We discuss the changes APRA is proposing on Bank capital ratios.
Tag: APRA
APRA Imposes Conditions on AMP Super
APRA says it has issued directions and additional licence conditions to AMP Superannuation Limited and N.M. Superannuation Proprietary Limited (collectively AMP Super).
APRA has imposed the directions and additional licence conditions to address a range of concerns regarding AMP Super’s compliance with the Superannuation Industry (Supervision) Act 1993 (SIS Act). The action arises from issues identified during APRA’s ongoing prudential supervision of AMP Super, along with matters that emerged during the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry.
The new directions and conditions are designed to deliver enhanced member outcomes by requiring AMP Super to make significant changes to its business practices. Areas identified for improvement include conflicts of interest management, governance and risk management practices, breach remediation processes, addressing poor risk culture and strengthening accountability mechanisms. The directions also require AMP Super to renew and strengthen its board.
Additionally, APRA requires AMP Super to engage an external expert to report on remediation and compliance with the new directions and conditions.
This is the second time APRA has used the broader directions power that was granted in April following the passage of the Treasury Laws Amendment (Improving Accountability and Member Outcomes in Superannuation Measures No 1) Bill 2019. It also demonstrates APRA’s commitment to embedding the “constructively tough” enforcement appetite outlined in April’s new Enforcement Approach
APRA Waters Down ADI Capital Framework
The Australian Prudential Regulation Authority (APRA) has released its response to the first round of consultation on proposed changes to the capital framework for authorised deposit-taking institutions (ADIs).
The package of proposed changes, first released in February last year, flows from the finalised Basel III reforms, as well as the Financial System Inquiry recommendation for the capital ratios of Australian ADIs to be ’unquestionably strong’.
ADIs that already meet the ‘unquestionably strong’ capital targets that APRA announced in July 2017 should not need to raise additional capital to meet these new measures. Rather, the measures aim to reinforce the safety and stability of the ADI sector by better aligning capital requirements with underlying risk, especially with regards to residential mortgage lending.
APRA received 18 industry submissions to the proposed revisions, and today released a Response Paper, as well as drafts of three updated prudential standards: APS 112 Capital Adequacy: Standardised Approach to Credit Risk; the residential mortgages extract of APS 113 Capital Adequacy: Internal Ratings-based Approach to Credit Risk; and APS 115 Capital Adequacy: Standardised Measurement Approach to Operational Risk.
The Response Paper details revised capital requirements for residential mortgages, credit risk and operational risk requirements under the standardised approaches, as well as a simplified capital framework for small, less complex ADIs. Other measures proposed in the February 2018 Discussion Paper, as well as improvements to the transparency, comparability and flexibility of the ADI capital framework, will be consulted on in a subsequent response paper due to be released in the second half of 2019.
After taking into account both industry feedback and the findings of a quantitative impact study, APRA is proposing to revise some of its initial proposals, including:
- for residential mortgages, some narrowing in the capital difference that applies to lower risk owner-occupied, principal-and-interest mortgages and all other mortgages;
- more granular risk weight buckets and the recognition of additional types of collateral for SME lending, as recommended by the Productivity Commission in its report on Competition in the Financial System; and
- lower risk weights for credit cards and personal loans secured by vehicles.
The latest proposals do not, at this stage, make
any change to the Level 1 risk weight for ADIs’ equity investments in
subsidiary ADIs. This issue has been raised by stakeholders in response to
proposed changes to the capital adequacy framework in New Zealand. APRA has
been actively engaging with the Reserve Bank of New Zealand on this issue, and
any change to the current approach will be consulted on as part of APRA’s
review of Prudential Standard
APS 111 Capital Adequacy: Measurement of Capital later this year.
APRA’s consultation on the revisions to the ADI capital framework is a
multi-year project. APRA expects to conduct one further round of consultation
on the draft prudential standards for credit risk prior to their finalisation.
It is intended that they will come into effect from 1 January 2022, in line
with the Basel Committee on Banking Supervision’s internationally agreed
implementation date. An exception is the operational risk capital proposals for
ADIs that currently use advanced models: APRA is proposing these new
requirements be implemented from the earlier date of 1 January 2021.
APRA Chair Wayne Byres said: “In setting out these latest proposals, APRA has
sought to balance its primary objectives of implementing the Basel III
reforms and ‘unquestionably strong’ capital ratios with a range of important
secondary objectives. These objectives include targeting the structural
concentration in residential mortgages in the Australian banking system, and
ensuring an appropriate competitive outcome between different approaches to
measuring capital adequacy.
“With regard to the impact of risk weights on competition in the mortgage
market, APRA has previously made changes that mean any differential in overall
capital requirements is already fairly minimal. APRA does not intend that the
changes in this package of proposals should materially change that calibration,
and will use the consultation process and quantitative impact study to ensure
that is achieved.
“It is also important to note that the proposals announced today will not
require ADIs to hold any capital additional beyond the targets already
announced in relation to the unquestionably strong benchmarks, nor do we expect
to see any material impact on the availability of credit for borrowers,” Mr
Byres said
An Insider Speaks To The People [Podcast]
Here is an extended discussion between Ex APRA/ASIC Executive Wilson N. Sy, Economist John Adams and Analyst Martin North. We look at how banking is regulated and who is really pulling the strings.
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An Insider Speaks To The People
Here is an extended discussion between Ex APRA/ASIC Executive Wilson N. Sy, Economist John Adams and Analyst Martin North. We look at how banking is regulated and who is really pulling the strings.
APRA’s Myopic On Housing Loans
APRA took a question on notice relating to the average size of mortgages from Senator Peter Whish-Wilson during Budget Estimates, and the answers have just been released.
The questions are sensible, the answers once again show how myopic the data APRA produces is. They only report the value of loans and number of loan accounts on the ADI’s books). Nothing about household exposure across multiple loans. Who then is, I ask?
Questions:
What method does APRA use to calculate the “average balance of housing loans” as provided in the publication Quarterly ADI Property Exposures?
How does APRA account for mortgage offset (redraw) accounts in its method?
How does APRA account for instances where there is more than one loan on a property (‘loan splitting’) in its method? Does APRA tally the total of all loans against a property; or does APRA tally individual loans, regardless of whether there is more than one loan on a property?
What is the extent of ‘loan splitting’? How many properties have more than one loan against them? How many properties have more than two loans against them?
What is the average value of loans where there is more than one loan against a property?
Where there is more than one loan against a property, what proportion is fixed interest and what proportion is variable interest?
Where there is more than one loan against a property, what is the average value of fixed interest loans and what is the average value of variable interest loans?
What is the extent of ‘loan splitting’ being undertaken by different ADIs? In particular: what is the extent of ‘loan splitting’ by the major banks?
Answer:
The average balance of housing loans in Quarterly ADI Property Exposures (QPEX) is a simple average calculated as the aggregate balance of all housing loans, gross of offsets and provisions, divided by the number of loans. It is important to note that QPEX reports data from the ADI’s perspective and not the customers (e.g. the value of loans and number of loan accounts on the ADI’s books).
APRA does not consider the average loan size to be a reliable indicator of risk. ADIs are required to assess the borrower’s ability to service each loan, and the amount of security against each loan taking into account all borrower liabilities. APRA’s expectations are set out in Prudential Practice Guide APG 223 Residential Mortgage Lending (APG 223). ADIs are
required to report to APRA on the value of new loans originated without fully meeting the ADI’s serviceability standards.
Offset accounts are considered a deposit liability and do not reduce an ADI’s housing loan exposure.
APRA does not adjust for loan splitting in QPEX reporting. However, under APG 223 the ADI is expected consider the customers’ aggregate exposure in the serviceability calculation and available security when originating housing loans.
APRA does not collect information on loan splitting, by loan type, or across institutions. In addition the focus on the LOAN not the customer exposure.
The Credit Monster Still Stalks The Halls!
We look at the latest stats from RBA and APRA on credit growth. Home lending is STILL growing at 3.9% per annum – yet we are about to stir up the monster some more – “you cannot be serious!”
https://www.rba.gov.au/statistics/frequency/stmt-liabilities-assets.html
https://www.apra.gov.au/publications/monthly-banking-statistics
Once again on the last working day we get the latest credit data from both the RBA and APRA. And fair enough, this is before the election, and the recent spate of “unnatural acts designed to kick start credit growth, but the trends before this are clearly down. Here we are talking about the net stock of loans – rather than new loan flows (so we see the net of old loans closed, refinanced, and new loans written). We will need to wait for the ABS series in a couple of weeks to get the flow stats.
The RBA provides an overview, and a seasonally adjusted series, including the non-bank sector. APRA provides data for the banking sector – ADI’s or authorised depository institutions.
Total credit in the system, is still growing, with housing lending up to $1.83 trillion dollars, with owner occupied lending accounting for $1.23 trillion and investor loans 0.59 trillion. Business lending was 0.96 Trillion dollars and personal credit was $146 million dollars. So, you can see how significant housing credit – and yes, it is STILL growing.
Of that $1.83 trillion dollars for housing, $1.68 trillion comes from the banks, as reported by APRA. Of that $1.12 trillion dollars is for owner occupied housing, and 0.55 trillion dollars for investors. The rest is non-banks, institutions who can lend, but do not fund these loans from holding bank deposits. APRA now have responsibility for these too but is not that actively engaged. So, to the rate of change of credit growth.
We know that housing credit growth has been slowing as demand has slowed, and lending standards tightened, in response to APRA’s interventions and the Royal Commission. But the stark reality is that business lending is also flat according to the RBA.
In fact, last month, total credit grew by only 0.16% and this is the weakest since early 2013.
Overall housing credit was up by 0.28% in the month, and personal credit declined by 0.3%
Annual credit growth slowed to 3.7%, the weakest since November 2013 and the trends are clear.
Slowing Housing credit growth is a large element in the numbers, as we have been tracking. The latest annual figure is just 3.9%, and this is the lowest ever in the series which started back in the late 1970s.
Looking at the three-month series you might argue that the rate of decline is easing just a little, there is not much here really to get excited about. Of course, most of the commentators are now looking ahead following the Coalitions return to power. The RBA I think cut rates on Tuesday, which is the first cut since August 2016. And of course, APRA is consulting on a proposal to loosen the interest rate buffer test.
I won’t repeat here the significant downside forces which will make a rebound in housing lending difficult, other than to say, the Coalition has promised a home price recovery, so they have to try and engineer it any cost – even if the debt balloon inflates further.
Investor housing momentum is still very weak, and there is little to suggest this will change soon – though some might try to sell into any more optimistic season. So, its down to first time buyers, and those seeking to trade-up.
Turning to business credit, this grew by 4.5% over the past year, up from 3.0% for 2017 but is easing back from gains of 6.4% in 2015 and 5.5% in 2016. In fact, this is an important issue, as business lending and confidence are easing back – not a good sign.
APRA’s data showed that owner occupied lending rose 0.38% in the month, investor lending was flat, and the market growth was 0.3%.
And our analysis of the individual bank data shows that housing market shares did not change that much, although CBA and Westpac were more active in net terms last month, though mainly in owner occupied lending. NAB and ANZ dropped more investor loans.
The 12-month portfolio moves for investor loans reveals the majors below the market. Macquarie and HSBC are leading the charge.
But a comparison of the gap between the Bank lending and RBA data shows the non-banks are still growing their books faster. Overall, they are running at an annualised 7.8%.
And analysis of owner-occupied lending by the non-banks shows it is still at 12.8%, compared with 2.1% for investor loans, but both above system.
So, standing back, the pre-election trends were weakening, the non-banks were making hay, and investors are still on the sidelines. Now it will be interesting to see if the so-called sentiment swing, and hype shows up in the numbers in the next couple of months. But to state the obvious, a growth rate of 3.9% for credit for households even now is way stronger than wages growth or inflation, so the debt burden is building further, and yet the policy settings are about to be shifted to encourage more of the same. Hardly sensible.
Edwin Almeida: The Placebo Effect
Property insider Edwin Almeida recorded a show with me, post the election and the APRA loosening. He also wrote a companion piece, below.
SUMMARY OF MY THOUGHTS MOVING FORWARD POST ELECTION 2019
@justthink1 Edwin Almeida ‘Ribbon Property Specialist’
Thumb on the scale
If property owners ever needed a thumb on the scale to give people a false sense of ‘property price increase and rebound,’ the outcome of this election was timed perfectly for them. It will be short lived however.
Nonetheless, many NEW buyers will fall for the false sense of economic security, value growth in property and like sheep to the slaughter, will jump right in and get a “mortgage.” Their very own voluntary life sentence which may well end up under water and at 20,000 leagues.
The savvy owners
Smart property owners will now take this opportunity to list their property and bail out, a welcomed relief for many. They will do so to take advantage of the new found sentiment of prosperity post the election. The smart sellers will jump on the newly revived ‘property prosperity (bubble)’ which many property-pundits will be preaching.
Nonetheless, this revival will only create and turn out to be a short lived slowdown to the prop-market drop, in ‘real time’ that is. CoreLogic daily numbers will continue to show a downward trend for the time, as it catches up with live data.
But hell, make hay whilst the sun shines and get on the market. Why you say? Read on and see.
Buyers will jump the gates and take on anything and everything on offer as the MSM puts out upbeat propaganda of a market turnaround and stability under the elected government.
I believe there will also be a quick run to the Property Portals by vendors that withdrew their listings from the market as they couldn’t pallet further drops in prices and long days on market and all due to the pre-election uncertainty. Keep an eye on Domain and REA Numbers over the next 2-4 weeks and see if I’m on the money or not.
Personally, I can already see the emails hitting agent’s in-boxes with highlighted and bold text: Relist, re-advertise and place my property back on the market; we’re back in business.
In the short term, it will be a small run and good for the owners that hit the market quickly, BUT in the medium to long term, it will only add more stock on the market as the majority of buyers still have to navigate through banking restrictions.
However, the fever may hit enough of the cashed up buyers that have been waiting on the sidelines. Enough numbers to make the mainstream property analysts declare victory over the doomsayers.
Interest Only Investors
If there was a time for the IO investors to bail out and not lose more than what they have been, now is it. I dare say many will take opportunity and list. Well, the smarter ones that is and the ones that are not so much into debt and so deeply under water with mortgages.
After all, the mainstream analysts and property-pundits have rang the bell, the real estate hounds are out and the starter’s gun has fired. First Home Buyers are on the grounds once more with newly found HOPE, and the selling agents smell blood and are on the hunt.
Will the Banks bend over for the Government and loosen their grip on credit?
Maybe they will, maybe they won’t. I’ll leave this to John Adams and Lindsay David to enlighten us on the subject. I personally don’t believe they want to and particularly not when they can see the storm ahead.
Most of my internal banking sources tell me, the landscape of economic pain still remains and the ship will take a while to turn around.
The Achilles Heel
Our weakest link continues to be OVERSUPPLY, yet no party policy addressed it before the election, rather both were more focused on building more.
Lending more to build more, will only make this worse. More property equals less rent and so on but heck, we just see things on the front line, what do I know right?
Truth be told, the savvy investors aren’t interested in NG, they want; high yields, growth & to add value to make a gain.
Besides, would you buy a newly built, badly engineered apartment or home now and after the fiasco of Opal Tower and the issues around Private Certification? Didn’t think so.
Cost of living & employment
Will cost of living lessen all of a sudden under the elected Morrison government? Like you, I don’t believe it will.
Just because the Liberal party are back in, doesn’t mean we receive a $5K bonus in our accounts next time we go to the teller. Hold on, I better run and check maybe I did get a bonus. Just checked online banking and nope, didn’t get the bonus.
Yes, the mainstream noise says ‘brighter times ahead.’ Let’s see how bright they really are as we navigate the next quarter. Will there be announcements of new FULL time jobs being created? Jobs to actually help pay a mortgage? Or will we have more part-time job numbers?
My overall opinion
In my personal opinion, I just see what transpired on the weekend and what will happened in the next quarter as the last bastion of the property demigods to keep the property bubble inflated. The property analysts that once say drops of up to -25% may well have a change of heart. Others will begin to call the trough and the revival.
However, I still believe and feel there are way too many holes in this economy and property market. Frankly, not the Libs nor Labor were and are going to stop it from hitting my predicted 2004-2005 property prices in most parts of Sydney.
Call what I see on the ground and at firsthand experience ‘the vibe,’ or call it what you will. Most definitely, don’t call it ‘delusional economics’ nor mix my thoughts with those of the mainstream that propagate and preach a rebound.
A brief overview of what I see that will transpire over the next few months. But please don’t stone me, as I say it’s just ‘the vibe’ on the ground and what we see on the property front line.
APRA changes “unlikely” to invigorate housing market
While APRA’s proposed changes to serviceability assessments for ADIs have been broadly celebrated, others have expressed doubt that the regulatory revisions will stimulate the housing market in as meaningful a way as is hoped. Via Australian Broker.
“While these changes are welcome and will help some borrowers that can’t quite access a mortgage currently to get one, it is unlikely to result in a rebound in the housing market,” said CoreLogic research analyst Cameron Kusher.
Kusher referred to ANZ’s recent investor update to the market to elaborate on his stance.
The update from ANZ attributed reduced borrowing capacity to three factors: changes to HEM accounting for 60%, the servicing rate floor responsible for 30%, and income haircuts causing the remaining 10%.
Kusher pointed out that, according to this data, 70% of the reduction in borrowing capacity is unrelated to the current serviceability assessment model. Even if APRA were to change its current guidelines, it will likely continue to be much more challenging to get a mortgage than in the past.
Roger Ward, director of Champion Mortgage Brokers, agrees that the current 7.25% assessment rate is just one of six lending standards that have contributed to the credit squeeze.
Drawing from his 25 years in the banking and finance industry, Ward outlined the remaining five challenges to lending as:
- Banks considering borrowers’ capacity to repay for the full 25 to 30 years of a mortgage term, despite most loans now only lasting seven to eight years
- A one-dimensional and inaccurate approach to identifying spending habits and current costs of living
- Changes in credit reporting providing data on the last 24 months’ payment history on credit cards, with one late payment sometimes enough to be declined by a bank
- LVR changes and limitations, especially those impacting investors
- Tiered interest rates dependant on the size of the original deposit
While allowing lenders to review and set their own minimum interest rate floor will undoubtedly help some borrowers access previously unreachable mortgages, the housing market will require stimulation from elsewhere in order for dwelling values to begin their rise.
According to Kusher, “[APRA’s] proposed changes, in conjunction with the uncertainty of the election now behind, will potentially provide additional positives for the housing market. [They] would potentially slow the declines further and may result in an earlier bottoming of the housing market.
“Despite that prospect, it will remain more difficult to obtain a mortgage than it has done in the past and we would expect that if or when the market bottoms, a rapid re-inflation of dwelling values is unlikely,” he concluded.
Moody’s On APRA Moves
Via Moody’s. On 21 May, the Australian Prudential Regulation Authority (APRA) announced a proposal to remove its requirement that banks use an interest rate floor of at least 7% in their assessment of mortgage serviceability. The proposal will help support credit growth and could stem falling house prices. The announcement also has the potential to increase household leverage. However, banks have progressively tightened mortgage underwriting practices, which will mitigate the risk of a resurgence in excessive credit growth and another house price boom.
Since December 2014, APRA has required banks to assess loan serviceability using the higher of either an interest rate floor of at least 7% or a 2% cent buffer over the loan’s interest rate. APRA also recommended that banks should operate above these minimum requirements, which resulted in most banks using a 7.25% floor and 2.25% buffer. Under APRA’s proposal, banks will be allowed to set their own interest rate floor, but will need to incorporate a buffer of at least 2.5%.
The proposal is likely to increase borrowing capacity, with some banks reporting that the interest rate floor has been a key contributor to the decline in borrowing capacity in recent years1. Improving access to credit will support credit growth for the banks, which has declined significantly from its peak in 2014 …
… and, in turn, stem the fall in house prices.
Falling house prices are dampening household consumption and contributing to a weaker growth outlook for Australia.
APRA said that a review of the interest rate floor was necessary because interest rates have declined since 2014 and are likely to remain at historically low levels for some time, which means that the gap between the 7% floor and actual rates paid on home loans may become unnecessarily wide. Furthermore, since the introduction of a single rate floor, banks have introduced differentiated pricing for mortgage products. This has resulted in the highest interest-rate buffer being applied on lower-priced and less-risky owner-occupier principle and interest loans, while the smallest buffer was being applied to investors with interest-only loans. Interest-only loans are generally more risky and attract a higher interest rate.
This proposal reflects the unwinding of APRA’s macroprucential policies that were progressively introduced from 2014, during a period of rapid growth in credit and housing prices. Such policies included interest-only lending restrictions that were removed in December 2018 and the removal of investor lending restrictions in April 2018. These restrictions had been in place since March 2017 and December 2014, respectively.
Despite declining house prices, high household leverage remains a key risk to Australian banks. And there is a risk that the lowering of the interest rate floor, in combination with the potential for the Reserve Bank of Australia to lower the cash rate later this year, could drive a resurgence in excessive credit growth and another house-price boom. However, banks have progressively tightened mortgage underwriting practices, which provides a strong mitigant to this risk. For example, banks have become increasingly focussed on the verification of a customer’s declared income and living expenses. This move has decreased borrower capacity and significantly
lengthened the mortgage application process. Banks have also developed limits on lending at high debt/income levels, where debt is greater than 6x a borrower’s income, and have introduced haircuts on uncertain and variable income, such as non-salary and rental income.