophisticated individuals” — who won’t try to withdraw their money.

Under the new FSB-directed global regime agreed to by the G20 in 2010 — now being implemented by Australia, Canada, Europe, the UK and USA — just as in Cyprus, all “unsophisticated” bank depositors will get screwed overnight.

Or more likely, over weekend.

It is also worth noting the bankers’ views on internet access to bank accounts in a “crisis” (ie, possible bank run scenario):

A number of submissions objected to the inclusion of internet access as a criterion in the less stable deposit scorecard. These submissions argued that means of access was not a strong indicator of withdrawal propensity and it should be removed from the scorecard; instead, greater emphasis should be placed on deposit size as this was more consistent with ADI experience.

APRA: Implementing Basel III Liquidity Reforms in Australia

APRA: Implementing Basel III Liquidity Reforms in Australia, page 17

In other words, the banks are confident that your having internet access does not necessarily mean that you are more likely to get your money out in a crisis. Given the number of times our banks have mysteriously suffered from internet banking “outages” in recent years, I’m not surprised. It’s called “economic shock testing” (see Electro-Physics: The Theory Of Economic Warfare).

Do not be deceived by the smokescreen of the “government guarantee” for depositors.

As we have seen in The Bank Deposits Guarantee Is No Guarantee At All, Australia’s so-called “guarantee” for deposits up to $250,000 only provides for up to $20 billion in Federal (borrowed) money per bank — less than 1/10th of the amount that each of the Big Four has in (electronic) obligations to bank account depositors (ie, “creditors”).

Or should I say, it “only promises to provide for up to $20 billion…”.

There is no money actually set aside to “guarantee” any depositors.

As confirmed in the APRA document, page 15:

Fully guaranteed retail deposits

The revised Basel III liquidity framework includes an additional retail deposit category for deposits that are fully insured under a pre-funded deposit insurance scheme. The deposit insurance scheme in Australia, the Financial Claims Scheme (FCS), is not pre-funded and, as such, this category is not relevant for domestic deposits.

APRA, 'Implementing Basel III Liquidity Reforms In Australia'

APRA, ‘Implementing Basel III Liquidity Reforms In Australia’

You have been warned.

Australian banks not only have ten times more in deposit obligations than the government has guaranteed promised to provide as insurance for each bank’s eligible deposits.

As of March 2013, the banks also have a new record $21.5 Trillion in Off-Balance Sheet “business” that is mostly derivatives; an increase of $2.5 Trillion in the March quarter alone, including a $2.2 Trillion increase in Interest Rate derivative contracts:

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In the APRA document on implementing the Basel III bank liquidity reforms, we learn that the “cash outflow rate” for derivatives positions will be rated at 100 per cent of their measured value:

Additional derivatives risks

The revised framework includes a number of additional collateral outflow categories designed to ensure that risks associated with derivative positions are correctly captured in the LCR. The cash outflow rate for these categories is 100 per cent of the measured value.

APRA: Implementing Basel III Bank Liquidity Reforms, page 16

APRA: Implementing Basel III Liquidity Reforms In Australia, page 16

… while derivatives that are (supposedly) “secured” by so-called “High Quality Liquid Assets” — limited to cash; central bank reserves that “can be drawn down in times of stress”; and “marketable securities representing claims on or claims guaranteed by sovereigns, quasi-sovereigns, central banks and multilateral development banks, that have undoubted liquidity, even during stressed market conditions, and that are assigned a zero risk-weight under the Basel II standardised approach to credit risk” — these will have a cash outflow rate deemed to be zero per cent:

Derivatives secured by HQLA

The revised framework has clarified that where a derivative cash flow is secured with HQLA1, a cash outflow rate of zero per cent is to be applied.

APRA: Implementing Basel III Bank Liquidity Reforms, page 16

APRA: Implementing Basel III Liquidity Reforms In Australia, page 16

Remember that the cash outflow rate is determined by the perceived risk of it actually “flowing out”.

In the case of the form of “liquidity” known as “deposits”, APRA says (page 16) that “Stable deposit balances are those that are considered to have the lowest propensity to be withdrawn during times of stress and, hence, receive a low three or five per cent cash outflow rate. Less stable deposits are considered to have a higher propensity to be withdrawn and as a result, depending on deposit characteristics, receive a 10 per cent or higher cash outflow rate.”

So, in an actual crisis situation, just how much of the banks’ $21.5 Trillion in Off-Balance Sheet “business” will have a “cash outflow rate” of 100 per cent, and how much will have a cash outflow rate of zero per cent?

Who knows.

But one thing I do know.

I’d not want to have any of my money in a bank on the day — make that, the weekend — when we all find out.

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