Former prime minister Tony Abbott has strongly condemned the performance of financial sector regulators, suggesting they should be sacked and replaced by “less complacent” people.
With increasing attention on the apparently inadequate performance of the Australian Securities and Investments Commission (ASIC), Abbott raised the question of what the regulators had been doing as the scandals had gone on.
“We all know there are greedy people everywhere, including in the banks,” he told 2GB on Monday. “But banking is probably the most regulated sector of our economy. What were the regulators doing to allow all this to be happening?”
Abbott said his fear was “that at the end of this royal commission we will have yet another level of regulation imposed upon the banks when frankly what should happen is, I suspect, all the existing regulators should be sacked and people who are much more vigilant and much less complacent go in in their place.”
He said the analogy was, “yes, punish the criminals but if the police are turning a blind eye to the criminals, you’ve got to get rid of the police and get decent people in there”.
Meanwhile Malcolm Turnbull, speaking to reporters in Berlin, defended refusing for so long to set up a royal commission, although he said commentators were correct in saying that “politically we would have been better off setting one up earlier”.
Turnbull said that by taking the course it had the government “put consumers first”.
“The reason I didn’t proceed with a royal commission is this – I wanted to make sure that we took the steps to reform immediately and got on with the job.
“My concern was that a royal commission would go on for several years – that’s generally been the experience – and people would then say, ‘Oh you can’t reform, you can’t legislate, you’ve got to wait for the royal commissioner’s report.’
“So if we’d started a royal commission two years ago, maybe it would be finishing now and then we’d be considering the recommendations … With the benefit of hindsight and recognising you can’t live your life backwards, isn’t it better that we’ve got on with all of those reforms?”
Turnbull dismissed Bill Shorten’s call for the government to consider a compensation scheme for victims by saying this matter was already in the commission’s terms of reference.
Among the reforms it has made, the government highlights giving ASIC more power, resources and a new chair.
But Nationals backbencher senator John Williams, who has been at the forefront of calls for tougher action against wrongdoing in the financial sector, told the ABC that ASIC has got to be “quicker, they’ve got to be stronger, they’ve got to be seen as a feared regulator.
“That is not the situation at the moment,” he said.
He had sent a text message to Peter Kell, ASIC deputy chair, a couple of nights ago “and I said, mate, Australia is waiting for you to act”.
Asked how the culture within ASIC could be changed, Williams said, “I suppose you keep asking them questions at Senate estimates, keep the pressure on them, keep the message going on with the management of ASIC regularly.
“As I have said to the new boss [chair James Shipton], you’ve got to act quickly, you’ve got to be severe, you’ve got to be feared. If you’re not a feared regulator, people are going to continue to abuse the system, do the wrong thing without fear of the punishment”.
He welcomed the increased penalties announced by the government last week.
The chair of the Australian Competition and Consumer Commission (ACCC), Rod Sims, while declining to comment on ASIC, said he agreed with Williams “that you really do have to be feared. And frankly I’d like to think the ACCC is.
“I won’t comment on others but you want people to be really watching out – watch out for the ACCC, watch out that you don’t get caught because if they catch us it’s going to be really dire consequences. And I think we’ve got that mentality,” he told the ABC.
Updated at 4:30pm
In an interview on Sky late Monday, Finance Minister Mathias Cormann admitted, “With the benefit of hindsight, we should have gone earlier with this inquiry.” This was in stark contrast with his colleague, Minister for Financial Services, Kelly O’Dwyer, refusing to make the concession when she was repeatedly pressed in an interview on Sunday.
Author: Michelle Grattan, Professorial Fellow, University of Canberra
Auction activity remains relatively steady across the combined capital cities this week, with a total of 1,746 homes taken to market, returning a success rate of 63.1 per cent increasing from last week’s final clearance rate which saw the lowest weighted average result so far this year at 61.7 per cent (1,915 auctions).
The results segregated by property type showed that units outperformed houses this week, with 65 per cent of units selling, while the combined houses returned a 62.2 per cent success rate; conversely the house market accounts for a higher proportion of overall auction activity.
Melbourne saw a total of 905 auctions take place this week, returning a 63.8 per cent preliminary clearance rate, which was slightly higher than the 62.4 per cent over the week prior when 873 auctions were held.
The number of homes taken to auction across Sydney fell this week, with 551 held. The lower volumes returned a higher week-on-week clearance rate with 66.4 per cent of properties reportedly selling, increasing on the week prior’s 61.5 per cent final clearance rate when volumes were higher (795).
The performance across the smaller auction markets continues to be quite varied, with Tasmania returning the highest preliminary clearance rate of 75 per cent, while only 19 per cent of auctions were successful across Perth.
Given the range of issues already exposed by the Royal Commission into Financial Services Misconduct, including selling loans outside suitable criteria, fees from advice not given and other factors; we need to ask about the impact on the profitability of the banks and so share prices.
And all this is in the context of higher funding costs already hitting.
A number of international investors and hedge funds have placed shorts on the major banks, signalling an expectation of further falls in share price ahead, but the majors have already dropped by around 15% in the past year.
The recent RBA chart pack contained this picture on profitability. Bad and doubtful debts are very low, thanks to low interest rates. But that may change if rates were to rise, and “liar loans” are wide spread. There is no good data on the potential impact so far.
It is important to remember the Productive Commission recently called out that :
A quick survey of the banks from last year show that the return on equity – a measure of absolute profitability – or ROE range from 14.5% for CBA, 10.3% from NAB, 10.9% for ANZ and Westpac was 13.3% while AMP was 11.5%.
Looking overseas, US based Wells Fargo, which happens to be a key Warren Buffett holding, was 11.5% , the Bank of America earned less than 6.8% and Lloyds earns 4%. Barclays was -2.7%. In fact among western markets, only Canadian banks come close to our ROE’s – for example of Bank of Montreal was 11.3% but then they have the same structural issues that we do.
Data from news.com.au from 2016 shows the relative profit to GDP across several countries. Australia Wins.
That means 2.9 per cent of every $100 earned in Australia ends up as bank pre-tax profit, compared to the US and UK at $1.2 and 90 cents per cent respectively.
China is the highest after Australia at $2.80, Sweden $2.60 and Canada $2.30.
The Australia Institute also pointed to public money being used to secure the banking sector.
“Excessive profits provide a drag on the economy and hurt consumers who pay higher margins on bank products. The Reserve Bank found the big four banks enjoy an implicit government subsidy worth up to $4 billion dollars a year,”
The Royal Commission revelations have the potential to impact the market value of the banks as reflected in their share prices, and also raises questions about the financial stability of the entire system in Australia. APRA, in particular and the RBA have been (over?) focussed on financial stability, as the recent Productive Commission draft report highlighted.
Regulators have focused on a quest for financial stability prudential stability since the Global Financial Crisis, promoting the concept of an unquestionably strong financial system.
The institutional responsibility in the financial system for supporting competition is loosely shared across APRA, the RBA, ASIC and the ACCC. In a system where all are somewhat responsible, it is inevitable that (at important times) none are. Someone should.
The Council of Financial Regulators should be more transparent and publish minutes of their deliberations. Under the current regulatory architecture, promoting competition requires a serious rethink about how the RBA, APRA and ASIC consider competition and whether the Australian Competition and Consumer Commission (ACCC) is well-placed to do more than it currently can for competition in the financial system.
Over the next few days we will try to assess the potential impact ahead, from higher loss rates, lower fee income and potential fines and penalties. Then of course, there is the question, will these additional costs be passed on to investors and shareholders, or simply recovered from the current customer based by higher fees.
We expect banks to start making provisions for the revenue hits ahead. ANZ, for example, said their RC legal bill will be around $15 million. CBA made a $200 million expense provision for expected costs relating to currently known regulatory, compliance and remediation program costs, including the Financial Services Royal Commission.
To start the journey lets look at the relative performance of the banks’ share prices over the past year. Westpac share price is 16.8% lower compared with a year ago.
ANZ is down 16% over the same period
CBA has fallen 15.9% in the past 12 months.
and NAB’s share price dropped 14.2% over the same period.
In comparison, the ASX 200 is up 0.25% over the past year.
Among the regional banks, Bendigo Bank has fallen 16.6%
Bank Of Queensland has fallen 11.7% over the past year.
In contrast Suncorp is 0.74% higher
and Macquarie Group was up 19.5%. They of course have more than half their business offshore now.
Next time, we try to size the revenue hits ahead, and think about what that may mean for the banks and their customers.
Mr Turnbull and his senior colleagues have spent the past two years arguing against a royal commission into the financial sector, although some of his backbenchers were campaigning vigorously for a royal commission.
ABC Insiders did a nice montage yesterday showing the evolution of the spin, from initially vehemently resisting a commission.
The PM finally called a royal commission late last year and shocking revelations have emerged as it has been taking evidence.
This was after an appalling interview with Kelly O’Dwyer who has been the Minister for Revenue and Financial Services, since July 2016.
Public hearings into the financial advice sector continued on Friday as BT Financial Advice general manager Michael Wright continued giving evidence.
Counsel assisting Rowena Orr grilled Mr Wright on the remuneration practices of Westpac/BT and whether its planners could be considered professionals when they are incentivised with sales targets.
Mr Wright said that while advisers are not viewed as ‘professionals’ by Australians in the same way that doctors are, the perception is changing for the better.
Furthermore, he said, the ‘balanced scorecard’ for Westpac advisers will be changed to include more non-financial factors.
“We’ll be setting peoples’ remuneration off their qualifications, based off their competency as an adviser, based off the standards that they go through with advisers,” he said.
“We will not set people’s remuneration – fixed or variable – based off how much money they write,” Mr Wright said.
However, Ms Orr pointed out that one-fifth of the ‘balanced scorecard’ for the company’s advisers will include financial measures.
“We debated this long and hard. The reality is we want to have a viable, sustainable, professional business. We’ve not a charity,” he said.
“We considered removing revenue from the scorecard and having 100 per cent non-financials,” Mr Wright said.
From 1 October 2018, Mr Wright said, BT will be ending grandfathered commissions for superannuation and investments – although risk commissions will remain (as per the Life Insurance Framework).
When it comes to the advice business he oversees, Mr Wright said he would be “delighted” if BT moved to a completely fee-for-service model.
However, with his “BT product provider hat on”, he said there is a first-mover disadvantage to being the first institution to end grandfathering completely.
Property investors are more likely to support foreign investment in the property market than people without such investments, we have found in a survey of Sydneysiders’ views about foreign real estate investment. Perhaps more surprising, would-be buyers, who might be expected to worry about demand pushing up prices, were also more likely to be supportive than those who were not looking to buy a property.
We reported previously that over 60% of Sydneysiders do not want more individual foreign investment in residential real estate in Sydney.
Within this context, we surveyed almost 900 people in Sydney to examine the relationships between home ownership, real estate investment, housing stress and views about foreign investment. Our analysis shows:
Those who have property market investments are more likely to be supportive of foreign investment than those who don’t have such investments.
Comparing those who are in housing stress to those who are not in housing stress, there are no significant differences in the two groups’ beliefs about foreign real estate investment.
One group with a strong interest in Sydney’s real estate market are local real estate investors. We were interested in whether those with investment properties and those without differed in their views about individual foreign investment in residential real estate.
We found those with investment properties were likely to be more supportive of foreign investment in Sydney’s housing market than those without investment properties.
For example, 29% of the investment property owners agreed that “foreign investors should be able to buy properties in Sydney” compared to 17% of those without investment properties. They were similarly supportive of foreign students being allowed to buy properties while studying in Australia, with 32% agreeing with this compared to 19% among those without investment properties.
Property investors were more positive about the government’s regulation of foreign investment as well: 28% agreed it has been effectively regulated, compared to 16% of those without investment properties.
House hunters’ views
House prices in Greater Sydney have increased rapidly over the last decade and household debt has grown too.
We might expect people who are actively looking to buy a property to be particularly concerned about foreign real estate investment, as they may feel they are competing against and being priced out of the market by foreign buyers.
For this reason, we asked survey participants whether they were actively looking to buy a property. In response, 23% said they were. Of this group, 31% agreed that foreign investors should be able to buy properties in Sydney, compared to 15% of those not looking for a property.
Housing-stressed households’ views
Increasing mortgage and rental costs are a source of discontent within Sydney’s population. Measurements of housing stress are disputed, but are nonetheless used to give a comparative value to how hard it is for a household to meet housing costs. A ratio of housing costs to income of 30% and above is a common benchmark for housing stress.
Using this measure, we found that more than half (52%) of our survey participants were experiencing housing stress. Another 33% spent less than 30% of their income on their housing and 15% indicated they did not know.
Comparing those over the 30% threshold with those who spend less of their income on housing, we found no significant differences in beliefs about foreign real estate investment.
Other drivers of concern
We found those who are active in the local real estate market remain concerned about foreign investment in general.
If housing stress levels do not lead to differences in attitudes to foreign investment, as our findings suggest, cultural or other factors may be at work in the general discontent about foreign investors in Sydney.
We need to investigate further how being active in the housing market informs Sydneysiders’ views about the right of foreign investors to use real estate as a vehicle for growing capital.
Sydneysiders with equity in the housing market, such as home owners or investors, might view foreign buyers pushing up housing values as positive. As a result, they might fear that restricting foreign investors might depress their assets.
If this type of shared commitment to real estate investment were present across the domestic-foreign investor divide, this could reinforce the idea of treating real estate as an asset class at the global scale, while cultural tensions between foreign and local investors remain at the local level.
Authors: Dallas Rogers, Program Director, Master of Urbanism. School of Architecture, Design and Planning, University of Sydney; Alexandra Wong, Engaged Research Fellow, Institute for Culture and Society, Western Sydney University; Jacqueline Nelson, Chancellor’s Postdoctoral Research Fellow, University of Technology Sydney
The latest US data shows mortgage rates in the US continue higher. And more to come.
Here is the latest commentary from the Mortgage Rates Newsletter.
Let’s clear one thing up before we begin. Freddie Mac, MBA, and Ellie Mae all noted new 4-year highs in mortgage rates this week. They are all technically wrong. This has to do with the way their data is collected and/or averaged. And while I have no doubt that they are accurately conveying the results of their data collection efforts according to their methodology, there is a more accurate way to do things. Specifically, we can track actual lenders’ rate sheets every day.
Even if we take an average of that daily data, we still find that rates aren’t quite back to 4-year highs just yet. Depending on the lender, these occurred on one of the days near the end of February. In fact, some lenders’ rates from March 21st are still higher than today’s. Are we talking about very big differences between now and then? Not at all! But if we’re going to talk about rates hitting 4-year highs, we might as well be precise about it.
One thing everyone can agree on is that today’s rates are higher than yesterday’s, which in turn, were higher than Wednesday’s. The lion’s share of that move higher happened yesterday, but today’s underlying bond market movement suggests there’s a bit more pain yet to be priced-in to the average lender’s mortgage rate sheets.
The preliminary auction results are in from Domain. Once again volumes are down, and clearance rates will settle lower than last year. Also, it looks like more property is being withdrawn.
Brisbane sold 15 of 38 reported auctions from 67 scheduled. Adelaide ran 31 auctions from the 69 listed, with 23 sold. Canberra ran 25 auctions from 31 listed with 14 sold.
The finance sector unmentionable hits the proverbial fan. Welcome to the Property Imperative Weekly to 21st April 2018.
We start this week’s review of the latest finance and property news with the latest from the Royal Commission into Financial Services Misconduct.
After the shameful disclosures relating to poor lending practices, bad advice, misaligned incentives and poor regulation last time; now they have been looking to the nether regions of financial planning and advice. And guess what, the same behaviours are evident again, in spades. Bearing in mind 48% of the $4.6 billion annual revenue from wealth management goes to the big four banks and AMP, they were forced to admit their mistakes in public. You can watch our separate video on the detailed findings “More Cultural Badness from The Finance Sector”. But here are a few highlights.
AMP apologised unreservedly for the misconduct and failures in regulatory disclosures in the advice business as revealed in the Royal Commission and Chief Executive Officer, Craig Meller will step down from his role with immediate effect.
The Australian Bankers Association admitted that the issues raised have been unacceptable and do not meet the high standards the community rightly expects of banks. And the Treasurer announced significant increases in penalties ASIC can impose. The government will increase penalties under the Corporations Act to: “For individuals: 10 years’ imprisonment; and/or the larger of $945,000 OR three times the benefits; For corporations: the larger of $9.45 million OR three times benefits OR 10% of annual turnover. “The Government will expand the range of contraventions subject to civil penalties, and also increase the maximum civil penalty amounts that can be imposed by courts, to the maximum of: the greater of $1.05 million (for individuals, from $200,000) and $10.5 million (for corporations, from $1 million); or three times the benefit gained or loss avoided; or 10% of the annual turnover (for corporations). “In addition, ASIC will be able to seek additional remedies to strip wrongdoers of profits illegally obtained, or losses avoided from contraventions resulting in civil penalty proceedings.”
These increases are right, as before the financial impact of poor behaviour was very low. However, do not be misled, changing penalties will not address the fundamental cultural, structural and economic issues which have combined to deliver a finance sector which is simply not fit for purpose.
We need to remove incentives from the advice sector (mortgage brokers included). Actually we need unified regulation across credit and wealth sectors (the current two regimes are an accident of history).
We need structural separate and disaggregation of our financial conglomerates. We need a realignment of interests to focus on the customer – which by the way is not at odds with shareholder returns, as customer focus builds franchise value and returns in the long term.
We need cultural reform and new values from our finance sector leaders. And Executive Pay should come under the spot light.
We need a reform of the regulatory structure in Australia, because they are captured at the moment at least by group think, and their interests are aligned too closely to the finance sector. This must include ASIC, APRA, RBA and ACCC. All have bits of the finance puzzle, but no one is seriously accountable.
But there is a more fundamental issue. We have relied on overblown credit, and superannuation sectors, as a proxy for high quality economic growth. This inflated housing and lifted household debt and GDP. We need a fundamental economic reset, because reforming financial services alone won’t solve our underlying issues.
The Government, who resisted the Royal Commission, has now also indicated they are receptive to expanding the scope and term of the inquiry, which in my view should include regulation of the sector, and the macroprudential settings in place. So write to the Commissioner, and your MP advocating a broader scope.
Finally, on this, it is worth noting that former deputy prime minister Barnaby Joyce went with a full-monty confession. “In the past I argued against a Royal Commission into banking. I was wrong. What I have heard … so far is beyond disturbing”, he tweeted. Joyce is now a backbencher, and free with his opinions. It’s another story with current ministers. They continue trying to score political points over Labor, which had been agitating for a royal commission long before it was set up.
My suggestion is this financial sector mess is so significant, that both sides of politics should set aside party differences and focus on the main game. Because what happens next will fundamentally determine the future economic success of the country, no less. If we continue with the current sets of assumptions we will run the country into the ground as the debt burden becomes unbearable, and savings for retirement are devalued and destroyed. It’s that serious.
Turning now to more immediate economic news, the latest lending stats from the ABS underscores that the “Great Credit Binge Is Ending”. You can watch our recent video where we discuss the results in full. To start at the end of the story, we see significant falls across most states in investment lending flows, with the most significant falls in the Sydney market. The share of investment flows continues to drift lower, to around 35%. But that is still substantial investment lending! Finally, the percentage of investment lending of all lending flows is below 20%, and shows a small fall. But we also see a fall in business lending to around 55%, excluding investment property lending.
The ABS also released their March 2018 unemployment statistics. It was not good with the trend unemployment rate increasing slightly to 5.6 per cent though the trend participation rate increased to a record high of 65.7 per cent. WA has the highest rate of unemployment at 6.4% and is still rising, whilst rates in NSW and ACT also rose.
The HIA released their latest Housing Affordability report, claiming that affordability improved in most of Australia’s capital cities during the first three months of 2018 as house price pressures eased. But this is largely spin, as their calculations do not necessarily take account of the now tighter, and becoming even tighter lending standards now in play. And in any case, in most centres, affordability is still well below the long term averages. But of course, they are advocates for the property sector, so there should be no surprise.
There was important evidence of the rising costs of funds this week as ME Bank says it has lifted its standard variable rate on existing owner-occupier principal and interest mortgages, effective April 2018. 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. 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. ME CEO Mr Jamie McPhee said the changes are in response to increasing funding costs and increased compliance costs. More hikes will follow, across the industry together with reductions in rates paid on deposits as the fallout of the Royal Commission and higher international funding costs take their toll.
For example, the 10-year US Bond rate is moving higher again, following some slight fall earlier in April. Have no doubt, funding cost pressure will continue to rise. We discussed the whole question of debt and the potential trigger for a recession in a recent video blog, “Global Debt and the Upcoming Recession”. The outlook looks more and more like our Armageddon scenario, as we discussed in detail in an earlier programme “Four Scenarios (None Good)”. Worse, regulators in the USAand China are both weakening banking regulation, at this time of high risk, high debt.
Oh, and by the way, we think it quite possible the RBA will need to do its own form of quantitative easing down the track, and that they will most likely buy pools of residential mortgages (yes including those with breached lending standards) to assist the banks in their liquidity, to assist home prices to rise, and allowing the debt bomb to tick for longer. Sound of can being kicked firmly down the road! But that would be the time to buy Australian equities, and even property. Maybe we need a scenario 5!
We released the latest Digital Finance Analytics Household Finance Confidence Index for March 2018 shows a further slide in confidence compared with the previous month. The current score is 92.3, down from 94. 6 in February, and it has continued to drop since October 2016. The trend is firmly lower and below the neutral setting. You can watch our separate video on this “Why Household Finance Confidence Fell Again”. But in summary, across the states, confidence is continuing to fall in NSW and VIC, was little changes in SA and QLD, but rose in WA. There were there were falls in all age groups. Turning to the property-based segmentation, owner occupied householders remain the most confident, while property investors continue to become more concerned about the market. Those who are property inactive – renting, or living with parents or friends remain the least confident. Nevertheless, those who are property owners remain more confident relative to property inactive households. Based on the latest results, we see little on the horizon to suggest that household financial confidence will improve. We expect wages growth to remain contained, and home prices to slide, while costs of living pressures continue to grow. There will also be more pressure on mortgage interest rates as funding costs rise, and lower rates on deposits as banks trim these rates to protect their net margins.
Finally, we turn to CoreLogics’s auctions data. They suggest that fewer auctions will take place this week, with a total of 1,592 properties scheduled, compared with last week’s final result of1,915 auctions held. This is also lower than a year ago when 1,751 auctions were held across the capital city markets. Sydney is set to see the most significant drop in activity this week. Victoria’s Reservoir and Surfers Paradise in Queensland both top the busiest suburb list this week, each with 19 properties scheduled to go to auction. Following with 14 scheduled auctions each is Burwood and Point Cook both in Victoria.
Turning to last week’s final results the clearance rate was a 61.7 per cent success rate which was lower than the week prior when 62.8 per cent. Melbourne’s final auction clearance rate fell to 62.4 per cent last week across a slightly higher volume of auctions week-on-week with 873 held, up on the 723 over the week prior when a higher 68.2 per cent cleared. In Sydney, the final clearance rate fell to 61.5 per cent, down on the 62.9 per cent the previous week, with volumes across the city remaining steady over the week with a total of 795 held. Clearance rates improved across all of the remaining auction markets last week, with the exception Tasmania which remained unchanged. Geelong recorded the highest clearance rate of the non-capital city regions, with 77.1 per cent of 54 auctions clearing.
You might want to watch my video on “Auction Results Under The Microscope”, where we discuss how the results are collated and whether we can trust them.
So overall, there is little evidence to suggest the property market is recovering (despite more from the Industry claiming that this was the case, this week). And we have yet to see the impact of tighter lending standards flowing through. Our survey data indicates that more households are finding it tougher to meet the income and expenditure hurdles now, and as a result we expect credit and therefore home prices to continue to fall. And if anything, that fall will likely accelerate, unless we get unusual measures in the budget, which by the way we think are quite likely.
The Federal Reserve’s and the Office of the Comptroller of the Currency’s proposed changes to the enhanced supplementary leverage ratio (eSLR) and total loss-absorbing capacity (TLAC) ratio, would provide the most capital relief to trust and custodial banks relative to other U.S. global systemically important banks (GSIBs), Fitch Ratings says.
These changes are unlikely to result in near-term rating implications, though this proposal and the impact of other recently proposed rules that reduce capital requirements are credit negative for the sector. The ultimate ratings impact will depend on how individual US GSIBs respond to potentially looser regulatory standards and lower capital requirements.
The proposal would change how the US GSIBs’ eSLR and TLAC ratios are calculated to include half of their respective GSIB capital surcharge as a percentage of risk-based capital, providing the most relief to firms with the lowest relative capital risk. The Fed estimates the proposed changes would reduce the required amount of Tier 1 capital of the US GSIBs by four basis points, or approximately $400 million, and would reduce the amount of Tier 1 capital required across the lead IDI subsidiaries of the GSIBs by approximately $121 billion.
Currently, GSIBs must meet an eSLR of at least 5% at the holding company level, comprised of a minimum 3% base requirement plus a 2% standard buffer, while GSIB insured depository institution (IDI) subsidiaries need a minimum of a 6% SLR to be deemed “well capitalized.” Under the new proposals, eSLR ratios would be adjusted lower to the sum of the 3% required minimum plus 50% of the respective banks’ GSIB surcharge, instead of the prior standard. The same application of the proposed rule would apply for IDIs, replacing the 6% required minimum to be deemed well capitalized.
Amendments to the eSLR calculation, which apply to U.S. GSIBs and their IDIs, would benefit custody and trust banks the most. State Street and Bank of New York Mellon have the lowest GSIB risk-based capital surcharge of 1.5%, which could potentially result in lowering their eSLR by 1.25% at the holding company and up to 2.25% at the IDI level. The proposed amendments don’t incorporate the changes presented in the Senate bill to ease Dodd-Frank Act requirements, which would allow the trust and custody banks to remove certain safe assets such as Fed deposits from their leverage ratios if the bank was predominantly engaged in custodial banking.
Under the proposed legislation, the amount of required eligible debt required for total loss absorbing capital (TLAC) would also fall. The bank holding company TLAC leverage buffer, like the SLR calculation, would be also modified to 50% of the GSIB risk-based capital surcharge buffer, instead of a fixed 2% leverage buffer. The leverage component of the long-term minimum debt requirement would be cut to 2.5% from 4.5% previously.
