Big banks may need $41b more capital, UBS says

From Chris Joye at AFR:

UBS’s more likely scenario of a 3 per cent TBTF capital buffer combined with an increase in the average mortgage risk weight to 25 per cent gives a total capital shortfall of $41.1 billion for the majors.

Risk-weightings, especially for residential mortgages are coming under increased scrutiny. The big four banks have a major advantage in this area, employing risk-weightings as low as 15% to 20% based on their historical record of low defaults. But that history includes a credit boom lasting more than 2 decades which fueled an unprecedented rise in housing prices and is unlikely to be repeated in the future.

APRA alluded to this problem in its second FSI submission:

..APRA also highlighted the problem with the major banks’ predicting their own probabilities of defaults on home loans in the absence of a recession in 23 years and the much lower levels of housing leverage in 1991.“The Basel Committee is currently reviewing the validity and reliability of risk weights generated under the IRB approach [used by the majors] in response to studies showing that the variability … is much greater than could be explained by differences in underlying risks,” APRA said.

Only when the tide goes out do you discover who’s been swimming naked. ~ Warren Buffett

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