Central Banks and Supranationals
4 min read 11 Feb 19
Summary: Last week’s conclusion of the Royal Commission into misconduct in Australia’s financial services sector has rightfully made international headlines. After digesting the 1011-page report, investors breathed a sigh of relief and pushed Australian bank shares sharply higher. The Commission’s findings and recommendations have been well-documented in the popular press (here), and the debates around them and their implementation will likely continue for months if not years, so we won’t rehash them all here. Instead, we focus on the implications for investors in Australian bank bonds and some important reminders credit investors should take away from the saga. So what are the key takeaways?
Following this report and the likely adoption of its recommendations, Australian banks will have a considerable amount of work to change compliance and remuneration policies, among other things. They will tackle these in time, while facing a stronger regulator. Combined with the Commission’s decision not to force the banks to separate banking, insurance and wealth management divisions, and not to require major changes to lending standards, bond investors should feel positive about the Final Report. More broadly, the scandal should also remind investors of the risks of herd mentality and the importance of good regulation, supervision and governance at financial institutions.
As you can see from the chart below, both bank equity and debt rallied after the findings were released.
This blog post was co-authored by Dave Covey & Patrick Golling.
The value of investments will fluctuate, which will cause prices to fall as well as rise and you may not get back the original amount you invested. Past performance is not a guide to future performance.