Category: Banking Culture

HIA Argues For MORE Credit

The Housing Industry Association (HIA) welcomed APRA’s removal of the 30% IO limit, but argues that banks are tightening beyond the APRA limits and still more credit is needed.

Actually, this is not really the case, rather it is reversion to more normal lending standards as defined by suitable lending.

The HIA are therefore advocating a loosening of standards back to the pre-royal commission and APRA conditions, where people got loans they could not afford and the industry was rife with poor practice and fraud. We should not aspire to return to such conditions again.

This is what they said:

“The removal of the restriction on interest-only lending is essential to addressing the concerning decline in credit growth for new housing,” said Tim Reardon, HIA Principal Economist.

“Credit growth across the market is the lowest it has been since the 1983 recession.

“Credit growth to investors is the lowest on record.

“Today APRA announced it is lifting its 30 per cent cap on banks’ interest-only lending. This is a welcome development in Australia’s mortgage market, but much more needs to be done to ease the current credit squeeze.

“APRA’s restrictions were designed to curb high-risk lending practices. Over the past 12 months ordinary home buyers have experienced significant constraints in accessing the appropriate level of finance to buy a home.

“The credit squeeze is happening at the behest of the banks’ own lending practices which have been tightened above and beyond APRA’s requirements.

“HIA research has found that the time taken to gain approval for a loan to build a new home has blown out from around two weeks to more than two months.

“HIA members are also reporting that almost half of loan applications are being rejected.

“APRA’s announcement sends an important message about the overall health and stability of the mortgage market which should be heeded by policy makers and lenders alike.

“With the Royal Commission scheduled to release recommendations early next year there is a risk that the credit squeeze may drag on into 2019. The residential construction sector is already cooling. Policy makers will need to proceed cautiously when responding to the Commission’s recommendations,” concluded Mr Reardon.

ABA Welcomes APRA’s IO Decision

The Australian Bankers Association (ABA) says the APRA decision “will increase choice for home loan customers”.

They say:

Today’s announcement of the removal of the 30% benchmark for new interest-only residential mortgages will allow all banks to offer more choice for customers, leading to an increase in competition across the industry, particularly for smaller and regional banks.

The benchmark was introduced by APRA in 2017 to respond to concerns of an oversupply of interest-only loans. The benchmark had a greater effect on banks with smaller home loan lending operations.

CEO of the Australian Banking Association Anna Bligh said that the decision by APRA would not only benefit customers, it also showed that banks were lending prudently with the proportion of interest-only loans more than halving in two years.

“APRA’s announcement today shows that banks have adjusted lending to respond to concerns around an oversupply of interest-only loans, illustrating a prudential system where both banks and regulators can quickly and effectively respond to a changing environment,” Ms Bligh said.

“While banks will continue to lend prudently, today’s decision will mean all banks can offer more choice for customers who are looking to buy a house or apartment.

“Increased competition across the industry will mean customers have more ability to shop around for the best deal for them when looking at an interest-only home loan,” she said.

In terms of banks home loan commitments, the proportion of interest-only loans are now 16.2% much lower than the proportion seen two years ago (37%).

APRA to remove interest-only benchmark for residential mortgage lending

The Australian Prudential Regulation Authority (APRA) has announced that it will remove its supervisory benchmark on interest-only residential mortgage lending by authorised deposit-taking institutions (ADIs).

The benchmark was put in place as a temporary measure in March 2017, as part ofa range of actions over recent years to reinforce sound lending practices. The introduction of the benchmark has led to a marked reduction in the proportion of new interest-only lending, which is now significantly below the 30 per cent threshold.

Earlier this year, APRA announced its intention to remove the supervisory benchmark on investor loan growth subject to ADIs providing certain assurances as to the strength of their lending standards. Most ADIs have now provided those assurances. ADIs that are no longer subject to the investor loan growth benchmark will also no longer be subject to the benchmark on interest-only lending from 1 January 2019. For other ADIs, it will be removed concurrently with the removal of the investor loan growth benchmark.

APRA Chairman Wayne Byres said: “APRA’s lending benchmarks on investor and interest-only lending were always intended to be temporary. Both have now served their purpose of moderating higher risk lending and supporting a gradual strengthening of lending standards across the industry over a number of years.”

Notwithstanding the removal of the interest-only benchmark, ADIs still need to ensure they maintain adequate oversight of the level and type of interest-only lending, consistent with APRA’s Prudential Practice Guide APG223 Residential Mortgage Lending and ASIC’s responsible lending obligations on borrower requirements and objectives. 

A copy of the letter to industry outlining the decision is available on APRA’s website at: https://www.apra.gov.au/letters-notes-advice-adis.

RBA Begs The Banks To Relent

Following the recent minutes from the Council of Financial Regulators, which is chaired by the RBA, now according to the Australian, the RBA has been lobbying the banks to lend more.

“Reserve Bank governor Philip Lowe  is understood to have met with the big bank chiefs in recent weeks to caution them against an overzealous tightening of credit supply in response to lending rules and the Hayne royal commission”.

The RBA is of the view that lenders are turning good business away, and need to take risk on.

Some SME’s are getting caught in the cross fire, and its clear that business is finding it harder to get funding. This was covered in the RBA’s minutes, released yesterday.

Of course the responsible lending obligations have not changed, but now the meaning and obligations are front of mind. Thus banks need to examine income and expenses etc and cannot necessarily rely on HEM or mortgage brokers.  So all this is in direct opposition to the RBA’s wishes, and we suspect the risk of legal action, or worse will continue to limit bank lending.

The ASIC Westpac case will be back before the courts in the new year, though as yet is not clear whether HEM will be tested in court, or whether its more about reaching a settlement. And the royal commission recommendations will be out in February

Is the RBA really condoning the bad behaviour and law breaking exposed in the past year?

And remember that currently mortgage lending is still running at more than 5% on an annualised basis, according to RBA data.

The fundamental problem is the RBA has been responsible for the growth of credit to the point where households in Australia are some of the most leveraged in the world,  home prices have exploded and bank balance sheets have inflated. But all this “growth” is illusory. Mortgage stress continues to build and the wealth effect is reversing as home prices slide.

Thus, as we anticipated, we will see a number of “unnatural acts” by the RBA and the Government to try and stop the debt bomb from exploding, by trying to get credit to expand. But this is irresponsible behaviour, in the light of rising global interest rates, high market volatility and building systemic risks.

Lenders commit to improve credit card practices following ASIC review

ASIC has released Report 604  Credit card lending in Australia – An update (REP 604), which sets out the changes being made by lenders to help consumers with credit card debt.

In July 2018, ASIC released Report 580 Credit card lending in Australia (REP 580), which found more than one in six consumers is struggling with credit card debt. 

 The report made it clear that ASIC expects credit providers to:

  • take proactive steps to address problematic credit card debt and products that do not suit consumers
  • minimise the extra credit provided to consumers who regularly exceed their credit limit, and
  • allocate repayments for all credit cards in the more favourable way required for cards entered into after July 2012.

ASIC engaged with the ten largest credit providers that were part of our review (American Express, ANZ, Bendigo and Adelaide Bank, Citigroup, CBA, HSBC, Latitude, Macquarie, NAB and Westpac) and sought their commitment to change. Their commitments are described in their report released today.

Although these commitments are not required by the law, they are important in ensuring that the credit card market works for consumers, including vulnerable consumers. 

Across the board, lenders have committed to changes to address the concerns by ASIC: 

  • 9 large credit providers committed to taking proactive steps to help consumers with problematic credit card debt
  • 4 committed to fairer approaches for balance transfers, and
  • 9 credit providers have committed to lower the amount by which consumers can exceed their credit limit.

Many credit providers are trialling measures — such as tailored communications and/or structured payment arrangements — to help consumers with potentially problematic credit card debt or who are failing to repay balance transfers.

Others are taking a fairer approach to balance transfers, such as by allowing interest free periods on new purchases and enhancing disclosure about cancelling old credit cards.

Macquarie, CBA and HSBC are the most progressed with implementing changes around credit card lending. Although American Express has committed to some changes, other lenders have proposed more comprehensive measures.

‘ASIC expects that all credit card lenders will address the issues raised in our review,’ ASIC Commissioner Sean Hughes said. ‘We will be monitoring lenders over the next two years to make sure they have taken action to address our concerns, and to ensure that consumer outcomes are improving in the credit card market.’

In REP 580, ASIC committed to conduct a follow-up review to see if there is an improvement in outcomes for consumers. ASIC will also not hesitate to use its future enforcement powers if necessary to bring about needed changes. 

Background

In July 2018, ASIC published its report on credit card lending in Australia. 

ASIC’s review of credit card lending found:

  • In June 2017 there were almost 550,000 people in arrears, an additional 930,000 with persistent debt and an additional 435,000 people repeatedly repaying small amounts.
  • Consumers carrying balances over time on high-interest rate cards could have saved more than $621 million in interest in 2016–17 if they had carried their balance on a card with a lower interest rate
  • 63% of consumers did not cancel a card after a balance transfer and a substantial minority of consumers increased their total debt after transferring a balance.

Since REP 580 was released ASIC has prescribed a three-year period for credit card responsible lending assessments. This means that credit providers must not provide a credit card with a credit limit that the consumer could not repay within three years. This reform commences on 1 January 2019. More information about the reform is available in Report 590 Response to submissions on CP 303 Credit cards: Responsible lending assessments (REP 590).

The Government has implemented other reforms to help prevent problematic credit card debt. This includes banning unsolicited credit limit increase invitations and making it easier for consumers to cancel credit cards.

ASIC’s MoneySmart website has information for consumers about choosing and using credit cards, including information about balance transfers, how to pay off multiple cards and how to cancel a credit card. 

Consumers can also use MoneySmart’s credit card calculator to work out the fastest way to pay off their card and how much they can save by paying it off sooner.

BIS Accuses Banks Of “Window Dressing” Capital Ratios

The Basel III leverage ratio standard comprises a 3% minimum level that banks must meet at all times, a buffer for global systemically-important banks and a set of public disclosure requirements. For the purpose of disclosure requirements, banks must report the leverage ratio on a quarter-end basis or, subject to approval by national supervisors, report a measure based on averaging (eg using an average of exposure amounts based on daily or month-end values).

Heightened volatility in various segments of money and derivatives markets around key reference dates (eg quarter-end) has alerted the Basel Committee to potential regulatory arbitrage by banks. A particular concern is “window-dressing”, in the form of temporary reductions of transaction volumes in key financial markets around reference dates resulting in the reporting and public disclosure of elevated leverage ratios. In this regard, the Committee published a newsletter in October 2018 in which it indicated that window-dressing by banks is unacceptable, as it undermines the intended policy objectives of the leverage ratio requirement and risks disrupting the operations of financial markets.

This consultative document seeks comments on revisions to leverage ratio Pillar 3 disclosure requirements to include, in addition to current requirements, mandatory disclosure of the leverage ratio exposure measure amounts of securities financing transactions, derivatives replacement cost and central bank reserves as calculated using daily averages over the reporting quarter.

The Committee welcomes comments on all aspects of the consultative document here by Wednesday 13 March 2019

RBNZ To Lift Bank Capital Requirements

The Reserve Bank of New Zealand has released a discussion paper in which they consult on proposals to lift the capital held by banks in New Zealand.

The expected effect on banks’ capital is an increase of between 20 and 60 percent. This represents about 70 percent of the banking sector’s expected profits over the five-year transition period. They expect only a minor impact on borrowing rates for customers.

They say “Banks currently get the vast majority of their money by borrowing it (usually over 90 percent), with the rest coming from owners (usually less than 10 percent). The Reserve Bank is proposing to change this balance by requiring banks to use more of their own money. This proposal is consistent with steps taken by other banking regulators after the Global Financial Crisis”.

Banks currently get the vast majority of their money by borrowing it (usually over 90 percent), with the rest coming from owners (usually less than 10 percent). The Reserve Bank is proposing to change this balance by requiring banks to use more of their own money. This proposal is consistent with steps taken by other banking regulators after the Global Financial Crisis.

If banks increase their capital, they will be more resilient to economic shocks and downturns, which will strengthen New Zealand’s banking system and economy.

Because the level of a bank’s capital can have an impact on the interest rate it charges on its loans, it is possible that higher capital requirements could make it more expensive for New Zealanders to borrow money from a bank. While we certainly take this into account, we think this impact should be minimal.

Another potential impact is that bank owners would earn less from their investment in the bank. While we agree that this is likely to be the case, we believe this cost would be more than offset by the benefits of a safer banking system for all.

The key changes are:

Limit the extent to which capital requirements differ between the Internal Ratings-Based approach (IRB) and the Standardised approach, by re-calibrating the IRB approach and applying a floor linked to the Standardised outcomes. This reflects one of the principles of the Capital Review: where there are multiple methods for determining capital requirements, outcomes should not vary unduly between methods. In essence, there should be as level a playing field as possible, both between IRB banks and between IRB and Standardised banks;

These proposals are expected to raise risk-weighted assets (RWA) for the four IRB-accredited banks to approximately 90 percent of what would be calculated under the Standardised approach;

Set a Tier 1 capital requirement (consisting of a minimum requirement of 6 percent and prudential capital buffer of 9-10 percent) equal to 16 percent of RWA for banks deemed systemically important, and 15 percent for all other banks;

Assign 1.5 percentage points of the proposed prudential capital buffer requirements to a countercyclical component, which could be temporarily reduced to 0 percent during periods of exceptional stress;

Assign 1 percentage point of the proposed prudential capital buffer requirement to D-SIB buffer, to be applied to banks deemed to be systemically important;

Retain the current Tier 2 capital requirement of 2 percent of RWA, but raise the question of whether Tier 2 should remain in the capital framework; and

Staged transition of the different components of the revised framework over the coming years.


The Council Of Financial Regulators Speaks

A welcome move, the shadowy Council Of Financial Regulators has started publishing minutes of its quarterly meetings. However, group think, and self-interest is all over it.  Specifically the comments about tighter credit, and the need to continue to lend (to keep the debt bomb ticking a bit longer! Also how does independence of the RBA work in this context?

They noted that non-ADI lending for housing has been growing significantly faster than ADI housing lending and there is some evidence that non-ADI lending for property development is also increasing quickly.

As part of its commitment to transparency, the Council of Financial Regulators (the Council) has decided to publish a statement following each of its regular quarterly meetings. This is the first such statement.

The statement will outline the main issues discussed at each meeting. From time to time the Council discusses confidential issues that relate to an individual entity or to policies still in formulation. These issues will only be included in the statement where it is appropriate to do so.

The Council of Financial Regulators (the Council) is the coordinating body for Australia’s main financial regulatory agencies. There are four members: the Australian Prudential Regulation Authority (APRA), the Australian Securities and Investments Commission (ASIC), the Australian Treasury and the Reserve Bank of Australia (RBA). The Reserve Bank Governor chairs the Council and the RBA provides secretariat support. It is a non-statutory body, without regulatory or policy decision-making powers. Those powers reside with its members. The Council’s objectives are to contribute to the efficiency and effectiveness of financial regulation, and to promote stability of the Australian financial system. The Council operates as a forum for cooperation and coordination among member agencies. It meets each quarter, or more often if required.

At each meeting, the Council discusses the main sources of systemic risk facing the Australian financial system, as well as regulatory issues and developments relevant to its members. Topics discussed at its meeting on 10 December 2018 included the following:

  • Financing conditions. Members discussed the tightening of credit conditions for households and small businesses. A tightening of lending standards over recent years has been appropriate and has strengthened the resilience of the system. At the same time, members agreed on the importance of lenders continuing to supply credit to the economy while they adjust their lending practices, including in response to the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry. Members discussed how an overly cautious approach by some lenders to incorporating relevant laws and standards into loan approval processes may be affecting lending decisions. Members observed that housing credit growth has moderated since mid-2017, with both demand and supply factors playing a role. The demand for credit by investors has slowed noticeably, largely reflecting the change in the dynamics of the housing market. In an environment of tighter lending standards, the decline in average interest rates for owner-occupier and principal and interest loans suggests that there is relatively strong competition for borrowers of low credit risk. Credit to owner-occupiers is continuing to grow at 5 to 6 per cent.
  • Non-ADI lending. The Council undertook its annual review of non-bank financial intermediation. Overall, lending by non-ADIs remains a small share of all lending. However, non-ADI lending for housing has been growing significantly faster than ADI housing lending and there is some evidence that non-ADI lending for property development is also increasing quickly. The Council supported efforts to expand the coverage of data on non-ADI lenders, drawing on new data collection powers recently granted to APRA.
  • Housing market. Members discussed recent developments in the housing market. Conditions have eased, but this follows a period of considerable strength in the market. Housing prices have been declining in Sydney, Melbourne and Perth, but are stable or rising in most other locations. The easing in the housing market is occurring in a period of favourable economic conditions, with low domestic unemployment and interest rates and a supportive global economy. The Council will continue to closely monitor developments.
  • Prudential measures. APRA briefed the Council on its latest review of the countercyclical capital buffer, the results of which will be published in the new year. It also provided an update on its residential mortgage measures, including the investor lending and interest-only lending benchmarks. In line with APRA’s announcement in April 2018 that it would remove the investor lending benchmark subject to assurances of the strength of lending standards, the benchmark has now been removed for the majority of ADIs. The interest-only lending benchmark, introduced in 2017, has resulted in a reduction in the share of new interest-only lending, along with the share of interest-only lending that occurs at high loan-to-valuation ratios.
  • Financial sector competition. The Council discussed work by its member agencies in response to the Productivity Commission’s Final Report of its Inquiry into Competition in the Australian Financial System. The Council strongly supports improved transparency of mortgage interest rates and a working group is examining a number of options. The Council also discussed the Productivity Commission’s recommendations relating to lenders mortgage insurance and remuneration of mortgage brokers. Both the Productivity Commission and the Financial System Inquiry recommended a review of the regulation of payments providers that hold stored value – referred to in legislation as purchased payment facilities (PPFs). The Council released an issues paper in September and held an industry roundtable in November. Members considered the feedback received from these processes and received an update on progress with the review.
  • Limited recourse borrowing by superannuation funds. Members discussed a report to Government on leverage and risk in the superannuation system, as requested in the Government’s response to the Financial System Inquiry. The use of limited recourse borrowing arrangements remains relatively small, but has risen over time. Leverage by superannuation funds can increase vulnerabilities in the financial system, though near-term risks have reduced with the shift in dynamics in the housing market.
  • International Monetary Fund’s Financial Sector Assessment Program (FSAP). The FSAP review of Australia was conducted during the course of 2018; preliminary findings were presented to the Australian authorities in November. The Council held an initial discussion of the main FSAP recommendations and how they could be addressed. The FSAP will be finalised in early 2019, at which time summary documents will be published. (Further information on the FSAP review was published in the Reserve Bank’s October 2018 Financial Stability Review.)

Representatives of the Australian Competition and Consumer Commission and the Australian Taxation Office attended the meeting for discussions relevant to their responsibilities.

Major mortgage class action dropped

A class action lawsuit that was being planned on behalf of “Australian bank customers that have entered into mortgage finance agreements with banks since 2012” has been dropped due to a lack of a “clear cause of action”; via The Adviser.

Law firm Chamberlains has announced that its major class action against various Australian banks will no longer proceed despite interest in the matter.

In May of this year, it was announced that law firm Chamberlains had been appointed to act in the planned class action lawsuit, which was instructed by Roger Donald Brown of MortgageDeception.com to represent various Australian bank customers that had been “incurring financial losses as a result of entering into mortgage loan contracts with banks since 2012”.

The law firm had been calling on bank customers to join the class action, led by Stipe Vuleta, if they had “incurred financial losses due to irresponsible lending practices”.

In an update to interested parties, seen by The Adviser, Chamberlains commented: “Over the last few months, we have been busy investigating the scope of a potential legal claim, which could be commenced as a class action against various Australian banks.

“During this process, we have engaged with senior and junior counsel to assist with the questions of law to be raised if an action were to be commenced in the Federal Court of Australia.

“Despite our efforts, we have been unable to identify a clear class of claimants who have a clear cause of action against a particular Australian bank.”

It continued: “As a result, we are unable to take this process further.”

While the law firm has said that some may still have “an individual case arising from [their] dealings with the banks, which may have merit outside of the framework of a class action”, it would encourage those people to “seek independent legal advice about [their] claim”.

Class actions in focus

Several class actions against major lenders have already been initiated following some of the revelations from the royal commission, including four separate class actions against AMP on the grounds that the company breached its obligations to customers and engaged in “misleading and deceptive representations to the market”.

The legal action was announced after senior AMP executives appeared before the royal commission as witnesses. Some of the executives admitted to a number of potential crimes and suggested that these were repeatedly mischaracterised to the Australian Securities and Investments Commission (ASIC) and to its customers as being “administrative errors”.

These included providing false and misleading statements to the regulator and charging customers for services that were not provided.

The ASX-listed lender, which announced the immediate resignation of its CEO and apologised “unreservedly for the misconduct and failures in regulatory disclosures” earlier this year, has lost more than $1 billion in shareholder value since March and could potentially face criminal charges.