Transcript of Question & Answer Session Remarks to the CIFR Financial Market Developments

This discussion relates to research presented at the CIFR Financial Market Developments Symposium.

Hi Kingsley Jones, Jevons Global. My question is for Guy Debelle, you mentioned cross border flows and I think you gave some emphasis to that and also how gross flows in your opinion were more important than net. In the context of some of the presentations, particularly the ones that are talking about new methods of data analysis like network analysis, what insights might you offer on your experience of knowing the plumbing on data sources that may be available that aren’t being used, it would be really interesting.

I mean Eliza is using one of them, and in fact it was in Jenny’s paper as well. So the BIS banking statistics have really developed a lot over the last few years, so there’s a lot more information, a number of people aren’t aware there’s a lot of information which isn’t in those statistics you actually have to be very careful in asserting what exactly they’re about. For instance, broadly speaking there’s no derivative transactions in there so … And the way they measure some of the banking flows in terms of identifying which jurisdiction they’re actually coming out of there’s some issues around there. As best as I can tell there’s only one person in the world who probably gets anywhere close to fully understanding and he’s the guy at the BIS who puts it together who Eliza actually knows, but … And even then I’m not entirely sure that he fully appreciates it all the time. But so that’s one very fertile ground, there’s potentially a fair bit more coming down the pipe with requirements that trades have reported in trade repositories there’s potentially going to be a lot of data, now who gets access to what chunk of that data is still very much an open question but as I said going forward there’s potentially going be a lot more data to work with than there has been historically. Beyond that it’s actually really a fairly painful exercise of going in and digging around jurisdiction by jurisdiction really and then you get issues of how compatible they are across jurisdictions. I mean there’s a large project underway which has got a number of global institutions that you’ve got between the IMF and BIS at least I think maybe that’s not exactly right, but basically it’s the Data Gap Initiative which identifies that indeed there’s a lot of data gaps and we have a much better sense at least of what the gaps are now than we did previously and so there’s a process in trying to address some of those data gaps how long that process will actually take to bear fruit I don’t know. So I’m not sure I can point you to anything sort of outside the banking statistics and as I said the only thing I’d say around the banking statistic you need to be careful in understanding what’s in those data and what’s not.

There’s been a … Ross Clare of the Association of Superannuation Funds of Australia … There’s been mention of the gross net cross border flows, an issue that has been a topic of some discussion is the flows overseas from superannuation funds and on the other side banks relying on inflows of debt finance to help with their operations. I was just wondering if any of the panellists was game enough to provide some commentary on that? Is it good, bad, doesn’t really matter, will be covered off in submissions to the Financial System Inquiry? But it is a topic of particular interest to the superannuation sector and I think the banking sector and would be very interested in any perspectives any of the panellists could bring to that topic.

Look it’s clearly, when the commentariat talk about the Financial System Inquiry and they talk about, they waffle on about superannuation in the banking system and this funding the economy thing, the issue really is that in very broad terms the superannuation system possibly has about the lending capacity of another big Aussie bank sitting in it at the moment and the mentality, the plumbing and wiring and the skills that are needed to apply that money to funding small businesses and indeed even home buyers and major businesses just doesn’t seem to be there. And so you’ve got a very intellectually stimulating series of very sort of big issues, the demographic shifts that are happening, the fact that we don’t have a non-bank domestic corporate bond market, all of these pieces all go together into a very chunky piece of work for the Financial System Inquiry to work out what levers have to be pushed, what could the government do if anything to reorient the at least in part the thinking of the superannuation system that it does have a role here it needs to be gathering the sorts of assets that back not sexy equity style returns in accumulation but the long term promises that are going to be owed to people in retirement that want inflation-adjusted, regular cash flows in order to replace their working pay cheques with something in retirement, so all of these issues are pretty weighty as is the need for viable interest rate projects to be properly funded etcetera and it is an interesting issue that while the – I don’t want to talk over Guy’s space here – but you know while the reliance on wholesale funding has …

‘Use’, sorry, is the word. You don’t rely on it, you use it.

… and yet the superannuation system seems to be … Will have to export and is exporting considerable amounts of capital to find homes for that. So look there’s most definitely issues that I would think the Financial System Inquiry will look at.

Another thing that’s interesting, if you’re in a global financial system and they are going to be cross border flows someone’s got to be doing them. So I always try to say well we don’t like these cross border flows, well if you want to be in a global financial system and if you want to have portfolio diversification and cross border portfolio diversification well guess what someone’s actually got to do that. So you are going to see financial flows. Now you can argue whether that’s structure is right or not or exactly appropriately configured that’s for sure but there are going be cross border flows and as I said part of the issue about looking at gross flows you see that flows going both directions. But as I said if we are in a global financial system there will be cross border flows with different intermediaries doing that intermediation and that’s the world you’ve basically signed yourself up to.

If I may venture to comment on the end of that, the answer just may be well what’s efficient. It may be that superannuation funds are very good at making equity style investments and are not good at making loans, banks are good borrowing money off-shore and on-shore and on-lending it. If that is functioning efficiently it’s fine and we don’t have to have you know patriotic based distortions of funding and general considerations of prudence for the banking sector come into plan, are you excessively dependent on overseas funding or short term funding or the like, but that’s been managed for a long time.

Good afternoon James Waugh from the Commonwealth Bank. Probably just touching on I guess the super or the non-bank lending sector potentially, is any of this sort of … We looked at Eliza’s paper that looked at bank flows and the influences of the regulatory environment skewing towards investment grade sovereign debt, are you seeing or are you in a state of shock what non-bank lenders are doing in this space and is that becoming an influence in any of the data you’re observing, I think your comment before was that combined superannuation is about the size of one major bank, but is that globally an influence now in the flows we’re seeing and is it something the regulators are looking at?

So there’s a whole chunk of stuff on shadow banking. Shadow banking interests basically only exists in two countries which is in the US and in China, most popularly at the moment at least. So if you want it … However you want to define, leaving aside Jeremy’s super question which is important but it completes the way the rest of the world thinks about shadow banking. I mean it doesn’t really exist outside the US and China and so the question you ask is no because it doesn’t exist outside US and China. And the Chinese stuff is all within China and the US shadow banking sector doesn’t do a lot of cross border stuff either. But then I think the question is how do you think about … I mean the superannuation industry is an intermediary right, it’s taking of people’s money and investing it in something, it’s no different conceptually to an intermediary as the banking system is, but as Jeremy says it does intermediate in incredibly different way than the banking sector does. Does that mean it needs to start heading down some of these other lines that you see I think that’s an important question to think about. I mean coming out form the sort of stuff I look at if you think about liquidity management which we spend a hell of a lot of time thinking about that in the banking system, but up until fairly recently the superannuation system hadn’t thought about liquidity management at all because if you’re in accumulation mode it’s irrelevant. When you start moving into a more mature mode that you’re talking about than liquidity management becomes much more of a first order issue, banking system’s had plenty of experience, might not have learnt from that experience but it’s had plenty of experience with liquidity management over a few centuries, but that’s something which has only really just entering the psyche of superannuation.

That’s a really good point I think sometime over the next decade and maybe again this is something the Inquiry can look at is just doing a little tweak to … And again this is a bit of a nudge but basically saying to the super system okay well you guys ought to be thinking about getting the sorts of assets that you can reverse repo to the RBA and we’re going to, because that’s effectively a borrowing transaction super funds aren’t allowed to do that at the moment, and so you’d open up that pathway and that would again incentivise banks to hold assets that they don’t really hold that much of so that they would then be able to tap the sort of liquidity that ADIs can tap so that would have dual that probably would do something positive for the system in easing that liquidity pressure, but it would also force super funds to hold some of those sorts of assets so again that could be something that the Inquiry could look at.