Finance - Research Publications

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    Measuring the Adequacy of Retirement Savings
    MURAWSKI, C ; Burnett, J ; Davis, KEVIN ; Wilkins, ROGER ; Wilkinson, N (Wiley, 2018-12-01)
    This paper introduces four metrics for quantifying the adequacy of retirement savings, taking into account all major sources of retirement income. We then apply them to projections of expected future retirement income streams of a representative sample of the Australian population aged 40 and above. We find that omitting one or more pillars of savings significantly biases estimates of retirement savings adequacy. We also find that the four metrics are only weakly correlated with key commonly used indicators of financial well‐being, in particular current income and net worth. Our analysis also points to several shortcomings of the widely used income replacement ratio as an indicator of savings adequacy.
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    Depositor Protection and Bank Liquidity Regulation: Distortions Affecting Superannuation
    Davis, K ; Maddock, R (Wiley, 2019-06-01)
    This article explains why short-term bank deposits, made on behalf of members by institutional superannuation funds, receive a substantially lower interest rate than deposits made directly by individuals and self-managed super funds. We estimate the potential negative effect on the ultimate retirement savings of those members. We show how extending the Financial Claims Scheme to provide coverage to such deposits on a ‘look through’ basis would remove that inequity and should, in principle, remove the rationale for the payment of lower interest rates. We consider the political arguments against extending the scheme and argue that these are of limited merit.
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    Hayne and The Future of the Australian Finance Sector
    Davis, K (The Financial Services Institute of Australasia (FINSIA), 2020-04-15)
    The objective of this paper is to examine the likely consequences of the RC on future Australian financial sector development.
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    Tax-driven Off-Market Buybacks (TOMBs): Time to Lay Them to Rest
    Brown, C ; Davis, K (The Tax Institute, 2020-07-01)
    Tax-driven Off-Market Buybacks (TOMBs) have been used by large Australian companies to distribute cash and stream franking (tax) credits to low-tax-rate shareholders. While small in number, the amounts are significant, involving an estimated cost to government tax revenue in 2018 of around $2 billion. This paper reviews the current and historical evolution of the regulation and taxation of TOMBs and argues that there are fundamental problems with corporate use of TOMBs. These include inequitable treatment of shareholders, government tax revenue costs, inconsistency with good principles of taxation, arbitrary tax determinations and practices which are difficult to justify. Since corporates can distribute cash to shareholders using other, quite standard, capital management techniques, we argue that a social cost-benefit analysis leads to the conclusion that TOMBs should be prohibited.
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    Regulatory changes to bank liability structures: implications for deposit insurance design
    Davis, K (Palgrave Macmillan (part of Springer Nature), 2020-03-01)
    “Tiered” depositor (or deposit insurer) preference as exists in Australia and has been recently introduced in the EU and UK calls into question the merits of ex ante fees for explicit, limited deposit insurance under such arrangements. This paper illustrates how, under such arrangements, the “fair price” of deposit insurance and risks to the deposit insurer are reduced to near zero unless virtually all bank non-equity funding is insured deposits. It is also argued that other regulatory changes affecting bank liability structures and resolution arrangements reinforce that effect, while introduction of “resolution funds” calls into question the rationale for a separate deposit insurance fund. While increased use of collateralised financing complicates resolution arrangements and raises other risks for financial stability, its impact on a “fair price” for deposit insurance under tiered preference is minimal.
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    Financial Product Design, Retail Investor Sophistication and Issuer Incentives: A Case Study
    Davis, K (Wiley, 2020-09-01)
    Many financial products and securities marketed to retail investors involve design features that can make it difficult to understand the risk and return characteristics involved. This paper examines one such security, Convertible Preference Step Up Units (CPUs), issued in Australia by the US Masters Residential Property Fund (URF) at the end of 2017. It argues that an apparently relatively simple design masks significant complexity which would make risk assessment and fair pricing well beyond the capabilities of retail investors. Despite that, analysis of the security design and disclosure documents suggests that it would not fall foul of the financial product banning powers recommended for the Australian Securities and Investment Commission by the 2014 Australian Financial System Inquiry and in draft legislation as at mid 2018. This highlights the difficulties for effective financial consumer protection resulting from the mismatch between financial literacy levels and financial product design.
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    Banking Regulation: Has Complexity Worked?
    Davis, K (Financial Services Institute of Australasia, 2017-12-01)
    This paper examines the Basel Committee’s approach to prudential regulation of bank risk, the recent apparent shift towards less complex regulation, and the reasons for this. The paper provides a brief discussion of the calls for alternative approaches to regulation from some prominent experts who generally dismiss the merits of the ‘risk-sensitive’, complex rules-based Basel approach. After addressing the pros and cons of simpler versus complex regulation, the paper also speculates on the future of financial regulation in light of the ongoing debate about the optimal regulatory structure and degree of complexity.
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    Credit Unions and Demutualisation
    Davis, K (EMERALD GROUP PUBLISHING LTD, 2005-01-01)
    This paper reviews experience with credit union demutualisation to date in the light of increasing discussion about whether demutualisation is a likely (or inevitable) future stage in the evolutionary process. It is argued that the credit union industry faces an inherent demutualisation bias which emerges as the sector develops maturity. Contributing factors include the emergence of professional management pursuing personal objectives, together with the economic realities of technological change, financial liberalisation, increased competition, and prudential regulation based on minimum capital requirements. Demutualisation incentives may partially reflect the unsuitability of the mutual form of governance in larger, more sophisticated financial institutions, but there is also a significant risk of demutualisation based on wealth expropriation motives. Alternative policies and strategies which might avoid this demutualisation bias are examined.
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