APRA Archives - Page 2 of 2 - the patient investor

August 10, 2014

Australia’s Major Banks Say The Murray Enquiry Used The Wrong Numbers… | Business Insider

From Greg McKenna:

The AFR reports ….the Australian Bankers Association CEO Steven Munchenberg said the banks are “concerned that if some of the statements in the interim report – that Australia’s capital is middle of the road, that housing is a systemic risk – are allowed to remain unchallenged and are then taken out of context that is going to cause us a lot of future grief”.

Munchenberg says the Inquiry hasn’t calculated the capital ratios correctly.

“The approach was simplified and didn’t take into account the complexities and nuances of how capital is determined in Australia, including deductions required by APRA and some of the areas where APRA has adopted a more conservative approach, and as a result underestimated the amount of capital in Australia relative to overseas”, he told the AFR.

Forget the nuances and comparisons to the plight of other banks. Australian banks need to almost double their capital and adopt a more conservative approach to home mortgage lending if they are to withstand future shocks. 3 to 5 percent capital against total exposure doesn’t get you very far. The history of low mortgage failures over the last 3 decades, in an expansionary phase of the credit market, is unlikely to be repeated during a contraction.

July 27, 2014

World wakes to APRA paralysis | Macrobusiness

Posted by Houses & Holes:

Bloomberg has a penetrating piece today hammering RBA/APRA complacency on house prices, which will be read far and wide in global markets (as well as MB is!):

Central banks from Scandinavia to the U.K. to New Zealand are sounding the alarm about soaring mortgage debt and trying to curb risky lending. In Australia, where borrowing is surging, regulators are just watching.

Australia has the third-most overvalued housing market on a price-to-income basis, after Belgium and Canada, according to the International Monetary Fund. The average home price in the nation’s eight major cities rose 16 percent as of June 30 from a May 2012 trough, the RP Data-Rismark Home Value Index showed.

“There’s definitely room for caps on lending,” said Martin North, Sydney-based principal at researcherDigital Finance Analytics. “Global house price indices are all showing Australia is close to the top, and the RBA has been too myopic in adjusting to what’s been going on in the housing market.”

Australian regulators are hesitant to impose nation-wide rules as only some markets have seen strong price growth, said Kieran Davies, chief economist at Barclays Plc in Sydney.

…“The RBA’s probably got at the back of its mind that we’re only in the early stages of the adjustment in the mining sector,” Davies said. “Mining investment still has a long way to fall, and also the job losses to flow from that. So to some extent, the house price growth is a necessary evil.”

…The RBA, in response to an e-mailed request for comment, referred to speeches and papers by Head of Financial Stability Luci Ellis.

…The RBA and APRA have acknowledged potential benefits of loan limits “but at this stage they don’t believe that this type of policy action is necessary,” said David Ellis, a Sydney-based analyst at Morningstar Inc. “If the housing market was out of control and if loan growth, particularly investor credit, grew exponentially then it’d be introduced.”

What do you call this, David:

Reproduced with kind permission from Macrobusiness

September 18, 2013

APRA: Australian banking system ‘more sound’

Interesting choice of words:

[Australian Prudential Regulation Authority chairman John Laker] said the Australian banking system was more sound than it was five or six years ago.

“We know that because we managed to negotiate the financial crisis without the fallout for our financial systems,” he said.

“The banking sector is holding more capital, it’s holding higher quality capital, it is holding more liquid assets.”

What he did not say is that Australian banks are financially sound and holding enough capital — and we are unlikely to hear that before banks double their current “improved” capital and leverage ratios.

August 19, 2013

Bloated business of banking | The Australian

Adam Creighton discusses the likelihood of taxpayers being asked to bail out too-big-to-fail banks.

In Australia that probability is now 100 per cent. Standard & Poor’s, a ratings agency, gives Australia’s biggest four banks a AA rating explicitly because taxpayers will provide “extraordinary support” to their creditors in any crisis, an implicit guarantee worth more than one-quarter of the four’s annual profits.

Since 1995, the big four Australian banks’ assets, reflecting a global trend, have ballooned from 94 per cent of Australia’s national income to $2.86 trillion, or 190 per cent.

July 2, 2013

Australian banks: Who’s been swimming naked?

Margot Patrick at WSJ reports that the Bank of England is enforcing a new “leverage ratio” rule:

Top U.K. banks regulator Andrew Bailey told lawmakers that the requirement for banks to hold at least 3% equity against total assets “is a sensible minimum,” and that those who fall short must act quickly, but without cutting their lending to households and businesses.

The Bank of England’s Prudential Regulation Authority on June 20 said Barclays and mutual lender Nationwide Building Society don’t meet the standard and gave them 10 days to submit plans for achieving it.

I hope that their Australian counterpart APRA are following developments closely. Both UK and Australian banks are particularly vulnerable because of their over-priced housing markets. And while the big four Australian banks’ capital ratios appear comfortably above 10 percent, these rely on risk-weightings of 15% to 20% for residential mortgages.

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

June 30, 2013

Barclays’ threat on lending under fire | FT.com

Anne-Sylvaine Chassany at FT writes of the UK’s Prudential Regulation Authority:

The PRA irked banks when it included a 3 per cent leverage ratio target in its assessment of UK lenders’ capital health. It identified shortfalls at Barclays and Nationwide, the UK’s largest building society, which have projected leverage ratios of 2.5 per cent and 2 per cent respectively under PRA tests.

Outrageous isn’t it? That banks should be asked to maintain a minimum share capital of three percent against their lending exposure — to protect the British taxpayer from future bailouts. My view is that the bar should be set at 5 percent, although this would have to be phased-in over an extended period to prevent disruption.

I hope that APRA is following developments closely. The big four Australian banks are also likely to be caught a little short.

May 6, 2013

Are Australian banks really sound?

Business Spectator reports:

In a statement APRA chairman John Laker said that, in implementing the Basel III liquidity reforms, the authority’s objectives were to improve its ability to assess and monitor ADIs’ liquidity risk and strengthen the resilience of the Australian banking system.

“APRA believes ADIs are well-placed to meet the new liquidity requirements on the original timetable and doing so will send a strong message about the soundness of the Australian banking system,” he said.

If you repeat misinformation often enough, people will believe it is true. Australian banks face two risks: liquidity risk and solvency risk. Addressing liquidity risk does not address solvency risk. Australian banks report risk-weighted capital ratios which are misleading if not downright dangerous. Risk-weighting encourages banks to concentrate exposure in areas historically perceived as low risk, such as residential mortgages. When all banks are over-weight the same asset, the risk profile changes — as Eurozone banks discovered with government bonds.

If we remove risk-weighting, as proposed in the US Brown-Vitter bill, the four majors in Australia would have capital ratios of 3 to 4 percent. Not much of a capital buffer in these uncertain times.

November 8, 2012

Australia: Did APRA assume a bailout in its stress test?

Houses and Holes at Macrobusiness.com.au makes an important point regarding the Australian mortgage insurance sector towards the end of this article:

Stress Test

John Laker, head of APRA, is out today with a speech in which he announced the results of a recent APRA stress test of Australian banks. Here is the scenario and the results:

The ‘what if’ scenario was built around a further deterioration of global economic conditions, with a disorderly resolution of the fiscal problems in Europe triggering a dislocation in global debt markets and a sharp downturn in the North Atlantic economies. China is assumed to be unable to fully offset the decline in its exports with domestic spending and, as a result, the rate of growth of the Chinese economy slows sharply. The implied reduction in Chinese demand for minerals lowers commodity prices significantly, with a consequent deterioration in the exchange rate for the Australian dollar. Domestically, households and businesses respond to the external shock by reducing consumption and investment expenditure. As a result, GDP falls and unemployment rises substantially, which feeds back into rising defaults and sharp falls in house prices and commercial property prices.

In this scenario, the key macroeconomic parameters for Australia used as the basis for the stress test were:

a sharp (5 per cent) contraction in real GDP in the first year;

a rapid rise in the unemployment rate to a peak of 12 per cent;

a peak-to-trough fall in house prices of 35 per cent; and

a fall in commercial property prices of 40 per cent.

This is a tougher stress test than the one APRA undertook in 2010. The projected economic contraction is deeper and more prolonged, with a weaker recovery and a longer period before return to growth. The rise in unemployment is higher and the impact on the housing market therefore more pronounced; there is a greater peak-to-trough fall in house prices. This time, the stress test also addressed liquidity consequences. The dislocation in global debt markets results in the largest banks being unable to access global funding markets for six months. The consequence is more intense competition for deposit funding and an increase in funding costs, weighing on lending margins and acting as a drag on revenues.

Remember, this is a hypothetical. It is in no way a forecast or a central expectation for the course of the Australian economy. Rather, the stress test was intended to test the boundaries of ‘severe but plausible’, especially given the current relatively strong position of the Australian economy. Benchmarked against recent industry-wide stress tests in other countries, the severity is confirmed by the fact that the GDP shock is more than four standard deviations based on the annual volatility of GDP in Australia since 1960; the shock was one-to-three standard deviations in other major tests. As a test of plausibility, the macroeconomic scenario would be comparable with the actual experience of the United Kingdom, United States and some European countries during the global financial crisis.

Although the macroeconomic scenario was tougher than in the 2010 exercise, the actual mechanics of the stress test were largely the same. The advanced banks were asked to apply the macroeconomic scenario in their own models and provide their assessment, in quite granular detail, of the impact on the ratings migration of assets, default behaviour, profitability and capital. After analysing this information, APRA then determined a common set of portfolio-specific risk measures that were applied to the banks’ loan portfolios.

Reflecting the severity of the scenario, the advanced banks all reported significant losses, driven by much higher bad debt expenses. Credit loss rates in aggregate were comparable with the experience in the early 1990s, although not quite as high as the peaks then reached. As expected, total losses were larger than in the 2010 exercise.

Despite the deterioration in labour market conditions and the projected stress on the housing market, residential mortgages, which account for nearly half of the advanced banks’ credit exposures, contributed only a fifth of total losses. The mortgage portfolio alone was not the principal driver of losses, a reflection of the structure of the domestic mortgage market as well as the general tightening in lending standards following the crisis. Losses were realised across a range of loan portfolios, particularly corporate, SME and commercial property portfolios. Losses on these business portfolios were more front loaded, materialising earlier in the scenario than losses on residential mortgage portfolios, which tended to lag the increase in unemployment.

The main results of the stress test for the five advanced banks, taken as a group, are as follows:

none of the banks would have failed under the downturn macroecnomic scenario;

none of the banks would have breached the four per cent minimum Tier 1 capital requirement of the Basel II Framework in any year of the stress test;

and the weighted average reduction in Tier 1 capital ratios over the three-year stress period was 3.8 percentage points.

This is a very positive result. It reflects the efforts of the advanced banks to strengthen their Tier 1 capital positions since the crisis began through ordinary equity issues and profit retention. It leaves these banks well positioned to transition to the new Basel III capital regime.

Well…bonza! But just one question. What did the stress test assume about the Lenders Mortgage Insurance sector (LMIs)? They are those hapless gents sitting on wafer thin capital buffers but carrying the risk of all the banks’ riskiest mortgages.

If the APRA stress test assumed a smooth and uninterrupted flow of payouts for losses from the LMIs to the banks then it also assumed their defacto nationalisation. In reality, under extreme stress, there is a very serious risk is that the LMIs will be wiped out and their relationships with the banks will descend into legal chaos as the two parties aim to survive at the cost of one another. You may recall that the biggest losers on Wall St in the GFC were insurers (think AIG), not banks.

In short, in the kind of scenario painted by APRA, it is quite possible that the government would have to step in and the post-nationalised LMIs would continue to pump a river of public cash into the banks via a backdoor bailout (ala AIG in the US).

So, if we are to take this excellent stress test result seriously, we really need to know what APRA assumed about the LMIs. Hmm?

Reproduced with thanks to Houses and Holes at Macrobusiness.com.au