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.

APRA Goes Back To The Future On Bank Capital [Podcast]

We discuss the changes APRA is proposing on Bank capital ratios.

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APRA Goes Back To The Future On Bank Capital [Podcast]
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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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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.