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Behavioural Economics - Greed is Good

The "Greed is Good" mantra lies at the heart of asset bubbles. It is not possible, and democratic societies do not want excessive regulation of human behaviour, therefore each generation learns the hard way. The cycle of life and the boom/bust mentaility needs to be more closely incorporated into macroeconomic modelling.



The trend to an integrated global economy is unstoppable. Those countries that invest in education, lower their tariffs, embrace technology with the consequential improvement in productivity will flourish. Higher cost of production countries like Australia must continually upskill and invest in new ideas as we will not be able to compete in the medium term. Whereas, economic blocks with high tariffs and boundaries to entry, e.g. Eurozone are ultimately doomed to fail.

Currency & Interest Rates

The appreciation of the Australian dollar against the US dollar, along with the push by many countries to devalue their currencies supports Chairmont's long held view that interest rates should be kept on hold, if not lowered. Australia has one of the highest yielding currencies in the world and further increases in interest rates will only add to the Australian dollar going higher. The higher dollar assists in relieving inflationary pressures as imports are cheaper, thus stimulating consumer expenditure. It is recognised that exporters suffer through the higher dollar, however our terms of trade are at historical highs and improvement in productivity along with limited wage growth should assist export driven companies adjusting. There appears to be limited house price growth and OECD economies particularly Japan (Bank of Japan reduced rates last week)and the US economy (increasing unemployment) are struggling and are double dipping.

Economic v Regulatory Capital

In recent times there has been much written on the latest Basel rules on regulatory capital and the possible impacts on banks’ costs and lending rates. In this context it is important to recognize the convergence of Regulatory Capital and Economic Capital under the Basel framework. Both forms are based on the Basel parameters and require regulatory oversight, but each has a slightly different role. Regulatory Capital is paramount for the safety and soundness of individual banks and the financial system as a whole, in terms of the quantum and type required, as applied through uniform industry standards. However in terms of the application of capital in the business of banking it is the individual (internal) Economic Capital modeling in banks that drive commercial decisions. Economic Capital modeling is the framework by which each bank manages their lines of business performance, investment decisions and loan pricing. While these models would be broadly consistent across banks in terms of parameter types each bank would have different parameter dynamics. Through Economic Capital models and frameworks high quality capital is allocated (at a cost) to investments and lending based on the size and types of the underlying risk, i.e. capital is allocated to support the risk. As capital is allocated based on risk (and risk appetite) it is somewhat independent of the amount of Regulatory Capital being held. The competitiveness of lending rates between banks is essentially related to these different Economic Capital models. It is acknowledged that a higher quantum of quality Regulatory Capital will increase the overall costs for a bank. However if this is to be borne by borrowers it would require changes to the internal Economic Capital model whereby additional capital is allocated to lending risk. In this case however it should be understood that the underlying risk of the customer has not changed, only that the bank has chosen to apply more capital to cover its costs.

Bendigo Bank & Deposit Guarantee

It is interesting to note that Bendigo Bank did not raise wholesale funds utilising the Federal Government Guarantee and despite this it could still increase its Net Profit After Tax by 189% according to today's annoucement. It also improved its Net Interest Margin from 1.72% to 2.12% largely through liability management.