Banks are bastards. The post-roaring 20’s Australia knew it and soon we will once again come to understand it. As the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry starts uncovering the uncomfortable truth, the Australian public will stick its collective head into our golden soil. Short of radical actions undertaken by the Reserve Bank, this will end in financial calamity — putting an end of 27 years without a recession and the saying “safe as houses”. When will this calamity occur? 2018? 2019? Next week? Who knows! There are too many macroeconomic factors at play, but with each passing month, more warning signs are starting to flash. This article presents the top four things you need to know about banking before that day.
1. The Guarantee is a lie
The promise of liars
We have been told by the government, our banks, the media, friends and family that all personal bank accounts in Australia have a A++++ government guarantee — In the case of a bank collapse and becoming insolvent, the government will step in and kindly repay our lost money. This is up to $250,000 per account per deposit taking institution. APRA outlines this in their glossy information sheets. Savings accounts, offset accounts and transaction accounts are typically covered. Great right? The government has our back. So no more bank runs, stability confirmed.
Your trustworthy government, media, family and friends are not entirely telling the truth — omitting a very large detail. The guarantee has a caveat of $20 billion dollars per bank. In the event of a major banking collapse, that is any of the big four, consider your money lost. This fact is hard to find. You can’t even find it if you wade through the 1959 Australian Banking Act. You have to go to the “Financial System Legislation Amendment (Financial Claims Scheme and Other Measures) Bill 2008”, “Activation of the EAFD” 1.20. It states,
A declaration outlines the total amount available to make payments to depositors of a declared ADI. For the first three years of the scheme, the amount that can be appropriated for the purposes of meeting depositors’ entitlements is unlimited. After three years, the maximum that can be appropriated is $20 billion. The declaration must also outline the amount available for the administration costs for implementing the scheme up to a maximum of $100 million. [Schedule 1, item 15, section 16AD]”.
The Reserve Bank of Australia are also well aware of this, outlining in their “Depositor Protection in Australia”,
“Payouts of deposits covered under the FCS [The Australian Government’s Financial Claims Scheme] are initially financed by the government through a standing appropriation of $20 billion per failed ADI [Authorized deposit-taking institutions]
How far would $20 billion go in terms of one of the big four?
According to the Big Four’s annual reports the size of deposit accounts totaled $2 trillion (Commonwealth Bank — $581 billion, ANZ — $467 billion, NAB — $407 billion and WESTPAC — $533billion). This includes savings, term deposits, chequing, debit card, transaction accounts, mortgage offset accounts, pensioner deeming accounts, retirement savings accounts etc… So only $80 billion (or 4%) out of this $2 trillion dollars is actually covered by the guarantee. Good luck getting your money back, especially before the public start yelling “BANK RUN!” in your branch. What makes this whole thing even worse is that the guarantee first needs to be activated first by parliament.
Bank Run 1933
Bank Run 2007
2. Mortgage Brokers are Owned by the Banks
There is a rift between ASIC and the courts over whether the brokers are agents of the borrowers or the lenders. ASIC has intervened in court proceedings in 2009 arguing brokers are agents of the lenders. The courts disagree. The ramifications are that any deception and fraud caused by the broker cannot harm the lender — also the bank then becomes insulated by poor lending practices by the broker. The senate standing committee on economics in Chapter 7 of the Performance of the Australian Securities and Investments commission”, concluded :
“Payouts of deposits covered under the FCS [The Australian Government’s Financial Claims Scheme] “the courts have found that, barring special circumstances, a mortgage broker was the agent of the borrower and not the lender; the broker’s actions were attributable to the borrower; and the knowledge of a broker could not necessarily be imputed to the lender.”
Why is this distinction important — does it matter? Yes, because the banks (un)surprisingly own the brokers. In the ongoing royal commission into misconduct in the banking superannuation and financial services industry the preliminary background report showed that, Commonwealth Bank owns 100% of Aussie home loans (the largest broker in Australia) and 20% of Mortgage Choice — NAB owns 100% of Choice, Financial and Systems Technology and Professional Lenders Associate Network of Australia — Macquarie holds minority stakes in Connective, Vow Financial and Yellow Brick Road. The report concluded the market share of these bank owned brokers at 70%, as of 2015. This means banks do not risk repercussions from by brokers misbehaving, but gain all the benefit. A win-win for the banks and the borrower loses in the event of fraud or deception.
3. Loan Application Form (LAF) Fraud is Rife
First of all, what is a loan application? To obtain a loan from a broker or a bank, the borrower must fill out and sign three pages of information including income, liabilities and assets. This, according to the borrower, is what is used to determine if a loan is serviceable. Unbeknownst to the borrower, the banker or broker then enters the details into a password protected ‘black-box’ style serviceability calculator — this is where it is approved or rejected. An additional eight or so pages of extra information are then added to the application and faxed to the lender. So that three page document that you signed was really a eleven page contract. For more information refer to a speech from the Mises Institute.
As commissions and bonuses depend on the number and size of the loans given, unscrupulous lenders and brokers can manipulate the serviceability calculator input. The total number of fraudulent applications is unknown, but it is likely in the tens of thousands. Many disgruntled customers have, only after being burned, obtained a copy of their application. According to the Banking & Finance Consumers Support Association (BFCSA) and LF Econmics incomes were exaggerated, assets overstated, jobs changed and in some cases white-out has been used. The highest profile case is of ABC’s Elysse Morgan’s salary being exaggerated by 38%.
A casual search of APH.gov.au yield hundreds of submissions to the senate mentioning LAF fraud. A couple typical recounts are shown below. The existing ramifications are horrifying — pensioners and guarantors losing their homes — lives and families ripped apart — retirements spent in misery.
PETER and ANNE
The impact of Bank Fraud on our lives as a consequence of Bank Products since 2008 has been devastating. Retiring in late 2007 aged 69 and 62 we were not employed, had no superannuation, apart age pension plus some cash savings to live on. We were Asset Rich and Income Poor. CBA approved 4 Low Doc Loans of $1.06m, over our home and assets. CBA suggested we use all our equity to ‘get ahead’. Term of 25 years and Interest Only. These loans were UNAFFORDABLE,UNVERIFIED AND UNSUSTAINABLE and all were based on over 30 False entries on the Loan Applications completed by persons unknown to us. These included False income of $154,000 pa, False assets including real estate and a business we did not own, and so much more. We only signed three pages and did not discover the file ad fraud until three years later. Despite our numerous complaints to the Financial Ombudsman Service [FOS] with proof and evidence in our 2007/08, 08/09 Tax Returns that showed we had retired, were not employed and had NIL income, FOS REPEATEDLY FOUND IN FAVOUR OF CBA, and we quote: -” We found CBA acted responsibly when it advanced the loans and we also found that you appeared to have sufficient income to service the loans.” This is false. There is no right to Appeal under FOS Terms of Reference. We now survive at age 79 and 72 on Age Pension in our caravan, having lost our home and other property under extreme duress to CBA. This is no way to treat decent hard working people which we would have described ourselves as being. The stress has been unbelievable.
I lost everything I owned in 2010 as a result of bad ending practices by Bank of Queensland. I lost over1.3 mil due to this process of an asset grab, 2 houses, all my superannuation, all my savings, which were substantial, and because the houses were cross-collateralised, cross-securitised, something I did noteven understand at the time, I could not save my accommodation or home for my family, and being a single parent this was utterly devastating. Being under such duress, is bad enough but my health deteriorated leading to two operations and then lack of work. So many issues arose due to the pressure put on me financially by Bank of Queensland. It is BOQ’s approval of the loans in the first place that caused my financial ruin. I guess advice is given due to the commissions earned by Bankers along the way. I was unaware that falsified documents were created without my knowledge or consent. Now I understand, that’s how the loans got through to approval. I found this out years later and I thought I had got there on my own merits, but during what transgressed I discovered these LAF’s and saw fraudulent income altering from approx $60,000 per year to $300,000 then $350,000 per year. The whole process of having to go through so much stress is too much to describe. After having 68%equity in my properties. I am broke and finally was evicted to the streets. I was homeless for over 3months and have been in four accommodations since. I am a 63-year-old woman, with no hope of financial recovery, (unless compensation is addressed) after having lost my business, lost my career, my superannuation, and now have no hope of surviving ‘retirement.’ And still I wonder where I will beliving in another 6 months or twelve months. My life has always been unstable since this, and I am having to pay storage for my possessions which means I can hardly live financially, due to nowhere to put them. I also now, due to long term health and heart conditions created by BOQ have been able to obtain or maintain work since and my life in a terrible stage of instability on a daily basis causing total disorganisation of life. It has affected my mind, persona, and mental state and of course my family relationships, leaving me terribly alone in life. I do not live a life, I exist. I have been treated by doctors ever since for depression, something that was never part of my former life. I have contemplated suicide several times since there is no hope for my future.
A very short list of further Reading from senate submissions
Why would Banks Commit LAF Fraud? RMBS – Risk is sold, profits kept
One possible reason for banks pushing for (or not curtailing) the manipulation of LAFs is to alter mortgage ratings — that is, to push a A rated loan to AA and AA loans to AAA. This has an impact on how much banks can on-sell this debt in residential mortgage backed securities (RMBS). These RMBS are bought by investors and superannuation funds. In this way banks hold no risk to the outcomes of these loans. In the event of a housing collapse, banks are not as affected as your superannuation balance.
We are no different! All major Australian banks securitize their loans. All major Australian banks offload even worse debt into CDO’s and synthetic CDO’s.
4. Bail-ins are ‘probably’ Legal
On the 14 February 2018, the Financial Sector Legislation Amendment (Crisis Resolution Powers and Other Measures) Bill 2018 was passed. Of Australia’s 76 senators, only seven were present for the vote. The bill provides APRA with extraordinary powers to liquidate the bank’s assets to pay creditors. In the bill, APRA have the power to take over the Body Corporate of an ADI (i.e., the Bank) during a crisis. Section 13F(1) of the 1959 Banking Act gives APRA power to forcefully buy shares of the ADI at a ‘reasonable’ price and “acquire capital instruments” of that failing bank to pay the bank’s creditors. Capital instruments, while the definition is rather loose, and is not really defined by the 1959 act, according to the CEC this includes deposits.
Green’s senator Peter Whish Wilson was one of the major voices in this topic. He agreed that APRA does have extraordinary powers to forcefully take capital instruments but he denies it can be used on depositors,
“And while this legislation before us today does include reforms to ensure that capital instruments of authorised ADIs and insurers can be written down or converted in accordance with their contractual terms, it does not include the statutory power, APRA, being able to write down or convert the interests of other creditors in resolution, including depositors of a failing ADI—a so-called bailing power.”
He also went onto say,
“Suggestions in submissions that deposits were not protected under the Banking Act 1959, that this bill provides APRA with bailing powers and that these powers are to be extended to deposits are incorrect. They’re absolutely valid concerns to raise, no doubt about it, but the best evidence we’ve had before us is that those concerns are not justified. Depositors are protected by the government’s Financial Claims Scheme, the FCS, which guarantees deposits up to a cap of $250,000 per person per authorised deposit-taking institution.”
Put simply, he believes that since the FCS guarantees the depositors, the bail-in powers are justified.
Bail-in’s have already occurred in Cyprus. A bank holiday, where banks close their doors, disabling all bank transfers and large withdrawals of cash, only to return on Monday with a haircut to their depositors. Australian banks could already be testing their systems. Recently on March 22nd ANZ had so call ‘technical glitches‘ whereby customers could not buy anything over $200 or withdraw any more than $200 for a 24 hour period. A bank-wide glitch with these attributes is highly unlikely. Commonwealth bank soon followed on April 4th this month, leaving customers unable to make purchases or view their statements. This, coupled with the drive to ban $100 and $50 bills to combat the black market ought to raise alarm bells for the ordinary banking customer.
“It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning.”
– Unknown Source
Dozens if not hundreds of points have not been covered and many more secrets lurk underneath Australia’s financial system — the new Australian Financial Complaints Authority starting in July this year (AFCA) being run by bankers — the Goldman Sachs connection to Aussie housing — the “I paid at an 19% interest rate, right now it it 4%” misnomer. Distilling such a deliberately complex and obfuscated banking world is nearly impossible.
So what is the take-home other than replacing the saying “safe as houses” with “banks are bastards” from our vernacular. What you do with your money is up to
the banks you. Do you still trust the government’s $250,000 guarantee despite the $20 billion cap per ADI? Do you trust brokers, knowing that the banks literally own them? Will you check your loan application for fraud (some lucky ones have even got their loans cancelled)? Do you believe a bail-in in is coming and do you really entrust APRA to do the right thing in a financial collapse? If you don’t, please leave a comment below.