The Conversation – Page 43 – Digital Finance Analytics (DFA) Blog

Shadow banking increases the risk of another global financial crisis

Banks may still be evading increased regulation by shifting activities to shadow banking. This system is well established as part of the financial sector, but it provides products that separate an investor from an investment, making it more difficult to evaluate risk and value.

This lack of transparency increases the risk in our financial system overall, making it vulnerable to the types of shocks that caused the 2008 global financial crisis. A current example is the so-called “bespoke tranche opportunity” offered by shadow banks. This is similar to the notorious collateralised debt obligations, packages made up of thousands of mortgage loans some of which were sub-prime, blamed for the global financial crisis.

Shadow banking is comprised of hedge funds, private equity funds, mutual funds, pension funds and endowments, insurance and finance companies providing financial intermediation without explicit public liquidity and credit guarantees from governments. Shadow banking is usually located in lightly regulated offshore financial centres.

In the period leading up to the global financial crisis, a large portion of financing of securitised assets that allowed regulated banks to exceed limitations on their risk-taking was handled by the shadow banking sector.

To this day, shadow banking continues to make a significant contribution to financing the real economy. For example, according to the Financial Stability Board, in 2013 shadow banking assets represented 25% of total financial system assets. While the average annual growth in assets of banks (2011-2014) was 5.6%, shadow banking growth stood at 6.3%.

A comparison of country-based share of shadow banking assets between 2010 and 2014 reveals the largest rise for China from 2% to 8%, while the USA maintains its dominance of the shadow banking markets with around 40%.

The failure of private sector guarantees to help shadow banking endure the global financial crisis can be traced to underestimated tail risks by credit rating agencies, risk managers and investors. Credit rating agencies lack of transparency, when it comes to explaining their methods (often disguised as “commercial-in-confidence”), continue to make it difficult for a third party to check assessments.

An excess supply of inexpensive credit also contributed to risk before the global financial crisis of 2008. This was because investors overestimated the value of private credit and liquidity enhancements.

One of the key challenges for regulators now is to devise rules and standards requiring shadow markets to hold enough liquidity to be sufficiently sensitive to risk. However, where investors and financial intermediaries fail to identify new risks, it is less likely that the regulators – who have fewer resources – will succeed.

Raising capital requirements can limit the capacity of financial intermediaries to expand risky activities, although monitoring overall bank leverage may be better. This is because credit ratings cannot be relied upon in the presence of neglected risks. Similarly, monitoring rising exposure of regulated banks to shadow banking or untested financial innovations can also become part of the regulator’s arsenal.

But there remains a major problem that is unlikely to be resolved by any regulation. Regulation is meant to strike a fine balance between close supervision and allowing space for financial innovation because loss of diversity can create stronger channels of transmission and could expose financial systems to greater systemic risk.

Too little regulation encourages excessive risk taking, while too tight a regulation is bound to strangle the financial sector that provides the lifeline for the economy. Striking such a fine balance is next to impossible in a dynamic, global financial sector.

The Basel Accords, set up to strengthen regulation after the financial crisis, will continue to play a key role in helping manage systemic risk like this. For example regulations can collect data that would be useful in macroprudential regulation, taking action to reduce various risks and remaining alert to unfolding trends on the ground.

Regulators need to heed the trends in shadow banking as part of this, to ensure transparency. However the nature of this sector, the long chains and multiple counterparties with unclear financial obligations, will continue to make the job of the regulator very difficult.

Author: Necmi K Avkiran, Associate Professor in Banking and Finance, The University of Queensland

How personalisation could be changing your identity online

From The Conversation.

Wherever you go online, someone is trying to personalise your web experience. Your preferences are pre-empted, your intentions and motivations predicted. That toaster you briefly glanced at three months ago keeps returning to haunt your browsing in tailored advertising sidebars. And it’s not a one-way street. In fact, the quite impersonal mechanics of some personalisation systems may not only influence how we see the world, but how we see ourselves.

It happens every day, to all of us while we’re online. Facebook’s News Feed attempts to deliver tailored content that “most interests” individual users. Amazon’s recommendation engine uses personal data tracking combined with other users’ browsing habits to suggest relevant products. Google customises search results, and much more: for example, personalisation app Google Now seeks to “give you the information you need throughout your day, before you even ask”. Such personalisation systems don’t just aim to provide relevance to users; through targeted marketing strategies, they also generate profit for many free-to-use web services.

Perhaps the best-known critique of this process is the “filter bubble” theory. Proposed by internet activist Eli Pariser, this theory suggests that personalisation can detrimentally affect web users’ experiences. Instead of being exposed to universal, diverse content, users are algorithmically delivered material that matches their pre-existing, self-affirming viewpoints. The filter bubble therefore poses a problem for democratic engagement: by restricting access to challenging and diverse points of view, users are unable to participate in collective and informed debate.

Attempts to find evidence of the filter bubble have produced mixed results. Some studies have shown that personalisation can indeed lead to a “myopic” view of a topic; other studies have found that in different contexts, personalisation can actually help users discover common and diverse content. My research suggests that personalisation does not just affect how we see the world, but how we view ourselves. What’s more, the influence of personalisation on our identities may not be due to filter bubbles of consumption, but because in some instances online personalisation is not very “personal” at all.

Data tracking and user pre-emption

To understand this, it is useful to consider how online personalisation is achieved. Although personalisation systems track our individual web movements, they are not designed to “know” or identify us as individuals. Instead, these systems collate users’ real-time movements and habits into mass data sets, and look for patterns and correlations between users’ movements. The found patterns and correlations are then translated back into identity categories that we might recognise (such as age, gender, language and interests) and that we might fit into. By looking for mass patterns in order to deliver personally relevant content, personalisation is in fact based on a rather impersonal process.

When the filter bubble theory first emerged in 2011, Pariser argued that one of the biggest problems with personalisation was that users did not know it was happening. Nowadays, despite objections to data tracking, many users are aware that they are being tracked in exchange for use of free services, and that this tracking is used for forms of personalisation. Far less clear, however, are the specifics of what is being personalised for us, how and when.
Data gathering: less complex than we might think. Anton Balazh/Shutterstock
Finding the ‘personal’

My research suggests that some users assume their experiences are being personalised to complex degrees. In an in-depth qualitative study of 36 web users, upon seeing advertising for weight loss products on Facebook some female users reported that they assumed that Facebook had profiled them as overweight or fitness-oriented. In fact, these weight loss ads were delivered generically to women aged 24-30. However, because users can be unaware of the impersonal nature of some personalisation systems, such targeted ads can have a detrimental impact on how these users view themselves: to put it crudely, they must be overweight, because Facebook tells them they are.

It’s not just targeted advertising that can have this impact: in an ethnographic and longitudinal study conducted of a handful of 18 and 19-year-old Google Now users, I found that some participants assumed the app was capable of personalisation to an extraordinarily complex extent. Users reported that they believed Google Now showed them stocks information because Google knew their parents were stockholders, or that Google (wrongly) pre-empted a “commute” to “work” because participants had once lied about being over school age on their YouTube accounts. It goes without saying that this small-scale study does not represent the engagements of all Google Now users: but it does suggest that for these individuals, the predictive promises of Google Now were almost infallible.
Are you an ideal user? EPA/DANIEL DEME
In fact, critiques of user-centred design suggest that the reality of Google’s inferences is much more impersonal: Google Now assumes that its “ideal user” does – or at least should – have an interest in stocks, and that all users are workers who commute. Such critiques highlight that it is these assumptions which largely structure Google’s personalisation framework (for example through the app’s adherence to predefined “card” categories such as “Sports”, which during my study only allowed users to ‘follow’ men’s rather than women’s UK football clubs). However, rather than questioning the app’s assumptions, my study suggests that participants placed themselves outside the expected norm: they trusted Google to tell them what their personal experiences should look like.

Though these might seem like extreme examples of impersonal algorithmic inference and user assumption, the fact that we cannot be sure what is being personalised, when or how are more common problems. To me, these user testimonies highlight that the tailoring of online content has implications beyond the fact that it might be detrimental for democracy. They suggest that unless we begin to understand that personalisation can at times operate via highly impersonal frameworks, we may be putting too much faith in personalisation to tell us how we should behave, and who we should be, rather than vice versa.

Author: Tanya Kant, Lecturer in Media and Cultural Studies, University of Sussex

Weighing up the risks behind the profits of Australia’s big four banks

From The Conversation.

The biggest Australian banks are fairing well in a year of increased pressure to reform from politicians, international events like the Britain’s exit from the European Union and more regulation from the Australian Prudential Regulation Authority (APRA).

A number of interrelated factors have contributed to the relatively strong performance of the Australian banks. For instance, the banks have limited exposure to the types of securities which led to massive losses for their counterparts in other countries. The banks also heavily rely on domestic loans, particularly the low risk household sector, so better lending standards and a proactive approach to prudential supervision by APRA may have contributed.

The Basel III regulatory requirements, brought in after the 2008 financial crisis, emphasise holding an increased amount of subordinated debt, as a measure of market discipline. However all the big four banks are holding less and less subordinated borrowings. More specifically, it declined by more than 50% from 2007 to 2014, according to our calculations.

APRA limits banks’ holdings of higher risk securitised assets, these are loans packaged into securities, to a maximum of 25% of the banks’ loan portfolio. These are high risk if not properly understood or defined, as happened with United States home loans, blamed for the start of the global financial crisis.

When Australian banks calculate bank capital requirements, they need to fully account for securitised assets. This is a rule from APRA that goes beyond international standards, to reflect the risk inherent in these products.

Inter-bank liquidity tightened significantly with all banks increasing their holdings of Exchange Settlements Accounts at the Reserve Bank, this a form of low risk liquidity. Australian banks have lower interbank deposits compared to their Europe and USA counterparts and are also heavily involved in long term wholesale funding and are required to hold more liquid assets including government debt to deal with liquidity. All of this makes Australian banks less risky in times of crisis because spillover effects from other banks are less likely.

The big four CC BY

There has been a significant increase in concentration in the Australian banking industry since the global financial crisis. For example with Westpac and the Commonwealth Bank of Australia taking over St. George Bank and Bank West, respectively.

Following mergers, the big four account for 88% of the Australian banking system assets. This reinforces the idea that the banks are “too big to fail”.

The banks have also moved to more fee generating activities, which increases risk, but to a lesser extent in Australian banks. Data shows between 1998 and 2014, on average, 1.2% greater interest income was generated relative to non-interest income for Australian banks, according to our analysis. However, there is also similar evidence for the top eight publicly-listed Canadian banks. They exhibit on an average, a 2.5% increase in net interest revenue relative to non-interest income over the same time period.

This reinforces that Australian and Canadian banks demonstrated extra ordinary resilience during the credit turmoil in the global financial crisis. The World Economic Forum in 2008 reported that Australia and Canada were among the top four safest banking systems in the world.

Large banks in Australia are active in international markets through direct ownership of foreign based banks and having offshore operations as a source of capital. Deregulation of banking in countries such as the USA, Canada, Australia and many developing countries has opened up new markets for foreign banks. Australian banks’ largest international exposure is to New Zealand, where all big four banks retain sizeable operations.

Although the growing interdependence among international economies and financial markets is certain to continue, the impact of Brexit on Australian banks remains minimal. It remains to be seen in the long-run how Australian banks will weather the international banking/economic developments.

As a last measure of the bank health, we can measure the domestic systemic risk with a methodology based on one used by the official Basel Committee on Banking Supervision. Based on July 2016 monthly data, the big four banks account for 80.38% of the systemic risk in the financial system and the riskiest, from highest to lowest, are the National Australia Bank, the Commonwealth Bank of Australia, Westpac and ANZ.

A history of failed reform: why Australia needs a banking royal commission

From The Conversation.

The move for an inquiry into how banks treat small business customers should not overshadow the ongoing call for a broader royal commission on banks.

Several financial inquries (outlined below) have failed to tackle the growing concentration in the Australian finance sector, or the need to separate general banking from investment banking as the reform process in the United States, UK and Europe is contemplating.

Calls for a royal commission are also underpinned by ongoing reports of misconduct within the banks, summarised in a timeline of bad behaviour below.

Every other major industrial country is at an advanced stage in bank reform, and Australia would be isolated if it did not engage in a similar substantial and structural reform process.
Former Commonwealth Bank chief and Financial Services Inquiry Chair David Murray released the final report of the inquiry in December 2014. Britta Campion/AAP
Financial reform in Australia

1997 Wallis Inquiry

This inquiry has been associated with the “four pillars” policy towards bank mergers (though the inquiry itself did not propose this), and the opposition to any merger between ANZ, CBA, NAB and Westpac. The unwritten policy originated in Paul Keating’s reservations on concentration in the industry. It also led to the CLERP financial reforms announced on fund raising, disclosure, financial reporting and takeovers.

2009 Future of Financial Advice Inquiry

This inquiry stemmed from industry failures, such as Storm Financial and Opes Prime, and explored the role of financial advisers and the general regulatory environment for these products and services. It resulted in the Corporations Amendment (Future of Financial Advice) Act 2012 by the Labor government to tackle conflicts of interest within the financial planning industry. This was subsequently amended by the Liberal government in the Corporations Amendment (Financial Advice Measures) Act March 2016 which softened some of the reforms.

2012 Cooper Inquiry

This was a review into the governance, efficiency, structure and operation of Australia’s superannuation system. It examined measures to remove unnecessary costs and better safeguard retirement savings, claimed fees in superannuation were too high, and that choice of fund in superannuation had failed to deliver a competitive market that reduced costs.

2014 Parliamentary Joint Committee on Corporations and Financial Services Inquiry

This inquiry included proposals to lift the professional, ethical and education standards in the financial services industry. It aimed to clarify who could provide financial advice and to improve the qualifications and competence of financial advisers; including enhancing professional standards and ethics.

2015 Murray Inquiry

This inquiry was intended to provide “a ‘blueprint’ for the financial system over the next decade,” but fell somewhat short of this in not critically addressing the concentration or restructuring of the main banks. While acknowledging the high concentration and vertical integration of Australia’s banking industry the inquiry’s approach to encouraging competition was to seek to remove impediments to its development. The inquiry aimed to increase the resilience to failure with high bank capital ratios, and to reduce the costs of failure, including by ensuring authorised deposit-taking institutions maintained sufficient loss absorbing and recapitalisation capacity to allow effective resolution with limited risk to taxpayer funds.
Demonstraters throw their support behind US Senator Elizabeth Warren’s proposal to reform the Glass Steagall Act. Shannon Stapleton/Reuters
In contrast to the limitations of the Australian reform process, more ambitious reform of the banking sector is being actively considered in the rest of the advanced economies. This is because of widespread international concerns regarding bank monitoring and standards, and the continuing threat of systemic risk and failure.

The objective is to create more effective competition, greater choice, improved governance, more balanced incentives, and responsible behaviour and performance. Central to international reform proposals is the intention of:

shielding commercial banks from losses incurred by speculative investment banking

preventing the use of public subsidies (eg central bank lending facilities and deposit guarantee schemes) from supporting risk taking

reducing the complexity and scale of banking organisations

making banks easier to manage and more transparent

preventing aggressive investment bank risk cultures from infecting traditional banking;

reducing the scope for conflicts of interest within banks

reducing the risk of regulatory capture and taxpayers exposure to bank losses.

Among the ongoing international initiatives to reform the banks are the UK Banking Reform Act, which includes ring fencing retail utility banking from investment banking, due for implementation in 2019.

In the US, the 21st Century Glass Steagall Act, proposed by Elizabeth Warren and supported by Democratic nominee Hillary Clinton, involves separating traditional banks that offer savings and checking accounts from riskier financial services such as investment banking and insurance.

In Europe, the Liikanen Plan, announced in 2012, proposes investment banking activities of universal banks be placed in separate entities from the rest of the group. This has already been taken up widely throughout the European banking sector.

A licence to operate?

The banks have experienced continuous systemic risk (partly of their own making), erosion of their integrity, and a loss of public trust.

The Australian banks are on notice that they need to renew their licence to operate, to reconnect with their sense of duty and the Australian people, and to reconfirm their responsibilities to the Australian economy. This will occur, even if it takes a royal commission to achieve it.

A timeline of banks behaving badly

January 2004: NAB foreign currency options trading

NAB announces losses of A$360 million due to unauthorised foreign currency trading activities by four employees who concealed the losses. Bank risk policies and trading desk supervision prove ineffective. NAB sacks or forces the resignation of eight senior staff, disciplines or moves 17 others and restructures its board of directors. Four traders, including the head of the foreign currency options desk, are subsequently prosecuted and jailed.

2008: global financial crisis takes down Opes Prime, Storm Financial, Allco and Babcock and Brown

The market capitalisation of the stock markets of the world peaks at US$62 trillion at the end of 2007. By October 2008 the market is in free fall, having lost US$33 trillion dollars, over half of its value in 12 months of unrelenting financial and corporate failure. Originating in the toxic sub-prime securities of the New York investment banks, the financial crisis threatens to engulf the economies of the world.

The mythology today is that Australia miraculously escaped the global financial crisis due to the resilience of its regulatory system and the governance and risk management of its banks. The reality is that more than a dozen significant Australian companies went under during the crises (amounting to losses in excess of $60 billion in total). In almost every case at least one of the big four banks were involved in supporting the business models and extending credit to very doubtful enterprises.

July 2012: HSBC money laundering

A US Senate Inquiry discovers that HSBC allowed Latin American drug cartels to launder hundreds of millions of ill-gotten dollars through its US operations, rendering the dirty money usable. The HSBC Swiss private banking arm profited from doing business with arms dealers and bag men for third world dictators and other criminals.

HSBC agrees to pay a fine in excess of US$2 billion to settle US civil and criminal actions. In 2016 it is revealed that UK Chancellor George Osborne intervened to prevent criminal charges against HSBC as this might have undermined financial markets.

2013: Libor rigging

Libor is the international vehicle for settling inter-bank interest rates, and covers markets worth US$350 trillion.

In 2012 it’s revealed that wholesale fraudulent manipulation of the rates has been occurring for years, and throughout the reform process following the global financial crisis. The crisis engulfs many international banks including Barclays, Citigroup, Deutsche Bank and JP Morgan. The irony of the scandal is that Libor was intended as a measure of the state of health of the banking system.

The US Commodity Futures Trading Commission and US Department of Justice impose fines totalling hundreds of millions of dollars on the international banks. In Australia ASIC investigates the role of ANZ, BNP, UBS, and RBS and imposes fines. In 2014 the administration of Libor is transferred to the Euronext NYSE.

2014: Commonwealth Bank financial planning scandal

An ABC Four Corners report reveals CBA customers have lost hundreds of millions of dollars after the bank’s financial advisers recommend speculative investments.

The report describes the sales-driven culture inside the Commonwealth Bank’s financial planning division, with a focus on profit at all cost and a culture that has been built on commissions. The bank is found to have misled potentially thousands of clients.

The bank sets up an internal inquiry and compensation (though is subsequently accused of dragging its feet on compensation). A Senate inquiry into the performance of ASIC during the affair recommends establishing a Royal Commission to examine the banks.

May 2015: Forex manipulation

Following the Libor scandal, it is discovered that traders have been deliberately orchestrating trades in the $US5.3 trillion-per-day global foreign exchange market to their own advantage.

“They acted as partners – rather than competitors – in an effort to push the exchange rate in directions favourable to their banks but detrimental to many others,” says US Attorney-General Loretta Lynch. “And their actions inflated the banks’ profits while harming countless consumers, investors and institutions around the globe.”

US and British regulators fine Barclays, Citigroup, JP Morgan, RBS, UBS, and Bank of America more than US$6 billion in recognition of the scale and duration of the fraud.

March 2016: ASIC targets ANZ for rigging the bank bill swap rate (BBSW)

ASIC commences legal proceedings against ANZ for unconscionable conduct and market manipulation in relation to the bank’s involvement in setting the bank bill swap reference rate (BBSW) in the period March 2010 to May 2012. It foloows up with actions against NAB and Westpac.

The BBSW is the primary interest rate benchmark used in Australian financial markets, administered by the Australian Financial Markets Association (AFMA). It is alleged the banks traded in a manner intended to create an artificial price for bank bills.

March 2016: CommInsure payments scandal

The insurance arm of the Commonwealth Bank comes under media scrutiny for operating along similar lines to the earlier financial planning business.

A company whistleblower reveals the measures the bank is taking to avoid making insurance payouts to policyholders, many of whom are sick or dying.

Author: Thomas Clarke, Professor, UTS Business, University of Technology Sydney

Here’s what happens when you ‘like’ a brand on Facebook

From The Conversation.

Businesses seem obsessed these days with getting you to “like” them on Facebook.

It’s difficult to browse the internet without being inundated with requests to like a company’s Facebook page or with contests and offers dependent on doing so.

From the company’s perspective, a like on Facebook offers a chance to stay “top of mind,” a marketing concept that means a consumer thinks of a specific brand first for a certain product or service by having its promotional messages show up in that user’s Facebook newsfeed. Being liked can also be used as a metric to determine the performance of social media campaigns and other promotional activities. The more a company is liked, the more successful the promotion is thought to be.

But is this really the case? To find out, we surveyed hundreds of Facebook users to dig into the meaning and value of the Facebook like. We wanted to understand the motivations behind liking certain types of brands and discover how that affects interactions between the user and the business. We also sought to understand how this varies depending on brand type (i.e., product makers versus service providers).

Findings from two studies we undertook reveal that what likes say about consumers and what they think about the brands they like is surprisingly varied.
Does Facebook’s ‘like’ button create brand loyalty? Fabrizio Bensch/Reuters
The loyalty of liking

For the first study, we asked 150 Facebook users to tell us about a brand that they currently like on Facebook. We then asked them to describe their motivation behind clicking the like button the first time, their interactions with the brand since liking them and any changes that have occurred in their relationship with the brand since then.

From our results, it seems that the primary reason that consumers choose to like a brand on Facebook is a sense of existing loyalty or obligation to support a brand. The largest percentage of respondents said they liked a brand simply because they felt that’s what a loyal fan should do. The next biggest share seemed to be more focused on getting something in return for their like, such as information, social recognition or entries into contests.

Interestingly, only a relatively small percentage of respondents reported that they “liked” the brand on Facebook because they simply liked (had a positive attitude toward) the brand. This differs from loyalty in subtle ways.

For example, I may have a positive attitude toward the Rolls Royce brand after seeing its products in advertisements, product placements, etc., but I have never owned one of its cars; therefore, I do not feel loyalty or obligation to the brand. This finding shows that some users who may not have purchased products from the brand may still like the brand on Facebook for various reasons.

As for levels of interaction since first liking a brand, over half of users said that while they may have read the brand’s posts or viewed its images in their Facebook newsfeed, they haven’t given any information whatsoever back to the brand. Just one-fifth said they reposted or shared content from the brand, while only 17 percent reported actually commenting on brand posts.

Finally, there was an interesting and contradictory set of instances in which respondents reported no change in the brand relationship but at the same time went on to actually detail positive brand-related consequences.

For example, a respondent initially noted that his relationship with Ford did not change after liking the Ford page, but later noted that he did look at more photos of new Ford trucks posted by the company on Facebook. This could be interpreted as a change in their relationship, because they are interacting more with the brand.

This suggests that generating Facebook likes can indeed have positive outcomes for a company, including having more interaction with its fans.

Are all likes created equal?

While the first study provided interesting results, we wanted to see if there was a statistically significant difference in the way that Facebook users reported interacting with product versus service brands.

While varying types of businesses may all be trying to gain the same outcome, there is evidence that differences exist between how product- and service-based brands interact with potential customers, ones that require distinct engagement strategies.

Just as all brands are not the same, all likes are not equal. It may seem more natural to like a brand that makes an actual product such as a favorite car manufacturer or clothing brand than a service like a plumber, cable provider or pet groomer. That’s because, due to their intangible nature, services can be much more difficult for consumers to evaluate. As a result, service companies need to initiate social interactions with their customers in order to communicate value and set appropriate expectations.

So in our second study, we surveyed 300 Facebook users to explore these differences and discovered some interesting similarities and differences in the way they interact with brands selling products and those offering services.

For example, we found that “fans” of product brands were more likely to report engaging in passive interactions with the company such as by reading or liking posts compared with those of service brands. They also reported a greater intention to make future purchases.

We found no differences between the groups, however, in their intentions to engage in more active Facebook interactions such as sharing or commenting on posts.

Parsing the results

So what does this all mean?

First, it tells us that simply adding up Facebook likes does not necessarily tell us how engaged a customer is with a company’s brand. Many of our respondents liked their respective brands for reasons other than wanting to engage in an interactive relationship. In other words, quantity of likes does not equal quality of relationships.

In addition, brand and social media managers should not automatically assume that new Facebook followers are new to the company. Many of our respondents felt that it was their obligation to a favorite or oft-purchased brand to like that brand on Facebook.

Although passive engagement with followers is perhaps not what gets the most attention when pundits discuss the benefits of Facebook engagement, it still offers benefits, such as becoming more “top of mind.” Brand managers should not always assume that their loudest and most active Facebook followers are the only ones getting the message.

Finally, our research offers different lessons for service- and product-based brands. For the former, feelings of brand connectedness were a strong outcome of Facebook interaction. These companies should perhaps focus more on personalizing their Facebook messages in an attempt to further stimulate and enhance this elevated sense of connectedness.

For product-based brands, although brand connectedness was lower, purchase intention and brand attitude – the positive or negative associations one has with the brand – were higher. To leverage this, these companies should perhaps include more calls to action on Facebook and showcase their latest and greatest product offerings.

So next time you “like” a brand on Facebook, think about what you are telling the company. And whether that’s the message you want to send.

What Britain can learn from how public housing is run in Europe

From The UK Conversation.

The UK government’s so-called “pay to stay” proposals for rent hikes for social housing tenants on higher incomes in England have led to a barrage of criticism, most recently from the Local Government Association, which argued that the bureaucratic costs and complexities involved would erase most income the scheme might generate.

The policy certainly raises concerns. It seems odd and unfair to on the one hand force tenants on higher incomes to pay market rents, while on the other hand offering tenants wishing to take advantage of their right to buy a significant discount to their property’s market value, whether they need it or not. As the LGA argued, it’s questionable how feasible it is to implement the means testing required, especially in the short time frame demanded (by April 2017). How should councils calculate accurate market rents, given the lack of appropriate data? And it seems incoherent for the government to demand a reduction of 1% a year in social rents, while promoting “affordable rent” properties at significantly higher rents than social housing.

But behind these details are bigger questions. If we take social housing to mean housing offered at below-market rents, can and should this ever be justified without means testing? And ultimately, what is the purpose of social housing? Are we to believe that it is only for the very poor until they are able to house themselves on the open market? Or is this approach and the ghettoisation that it entails, as Nye Bevan put it, “a wholly evil thing … a monstrous affliction upon the essential psychological and biological oneness of the whole community”. It bears noting that Bevan also acknowledged that there was still a place to ask higher rents of higher earners.

Britain has wrestled with what it wants social housing to be and how it should be run for decades, alternating between governments of different hues but also with the changing political and economic landscape. But of course other nations operate social housing and have different approaches. What can Britain learn from her European neighbours?

Vienna: using the state to keep rents down

For example, if Bevan were alive today and was disenchanted by the problems of under-supply and erosion of social housing in Britain, he would find a happy berth in Vienna, Austria. The city retains some 220,000 housing units of its own, supplemented by 136,000 units through housing associations, and requires new developments to be of mixed tenures (social rent, market rent, leasehold), with state financial support for developers and projects coming with social obligations.

The result of wide availability of affordable and secure social housing and regular new construction is that the social rent sector in Vienna actually depresses rents in the market sector, reducing the disparity that would otherwise exist and keeping rents generally more affordable. Although there are income thresholds beyond which new tenants may not access social housing, they are quite high (€44,000 for a single-person household, €66,000 for a two-person household), and once a flat is occupied the tenants enjoy security of tenure. All this leads to genuinely mixed communities, none more famous than the Karl Marx-Hof.
Vienna’s Karl Marx-Hoff. Roger Newbrook/Flickr, CC BY
Historically the Netherlands, Sweden and to some extent Germany (in east Germany and the cities) have been associated with this model, although it has come under significant political pressure in recent times.

Market answers to market problems

Such arrangements do not please everyone. In 2009, a Dutch investor succeeded in arguing to the European Commission that state aid (for social housebuilding) should only be used to support accommodation for “disadvantaged citizens”. As a result, the Dutch housing minister agreed to reduce the income threshold for access to social housing from €38,000, above the average, to well below it at €33,000 (although recent negotiations have subsequently reversed the decision).

The European Commission and the OECD in their respective country reports have frequently favoured an approach where rents are always at the market level regardless of whether the tenancy is social or private, with those on low incomes assisted through housing benefit rather than through the offer of accommodation that is cheaper per se. This comes with a clear focus on shaping social housing as something for disadvantaged groups.

If private real estate investors and right-of-centre politicians using competition policy is one pressure on the Bevanite view of social housing, the other comes simply from the fact that demand so often outstrips supply. If the state takes the (on the face of it, sensible) decision to prioritise those in greatest housing need then, de facto, social housing will progressively become the preserve of those at the lowest end of the income spectrum – a process sometimes referred to as residualisation.

This acute shortage of social housing has affected even thriving German cities such as Berlin, where social housing was privatised at a time when lack of cash was the issue not housing supply, leading to acute shortages now when both are being squeezed.

What conclusions can we draw? The debate in England about “pay to stay” is by no means unique, and reflects pressure from private investors, right-of-centre politicians and the European Commission to move away from cross-income social housing. Nevertheless politicians have a genuine choice: housing benefit might be considered a more efficient use of public money in the short term than offering lower rents for everyone living in social housing. But to restrict who may live in social housing so that it becomes the preserve only of the poorest risks concentrating deprivation in estates. It also stops social rents applying downward pressure, through competition with the private sector, on the wider market – which might increase housing benefit expenditure in the long run.

In the end, when the situation is as it is in Britain and a growing number of other countries, the whole debate becomes insignificant when the overwhelming problem is the shortage of housing supply.

Author: Ed Turner, Senior Lecturer in Politics, Head of Politics and International Relations, Aston University

Sydney property market spreads price shocks to other capital cities

From The Conversation.

The Sydney property market creates shocks that spill over to other capital cities, and Hobart is one of the worst affected, new research from the University of New South Wales shows.

The study looked at all eight Australian capital cities. Perth and Darwin’s housing market appeared to be the least affected by shocks originating in other capitals.

“We shouldn’t think of Australian housing markets as being completely isolated. It’s not the case that whatever happens in Sydney doesn’t have any implications for what happens in other housing markets,” says Associate Professor Glenn Otto, the author of the research.

Professor Otto examined data on median house prices and rents, from the early 1980s till 2015, released quarterly by the Real Estate Institute of Australia.

He modelled how variations in capital gains and rental returns in each of the cities affected returns in other cities, over twelve month periods.

“You historically don’t see a big share of Brisbane or Melbourne type shocks spilling over to other markets,” Professor Otto noted.

The spillover effects to different capital city housing markets have been increasing over time since the mid 1990s and account for about 40 to 50% of the variance in forecast property returns to houses and units.

“From time to time you’ll get predictions that we’ve built too many units in the Melbourne housing market and there’s an oversupply and its specific to these markets, so we’ll see some price correction.

“The thing I was interested in was, looking at the historical data, was to what extent that correction won’t be specific to the particular market but also will feed through to other markets,” said Professor Otto.

The research also examined the split between houses and units. Although there wasn’t a huge difference in results for the two different dwelling types, the cities most affected by shocks in terms of units were Brisbane and Hobart and for houses it’s Canberra and Hobart.

Professor Otto is now planning to research what causes these spillover effects and what that can tell us about volatility in Australia’s housing market.

“Australian cities are quite isolated so we wouldn’t necessarily expect people to be picking up and moving between cities in response to changes in property prices, but what we might see is investors thinking about where they want to buy and sell property.

“To that extent investors may be becoming an increasingly important part of the housing market, maybe that’s one mechanism by which we can see this kind of effect of one city being transferred to another city,” Professor Otto said.

The research was funded by an Australian Research Council Linkage Project Grant.

Jenni Henderson, Assistant Editor, Business and Economy, The Conversation interviewed Glenn Otto, Associate Professor, UNSW Australia

How to ditch corporation tax and grow government income at the same time

From The UK Conversation.

Another day, another tax headline. This week, it’s Apple, which faces a €13 billion (£11bn) tax bill in Ireland from the EU. Everyone says there must be a better way to make business pay its way. I support boosting the tax take, too, though not by punishing companies. Earlier this year, I argued in The Conversation that it was time for progressives to think the unthinkable and get rid of corporation tax.

UK politicians remain to be convinced, alas. The All Party Parliamentary Group’s recent report on the global tax system stated:

Some experts have argued that we should stop trying to tax the profits of global companies. We disagree. Governments need a range of taxes to fund public services and corporate profits form one part of that range.

They haven’t recognised that you could bring in much the same revenue for the state by shifting the burden to shareholders. How? By fully taxing company dividends – and reaping the tax proceeds of people selling UK shares that have risen because of companies becoming more profitable after being freed from corporation tax.

But here I want to propose another carrot: charge companies an annual fee to be registered in the UK.

Ever-decreasing corporation tax

Corporation tax brings in around 6% (net of dividend allowance) of UK tax revenues. Former chancellor George Osborne intended in the wake of Brexit to cut UK rates from the current 20% to 15% of companies’ pre-tax profits. Philip Hammond, his replacement, has yet to announce a policy but has signalled he may move in the same direction.

Coupled with further erosions to the corporate tax base due to internet trading and the relocation of intellectual property to more favourable tax regimes, the day is soon likely to arrive when the UK struggles to raise 4% of its tax revenues from corporation tax. What’s this in money terms? Say £20bn (compared to £30bn, net of tax credits, in 2015-16).

So how much corporation tax would be raised on average from UK companies each year if tax revenues fell to £20bn? There are 3.5m limited companies in the UK. But 2m are dormant, so only 1.5m are actively trading. This means that each company would be paying just over £13,000 each year to HMRC on average.

I don’t know the average cost of a company complying with corporation tax each year, but it won’t be far removed from £13,000 (much higher for multinationals, much lower for small companies). And while companies only pay taxes when they make profits, they must make tax returns either way. It’s also worth remembering that many companies are subject to investigations, make appeals and sometimes end up in court – more costs.
Profit-seeking missile. BoBaa22
Plan B

Now suppose we charged an annual fee for the privilege of being a UK company, using a fee scale based on company size. While companies would now be paying to be UK-registered, most would save more by not having to comply with corporation tax.

You could set the fee levels to bring in roughly what the government lost in corporation tax. In addition, the government would still have the revenue from the higher dividends and capital gains I mentioned earlier. In total, the income for the state would have risen substantially.

Collection of this fee would be simple. Companies would pay it when they deliver their confirmation statement (the replacement for the annual return). Penalties and interest would apply if payments were late – another source of money for government.

More information would be required to determine the number of fee bands and the charge per band for these new company fees, but below is a possible structure. Though the rates would of course be much higher for big companies, these are probably still comparable to what they spend on dealing with their tax affairs.

I’ve spoken to a few people who run or are involved with companies about how they would react to a system like this. What was their reaction? They’d bite your hand off to sign up, basically.

And a final thought. If the UK abolished corporation tax, where do you think Apple, Google and others would consider relocating given the problems the EU has created for Ireland?

Author: Grahame Steven, Lecturer in Accounting, Edinburgh Napier University

New Grattan research shows what is at stake in the superannuation debate

From The Conversation.

The Federal Government’s plan to wind back superannuation tax breaks would create a fairer superannuation system more aligned to its purpose of providing income to supplement the Age Pension, according to new Grattan Institute analysis. It would also contribute to budget repair.

The analysis shows how either of the reform packages proposed by both major parties would be a big step in the right direction. It explores how the current system provides much larger benefits to those with such ample resources that they will never qualify for an Age Pension. And it shows how the proposed changes would affect them – and pretty much nobody else.

As they debate the Coalition government’s proposals to wind back tax breaks on superannuation, politicians on all sides can do three big things: create a better and fairer superannuation scheme; take an important step towards repairing the Commonwealth budget; and show that our political system still works.

Both main parties have laid out their preferred reforms to super tax concessions. While they agree on all but the details, they are yet to strike a deal. Our new research shows what is at stake.

A better, fairer, super system

First and foremost, the proposed reforms to superannuation announced in the 2016 budget are about making super better, and fairer.

Tax breaks should only be available when they serve a policy aim. The purpose of super identified in the budget and due to be defined in legislation is to provide income in retirement to substitute or supplement the Age Pension. Super tax breaks don’t fulfil this purpose when they benefit those who were never going to qualify for an Age Pension in the first place.

The plans of both the government and the ALP would be big steps towards aligning super tax breaks more closely with their purpose. They would trim the generous super tax breaks enjoyed by the top 20% of income earners – people wealthy enough to be comfortable in retirement and unlikely to qualify for the Age Pension.

Retirees with large superannuation balances will start paying some tax on their superannuation savings, but still pay much less tax than wage earners on lower incomes. For a small proportion of women with higher incomes later in life, the changes will reduce their catch-up contributions. Yet the changes will reduce the tax breaks far more for wealthier old men.

Claims that the budget changes will affect many low and middle-income earners are wrong. Our research shows the changes will affect about 4% of superannuants, nearly all of them high-income earners who are unlikely to access the Age Pension. Nor are the proposed changes retrospective. Many reforms affect investments made in the past, and no-one suggests they are retrospective. Rather, the changes will affect taxes paid on future super earnings, and entitlements to make future contributions to super.

Any plausible combination of the packages on offer would make the super system fairer. At present, someone in the top 1% of income earners can expect to receive nearly three times as much in welfare and tax breaks from super in their lifetime as an average income earner. The government’s changes would trim some of these excesses: the top 1% would instead receive just twice as much as low or average income earners. And by targeting tax breaks that go to the top 20% of income earners, neither side’s plan would see much of an offsetting increase in Age Pension spending.

An unsustainable tax system for seniors

Decisions by the former Coalition Government to abolish taxes on superannuation withdrawals in 2007 and radically increase the amount senior Australians could earn before paying income tax have dramatically reduced the tax bills of older Australians.

These changes are one of the main reasons why households over the age of 65 (unlike households aged between 25 and 64) now pay less income tax in real terms today than they did 20 years ago. At the same time, the workforce participation rates and incomes of seniors have jumped. Generous super tax breaks have been funded by deficits. The accumulating debt burden will disproportionately fall on younger households.

Tax breaks to older Australians are also a major cause of the increase in the “taxed nots” identified by Treasurer Scott Morrison. The number of older Australians not paying any income tax has increased from three in four in 2000 to five in six today. The rise of these “taxed nots” coincides with the introduction of the Senior Australian Tax Offset in 2000, and tax-free super withdrawals in 2007.

Repairing the budget

The increased cost of services and reduced taxes per older household explain in large part why the Commonwealth budget is in trouble. For eight years, budget deficits have persisted at about 2 to 3% of GDP, and the future looks little better. The returned Turnbull government is putting a priority on budget repair, now described as a “massive moral challenge” by the Prime Minister. Winding back some of the tax breaks given to older Australians during the happier times of the mining boom is an obvious step.

The government’s super package would save the budget at least A$800 million a year. Alternative proposals by the ALP, which broadly supports the Coalition’s reforms, and then goes further, would save more than A$2 billion a year. Should Treasurer Morrison seek a deal with the ALP or the Greens, any “concessions” will mostly improve the budget position.

Nor is the Turnbull government likely to find more attractive opportunities for budget savings. Unlike most of the government’s savings measures, changes to super tax breaks are broadly popular. Electorates more likely to be adversely affected by the super changes – that is, those with more old and wealthy voters – tended to swing less to the ALP at the last election than other electorates. And a survey before the election showed that the proposals had more support amongst those most likely to be adversely affected.

A test for our political system

Even after the reforms, super tax breaks will still mostly flow to high-income earners who do not need them, and the budgetary costs of super tax breaks will remain unsustainable in the long term. Further changes to super tax breaks will be needed in future. But agreeing to the super package now before the Parliament would be progress in the right direction. And there is a broader issue at stake.

Super is only the first of a number of difficult choices that will come before the Parliament as government seeks to promote economic growth in a sluggish global economy, and bring the budget back under control. There is no easy road to these ends that will keep everyone happy all the time. Pragmatic compromise will be critical.

The proposed changes to super tax breaks are built on principle, supported by the electorate and largely supported by the three largest political parties. If we cannot get reform in this situation, then our political system is in deep trouble. In coming weeks, our MPs have the chance to show how government in Australia can still change the nation for the better.

Authors: John Daley, Chief Executive Officer, Grattan Institute; Brendan Coates, Fellow, Grattan Institute; William Young, Associate, Grattan Institute

Australian small businesses could be stretched by changes to commercial credit cards

From The Conversation.

Small to medium enterprises (SME) are increasingly relying on commercial credit cards to finance their operations, because payment terms for the businesses they supply are stretching out. But if the Reserve Bank of Australia (RBA) goes ahead with plans to include commercial cards in the new caps on interchange fees, SMEs will be even more hard pressed to make ends meet.

These interchange fees are a major component of the Merchant Service Fees that all Merchants pay on accepting payment cards. Commercial cards are however operated on a different business model to consumer credit cards. For example, commercial cards have much higher credit limits than consumer cards and the flow of interchange revenue from spending on these cards, to the card issuers (usually banks) enables them to take more credit risk and hence extend more credit to SME’s.

The Australian Small Business and Family Enterprise Ombudsman, Kate Carnell has said that, “the majority of small business failures are by far a result of poor cash flow, with slow payments from customers or clients, a leading factor”. She claimed that “the big end of town are delaying payments to those that can least afford it; small-to-medium sized enterprises”.

One example of this is major food businesses Fonterra and Kellogg’s stretching payment terms for suppliers from 90 days to 120 days. The consequences of this are twofold; firstly the large corporations will hold onto money for longer and get positive returns on that, while the SME’s are forced to use expensive overdrafts at banks to fund their ongoing business.

A survey by a UK company MarketInvoice earlier this year, found Australia was the worst offender for late payments, ranking even below countries such as Mexico. Some jurisdictions have however been moving in the other direction; since March 2013 the maximum payment terms in the European Union have been 30 days, unless an agreement is made in writing by both parties, in which case the maximum is 60 days.

To overcome the cash flow challenges that go on along with longer payment terms, many SME’s use commercial credit cards to pay their suppliers and hence take advantage of the up to 55 interest free days (all the major Australian banks issue commercial cards and the interest free periods are up to 55 days) on these cards. SME’s are using commercial credit cards for more than just their cash flow.

These cards can be used to partly finance payments to suppliers, particularly where an SME has struggled to get finance from a bank. SME’s are hence more likely to rely on commercial cards as a source of finance than are larger businesses, which typically can raise capital through a variety of means like bank loans, share issues or corporate bonds.

The reduction in interchange which the RBA is imposing may cause issuers, including banks, to cut costs by reducing credit risk, which would mean less credit extended to SME’s, via commercial cards. Issuers could also find this segment of the credit card market less attractive and hence be less willing to offer this type of credit card to SME’s.

The RBA’s reasoning for including commercial cards ín the proposed maximum 0.80% interchange cap, is there’s not enough evidence to suggest that issuers will stop providing these cards under the cap. The RBA however accepts that “this may involve the introduction of fees on these cards and/or the reduction of the interest free period”.

According to the Australian Bureau of Statistics, as of June 2015, the SME sector employed 68% of Australians and it generated 55% of total income from industry. As larger businesses look to increase the number of days before they settle their invoices from SME suppliers and these businesses face pressure to pay their employee’s wages and utility bills on time, the value of commercial payment cards is all the more obvious.

Less commercial payment cards; with less credit offered on them, at higher interest rates, could well be another unintended consequence of the RBA’s intervention into the payments system.

Author: Steve Worthington, Adjunct Professor, Swinburne University of Technology