The most personally exciting aspect of the Gillard Government’s banking reforms relates to their backing of an idea that I have been pushing for a long time now that could provide the technological architecture to facilitate true account portability.
The Government announced that they are appointing Bernie Fraser, who as the former head of the RBA and Treasury, and current Chairman of Members Equity Bank, is an outstanding choice, to examine, amongst other things, “the potential need for a Central Account Registry to oversee all banking details and account information, under appropriate supervision.”
I was made aware of the fact that the government was likely to endorse this innovation, which in addition to permitting account portability has potentially quite profound ramifications for regulatory risk management, prior to the announcement of the package on Sunday.
If you want to read my full exposition of this proposal, click here. Alternatively, a summary is enclosed below:
“I would propose that the Commonwealth establish a central electronic ‘clearinghouse’ of all residential, personal and business credit originated in Australia. For simplicity’s sake, let’s call it the National Electronic Credit Register (NECR).
If you think about it, credit is effectively an over-the-counter (OTC) contract. There is no centralised exchange novating the relationship between the parties as we see, for instance, with companies listed on the stock exchange, or with listed derivatives and futures contracts. In the latter cases, the ASX acts as a both a contractual and informational intermediary. NECR’s role would be purely around the aggregation and transmission of information between parties.
As we discovered during the GFC, one of the profound shortcomings associated with OTC markets is that they effectively eviscerate transparency. The only people who know what is going on are the counterparties themselves. This causes significant ‘information asymmetries’ that destroy confidence, and is one of the principal explanations for the evaporation of liquidity in many markets during the crisis.
In Australia, APRA and the RBA do collect a great deal of ex post facto credit data. But this is normally aggregated information and does not tell them much about the individual loan-by-loan risks. It also does not necessarily furnish them with any insights into the ex ante, or before the event, credit assessment standards employed by lenders.
The establishment of NECR would presumably be very straightforward. All Australian lenders have electronic lodgement processes and there are standardised communications formats that allow lenders to communicate with one another (in the mortgage market this is known as LIXI (or the “language of lending”)).
APRA, the RBA, and ASIC (to cover the non-banks) could, therefore, simply insist that any licenced entity involved in the creation of personal, residential or business credit sends NECR a simple data packet upon the settlement and, notably, discharge (ie, repayment) of every single loan. The lender’s transmission to NECR would contain, amongst other things:
1) A unique loan identification code (so that NECR can track the loan);
2) The loan amount;
3) The loan type (eg, 3 year fixed)
4) The interest rate;
5) The settlement/discharge date;
6) The collateral value (eg, property value);
7) The collateral address; and
8) Importantly, a nationally-defined debt serviceability standard measuring the ability of the borrower to meet the repayments on the loan (all lenders use these in one form or another, so it should be easy to define a standard metric that they have to supply, which in turn would allow us to make cross-sectional comparisons of ex ante credit quality for the first time).
NECR might also provide the architecture required for the transmission of broader customer information between counterparties. That is, it might help resolve the current bottlenecks around customers ‘switching’ accounts between institutions, the manifold difficultes associated with which stifle competition. I am told that one of the chief obstacles to switching is the absence of the necessary electronic linkages between institutions involved in the deposit-taking and/or credit creation business. NECR could be employed as a centralised hub that any institution could use to transfer customer data to another once they are instructed to do so by a customer.
My good friend Professor Joshua Gans has suggested something similar in the context of switching with his proposal for a universal customer ID.”
