APRA – Page 10 – Digital Finance Analytics (DFA) Blog

APRA Caves Again

The Australian Prudential Regulation Authority (APRA) has released its response to submissions on proposed changes to the application of the capital adequacy framework designed to support the orderly resolution of a failing authorised deposit-taking institution (ADI).

APRA released a discussion paper in November last year proposing that the four major Australian banks be required to increase their Total Capital by four to five percentage points of risk weighted assets (RWA) over four years. APRA expected the banks would meet the bulk of this requirement by raising additional Tier 2 capital. For small to medium ADIs, extra loss-absorbing capacity would be considered on a case-by-case basis as part of the resolution planning process.

The changes would increase the financial resources available for APRA to safely resolve an ADI, and minimise the need for taxpayer support, in the unlikely event of failure. They also fulfil a recommendation from the 2014 Financial System Inquiry that APRA implement a framework for minimum loss-absorbing and recapitalisation capacity.

Following extensive engagement with a range of stakeholders, APRA has announced an approach that will meaningfully lift the loss-absorbing capacity of the four major banks.

APRA will require the major banks to lift Total Capital by three percentage points of RWA by 1 January 2024. APRA’s overall long term target of an additional four to five percentage points of loss absorbing capacity remains unchanged. Over the next four years, APRA will consider the most feasible alternative method of sourcing the remaining one to two percentage points, taking into account the particular characteristics of the Australian financial system.

APRA amended its initial proposal in response to concerns raised in a number of submissions about a lack of sufficient market capacity to absorb an extra four to five per cent of RWA in Tier 2 issuance and the potential to excessively increase bank funding costs. A number of respondents provided useful market capacity analysis in their submissions. APRA also had extensive dialogue with ADIs, arrangers of Tier 2 issuance in global markets, and significant investors in Tier 2 instruments. Following this consultation process, APRA expects the issuance of an additional three percent of RWA in Tier 2 instruments can be achieved in an orderly manner, and be maintained through varied markets conditions.

APRA Deputy Chair John Lonsdale said the measures were an important step in minimising the risks to depositors and taxpayers should Australia experience a future bank failure.

“The global financial crisis highlighted examples overseas where taxpayers had to bail out large banks due to a lack of residual financial capacity. Boosting loss-absorbing capacity enhances the safety of the financial system by increasing the financial resources that an ADI holds for the purpose of orderly resolution and the stabilisation of critical functions in the unlikely event that it fails.

“Although APRA’s proposed response may increase funding costs for Tier 2 instruments issued by major banks, overall funding cost increases can be expected to remain small. Having taken into account feedback on market capacity, increasing Total Capital requirements by three percentage points by 2024 (instead of the four to five originally proposed) will be easier for the market to absorb and reduce the risk of unintended market consequences.

“By lifting their Total Capital by three percentage points of risk-weighted assets, we estimate the major banks will cumulatively strengthen their loss-absorbing capacity by $50 billion. APRA looked closely at alternative approaches used in other jurisdictions but concluded that increasing the issuance of existing capital instruments was more appropriate taking into account the distinctive characteristics of the Australian financial system,” Mr Lonsdale said.

APRA estimates the increase in Total Capital requirements will have a small impact on overall funding costs – less than five basis points – an estimate well within the range of analysis conducted by the Reserve Bank of Australia using historical market data

Adams/North: Federal Politicians Are In Negative Equity And Stressed!

Economist John Adams and Analyst Martin North examine “the kitchen sink” being thrown at the property market and consider the implications.

APRA Opens The Mortgage Lending Taps [Podcast]

We look at today’s APRA announcement and their changes to mortgage lending practice guidelines. What are the implications?

Digital Finance Analytics (DFA) Blog

APRA Opens The Mortgage Lending Taps [Podcast]

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APRA Opens The Mortgage Lending Taps

We look at today’s APRA announcement and their changes to mortgage lending practice guidelines. What are the implications?

APRA finalises amendments to guidance on residential mortgage lending

The Australian Prudential Regulation Authority (APRA) has announced that it will proceed with proposed changes to its guidance on the serviceability assessments that authorised deposit-taking institutions (ADIs) perform on residential mortgage applications.

In a letter to ADIs issued today, APRA confirmed its updated guidance on residential mortgage lending will no longer expect them to assess home loan applications using a minimum interest rate of at least 7 per cent. Common industry practice has been to use a rate of 7.25 per cent.

Instead, ADIs will be able to review and set their own minimum interest rate floor for use in serviceability assessments and utilise a revised interest rate buffer of at least 2.5 per cent over the loan’s interest rate.

APRA received 26 submissions after commencing a consultation in May on proposed amendments to Prudential Practice Guide APG 223 Residential Mortgage Lending (APG 223). The majority of submissions supported the direction of APRA’s proposals, although some respondents requested that APRA provide new or additional guidance on how floor rates should be set and applied.

Having considered the submissions, Chair Wayne Byres said APRA believes its amendments are appropriately calibrated.

In the prevailing environment, a serviceability floor of more than seven per cent is higher than necessary for ADIs to maintain sound lending standards. Additionally, the widespread use of differential pricing for different types of loans has challenged the merit of a uniform interest rate floor across all mortgage products,” Mr Byres said.

“However, with many risk factors remaining in place, such as high household debt, and subdued income growth, it is important that ADIs actively consider their portfolio mix and risk appetite in setting their own serviceability floors. Furthermore, they should regularly review these to ensure their approach to loan serviceability remains appropriate.”

APRA originally introduced the serviceability guidance in December 2014 as part of a package of measures designed to reinforce residential lending standards.

Mr Byres said: “The changes being finalised today are not intended to signal any lessening in the importance APRA places on the maintenance of sound lending standards. This updated guidance provides ADIs with greater flexibility to set their own serviceability floors, while maintaining a measure of prudence through the application of an appropriate buffer that reflects the inherent uncertainty in credit assessments.”

The new guidance takes effect immediately.

Copies of the letter and the updated APG 223 are available on the APRA website here.

Credit Growth As Weak As…. [Podcast]

We look at the latest lending statistics from both RBA and APRA. Not much evidence of a rebound so far!

Digital Finance Analytics (DFA) Blog

Credit Growth As Weak As.... [Podcast]

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ADI’s Mortgage Lending May Update

APRA has released their monthly banking statistics to end May 2019. It updates the stock of mortgages by lender.

Overall mortgage lending rose o.24% (or 2.8% annualised) to a new record of $1.69 trillion dollars. Within that owner occupied lending rose 0.34% to $1.13 trillion dollars while lending for investment purposes rose 0.023% to $557 billion dollars. Investment loans as a proportion of all loans outstanding fell again to 33.85%.

This of course is the last month before the election, and APRA easing mark 2 and the RBA cash rate cut.

So little here to show the credit impulse is accelerating. Investment lending remains in the doldrums, and owner occupied lending eased back in growth terms.

The monthly movements between the banks shows Westpac and CBA in positive territory, on both investment and owner occupied lending, while NAB and ANZ dropped investment loans further. HSBC and Macquarie also advanced, along with Bendigo and Adelaide Banks. Members Equity (ME Bank) dropped also.

That said the portfolio movements were quite limited. CBA holds the largest share of owner occupied loans and Westpac investment loans.

The annualised investment lending trends (sum of monthly movements) puts the majors well behind the likes of Macquarie and HSBC. The abolished investment loan speed limit just accentuates the point that some are driving loan growth very hard.

We would expect lending momentum to pick up in the light of APRA’s changes, lower interest rates and the chatter about home price recovery.

However, to emphasize the obvious point one more time – lending is still growing faster than incomes – so household debt is still growing – adding more weight in the saddlebag of consumer spending. Not that the RBA seems at all worried – though we think they should be!

The RBA data also comes out today and this will give a whole of market view.

Failing to act on climate change carries a price tag: APRA

An executive board member of APRA has told delegates that failing to take action on climate change now will lead to much higher economic costs in the long term, via InvestorDaily.

Executive board member Geoff Summerhayes spoke to the International Insurance Society Global Insurance Forum in Singapore and told delegates that short-term pains were needed for long-term gains.

“The level of economic structural change needed to prepare for the transition to the low-carbon economy cannot be undertaken without a cost,” he said.

“But it’s also true that failing to act carries its own price tag due to such factors as extreme weather, more frequent droughts and higher sea levels.”

Mr Summerhayes said that Australia had its share of the climate change debate, with one side calling for action and the other viewing climate change action as expensive.

“The risk is global, yet the costs of action may not fall evenly on a national basis. And second, the benefits will accrue in the future, but many of the costs of change must be borne now. For the Australian community, this remains a highly contentious set of issues,” he said.

Talking to experts in risk management, Mr Summerhayes called on the insurance industry to play a leadership role in bringing forward better data for what the costs of climate action are.

“By developing more sophisticated tools and models, and especially through enhanced disclosure of climate-related financial risks, insurers can help business and community leaders make decisions in the best interests of both environmental and economic sustainability,” he said.

APRA raised the issue in 2017 of the financial risks of climate change and since then has been endorsed by the RBA and ASIC as well.

“When a central bank, a prudential regulator and a conduct regulator, with barely a hipster beard or hemp shirt between them, start warning that climate change is a financial risk, it’s clear that position is now orthodox economic thinking,” Mr Summerhayes said.

How best to act remains a challenge, Mr Summerhayes admitted, and people were still debating who should carry the burden and whether the benefits were worth the costs.

“Government spending decisions may need to be reprioritised, and not every member of society will be able to bear these short-term costs equally comfortably,” he said.

However, what many forgot is that economic change also presents economic opportunities, the board member added.

“Forward-thinking businesses have for years been seeking to get ahead of the low-carbon curve by developing new products, expanding into untapped markets or investing in green finance opportunities,” he said.

Ultimately, it was a fight between short-term impact or long-term damage, Mr Summerhayes said.

“Controlled but aggressive change with a major short-term impact but lower long-term economic cost? Or uncontrolled change, limited short-term impact and much greater long-term economic damage?

“When put like that, it seems such a straight-forward decision, but in reality, businesses around the world are struggling to find the appropriate balance.”

Climate risk was ultimately an environmental and economic problem, and Mr Summerhayes said framing it as a cost-of-living problem presented a false dichotomy.

“That approach risks deceiving investors or consumers into believing there is no economic downside to acting slowly or not at all. In reality, we pay something now or we pay a lot more later. Either way, there is a cost,” Mr Summerhayes said.

Ultimately, better data could help everyone to better understand the physical risk trade-off and the reality that there was no avoiding the costs of adjusting to a low-carbon future.

“Taking strong, effective action now to promote an early, orderly economic transition is essential to minimising those costs and optimising the benefits. Those unwilling to buy into the need to do so will find they pay a far greater price in the long run,” he said.