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Australia's latest banking scandal is silly and suggests a widespread lack of skills in the financial sector.

BIScom Subsection: 
Editorial Staff

On 19th April, Australia's newest national bank, Members' Equity Bank a.k.a. ME Bank, announced that it was to increase its interest rates on existing home loans, with effect from 19th April. Then it made a silly error. Given that the banking sector in Australia is under the most intense scrutiny and that it would be logical to assume that, if at any time, this is the time where banks will double, triple even quadruple check their actions, the stupidity of the error raises a serious question: is the financial sector in Australia simply under-skilled and, therefore, unfit for purpose?

Incredibly, ME Bank, it was announced at the beginning of May, applied an incorrect starting date for the new interest rate. The notice is in ridiculous English (it jabbers on about "basis points" instead of simply stating the old and new percentage rates) which means, simply, that it was not designed for its consumers.

ME’s standard variable rate for existing owner-occupier principal-and-interest borrowers with an LVR of 80% or less, will increase by 6 basis points to 5.09% p.a. (comparison rate 5.11% p.a.^).

Variable rates for existing investor principal-and-interest borrowers will increase by 11 basis points, while rates for existing interest-only borrowers will increase by 16 basis points.

It's just a year ago that ME Bank decided that it would no longer offer interest-only home loans and loans which had an "LVR" or Loan-to-Value Ratio of more than 90%. That was a year after the bank was described by industry commentator Judith Sloan writing in http://catallaxyfiles.com as "Australia's worst performing bank" after a report in the Australian Financial Review.

ME Bank is interesting: it's owned by 29 so-called SuperFunds which have agreed to use the bank as their sole bank. Whatever its merits, its accounting is like the circular breathing used for Mongolian Throat Singing: the funds book the value of their shares (which they, in concert with their Big Four accountants, set - there being no trading in the shares) into their own balance sheets. Some might say that that's OK because auditors are involved but Australia's auditors are repeatedly under fire from, inter alia, ASIC for a mix of incompetence and corruption. Sloan argues "The industry super funds are booking the supposed gain in the capital value of ME Bank (based on a dubious methodology employed by PwC) through their P&L accounts and thereby artificially inflating the returns of the members." Isn't that the essence of a documents-based Ponzi scheme where the fraudster says what the fund is worth and accounts for what he says are increases in value, on paper, but never actually hands over the money? This is not to allege that ME Bank is a Ponzi scheme - but, equally, that is not to say that there are no other worrying factors.

ME Bank, which was established as Super Member Home Loans in 1994, is owned by 30 industry superannuation funds. Since its inception all profits have been churned back into the business. It had AUD860 million in total equity capital at 30 June, 2015.

The AFR pointed out that the bank needed more capital to fund growth - essentially, its member funds were tapped out after another demand was made. It is also possible that they had reached the limits of prudential investment in a single project, but that is a question we raise, not an answer we give.