Finance Market Update - 3 December 21
Everyone will have an old-fashioned bank account and a crypto wallet. In this fortnights update we talk about how banks will soon offer cryptocurrency services and why new capital regulations might put more pressure for banks to raise rates.
Banks to offer crypto
If you don’t already have a crypto wallet you probably will probably be offered one soon by an Aussie bank.
Earlier this year in an update we talked before about ‘Central Bank Digital Currencies’ (CBDC’s) which is a digital version of a standard government / central bank issued dollar ‘AUD’ or currency and how they are being thought about and developed right now.
With the likes of CBA, the biggest bank in the country about to start crypto banking you can be sure other banks will be moving into this futuristic and lucrative domain soon.
Both retail banks and central banks will be working with crypto in the near future.
It is nearly impossible to avoid seeing talk about Bitcoin and crypto when researching the future of banking, even the current state of banking.
The articles on wild thousands of percent profits made on tokens or digital pictures can really turn heads, and many (older) people will dismiss this as a bubble or denounce it compared to existing financial institutions, but there is very real value in this new age digital mechanisms of value exchange.
In a previous update we have also talked about the same differences between new and old banks and what makes banks different.
For the most part right now, it is not much.
But that might be about to change with the acceleration into crypto by banks. That is a strong differentiation and at the core level of banking can open up very innovative technology solutions for their customers.
If you need proof crypto is going to become a big deal in Australia just look at how CBA has partnered with Gemini, a New York based crypto exchange founded by the Winklevoss twins (famous from the Facebook movie which claims Zuck stole their idea).
When Square bought Afterpay in a crazy thought I said that businesses might not need banks in the future and this partnership is broadly in line with the tech > banks + crypto trend.
Together CBA and Gemini are going to make holding, buying, and selling crypto more accessible and easier for many everyday Aussies, and when the RBA which is Australia’s central bank and the biggest bank in the country are getting into crypto, it might be time to start paying attention.
CBA partnering with Gemini is just the start of crypto going mainstream in Australia.
Holding more money
The banking regulator the Australian Prudential Regulation Authority (APRA) is going to start making banks hold more money to offset risks in lending, and that could be another force putting pressure on banks to raise rates.
This change in ‘capital requirements’ could make banks more adverse to lending to certain kinds of loans, for example investors that have interest only repayments, and small business loans.
To APRA those kind of loans can be deemed riskier compared to owner occupied home loans and the more of these risky loans banks make the more money they will need to hold to offset the risk.
Holding more money to offset risks means banks can’t lend that money which reduces their margins and profitability.
To manage the pressure on margins and profit it is likely this could contribute to banks having to raise rates. Not anytime too soon, but this is another pressure point adding to rising rates.
APRA has only just released a new sort of working paper tabling new changes and there will be a period of consultation and review but it all points to more requirements on banks to hold more money. I am flagging this here because it is the start of even more capital controls for banks which will continue to erode their profitability which means they will need to increase their interest rates and fees.
The riskier loan types as categorised by APRA are investor loans with interest only repayments and small business loans.
For investors, it has long made sense to just pay interest on the loan and get the tax benefits from negative gearing and wait for the property to appreciate in value, so having higher interest rates was less of a concern. But that might become less tolerable for the banks lending the money as holding more capital against those loans will cost them margin and profit.
For small businesses, a long neglected and arguably underserviced area by banks, the imposition that lending to them is riskier is not ideal, or necessarily fair. Even though technically losses can be higher, small business deserves more than a fair go, not only because of the virus crisis but because they are the backbone of the economy.
We talked before about the cashflow gap that many small businesses face and if banks deem lending to small business more risky and raise rates and fees it will disadvantage them, almost unnecessarily.