Tag Archives: bank

Repeal regulation requiring ratings

The credit rating agencies (Moody’s, Fitch etc) have been accused of inflating the ratings of companies after their ratings underestimated the default risk during the 2008 financial crisis. First, it is strange to accept ratings expressed as letters (AAA, AAB etc) when the market participants care about the default risk and the letter codes are based (or so the rating agencies say) on the default risk. Remove the coarse letter codes and require the rating to equal the estimated probability of default over the next n years. The probability should have enough significant digits and should report standard errors. It should not vaguely claim that the default probability is somewhere between x and y. The potential for rating inflation and later justification of wrong ratings is reduced by transparency.
A good punishment for the rating agencies that also increases transparency is to repeal any regulation requiring the use of their ratings. Currently, banks are only allowed to invest in “investment grade” bonds, where the grade is determined by the credit rating (agencies). The purpose of the regulation should be to prevent banks from taking too much risk, so the variable of interest is the default probability, not the rating. Replace the requirement of “investment grade” rating with a requirement that the predicted default probability over the next n years must be below x. The obvious question is who predicts this probability.
The restriction to investing only in bonds predicted to be unlikely to default is similar to the vague requirement of due diligence. The investing bank must be able to justify its decision later if the investment turns out badly. The bank must use all available sources of info (maybe even rating agencies) and state of the art methods to predict default probabilities for bonds it intends to invest in. To prevent the bank from manufacturing a justification ex post to excuse its bad decision, the methodology it uses to predict must be provably unchanged from the time of investing. This can be achieved by sharing the methodology with the regulator.
There is a concern that business secrets leak from the regulator to competitors. This can be eliminated by encrypting the info that the bank gives the regulator, with the bank keeping the key. The encrypted info can even be publicly posted on the web. If concerns arise, the bank can later be ordered to give the key to the regulator (or even to the public), who can then verify the info received in the past. If the bank claims to have lost the key, the punishment should be the same as for the lawbreaking that the key is intended to verify.

Inept Australian banks

aving experienced banks in the US (I was a customer of Wachovia, Wells Fargo and Bank of America), I thought that those were the lower bound on the competence level of financial institutions. I was wrong.

In Australia I first opened an account in the Bank of Queensland in the shopping centre Toowong Village. That evening I tried to access their online banking and, experiencing difficulties, called their customer service. After some conversation they told me that the bank employee opening my account had neglected to enter some ID details into their computer system. Next day I opened an account at the Commonwealth Bank office in the University of Queensland.

A few days later I received a debit card with the wrong name on it, despite the employee opening my account having looked at my passport while typing in the details. I tried to complain through their online banking system and received a reply that I should call. When I called, they told me I should go to the bank branch. At the branch they agreed to send me a new debit card with the correct name. A few days later I received a debit card with the same wrong name. Then I tried to open an account at the credit union called bankmecu at their office in the university. They asked for my employment contract, which no other bank had asked for. When I said I did not have it with me, they didn’t ask me to come back later with the contract, but suggested I open an account at the ANZ bank next door. Obviously, bankmecu is a nonprofit and does not want customers. So I went to ANZ and opened an account there.

After about three weeks of waiting, I received a letter with the PIN for the ANZ debit card. The letter had been sent to the wrong city district and post code, but the right street address, so it somehow found its way to me. After a month, the debit card still had not reached me. When it finally arrived, my name was spelled wrong.

I did not receive the dividends of one stock I bought through ANZ Etrade. I contacted ANZ through their online banking. The customer service told me to contact Etrade, who told me to contact Computershare. A week later Computershare told me to contact their New Zealand office. A week after that the New Zealand office replied that they had sent a dividend cheque to my address. I replied that no cheque had reached me and asked them to deposit the dividends to my bank account. Some days later they agreed. A week later the money has not reached me.