Tag: APRA

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.

APRA On Financial Firm Conduct – Could Do Better

APRA’s report released today highlights the gaps which still exist across our financial firms, following the CBA analysis. Worryingly, despite firms’ boards and management teams being aware of the risk and accountability deficits which exist, some are not addressing them appropriately. Indeed, in some organsiations, there is still limited visibility of potential non-financial risks.

The Final Report of the Prudential Inquiry into the CBA found that continued financial success dulled the institution’s senses to signals that might have otherwise alerted the Board and senior executives to a deterioration in the bank’s risk profile. This was particularly evident in relation to the management of non-financial risks.

The Prudential Inquiry also found a number of prominent cultural themes; there was a widespread sense of complacency, a reactive stance in dealing with risks, insularity and not learning from experiences and mistakes, and an overly collegial and collaborative working environment that lessened constructive criticism, timely decision-making and a focus on outcomes.

The Final Report listed 35 recommendations focussing on five key levers of change:

  • more rigorous board and executive committee governance of non-financial risks;
  • exacting accountability standards reinforced by remuneration practices;
  • a substantial upgrading of the authority and capability of the operational risk management and compliance functions;
  • injection of the “should we” question in relation to all dealings with and decisions on customers; and
  • cultural change that moves the dial from reactive and complacent to empowered, challenging and striving for best practice in risk identification and remediation.

In releasing the Final Report, APRA noted that all regulated financial institutions would benefit from conducting a self-assessment to gauge whether similar issues might exist in their institutions. APRA subsequently wrote to the chairs of 36 institutions requesting a board endorsed written self-assessment of the effectiveness of their own governance, accountability and culture practices. APRA received all of these assessments by mid-December 2018.

APRA’s request for institutions to conduct the self-assessments was intentionally not prescriptive. Boards were asked to determine an approach to the assessment which would provide them with a comprehensive understanding of the effectiveness of governance, accountability and culture, and enable them to form a view as to the extent the ‘tone from the top’ is permeating through and across the institution. As a result, the structure, methodology and format each institution took to completing the self-assessment was considered an important indicator of how seriously boards approached the task.

APRA set three principles that it expected the self-assessments to reflect:

  • Depth – to enable the board to gain assurance that appropriate governance, accountability and culture are embedded in practices and behaviours, and enforced within the various levels and across the group-wide operations;
  • Challenge – either independent or self-challenge, to provide the board with fresh perspectives on the strength of governance, accountability and culture (e.g. the assessment should not only reflect the view of the risk function); and
  • Insights – to inform the board of areas requiring attention and improvement, and how better practice can be achieved.

Emerging themes

While the self-assessments exhibited considerable variation in the number and severity of findings, four themes emerged across all industries:

  • non-financial risk management requires improvement. This was evidenced through a range of issues identified by institutions, including resource gaps (particularly in the compliance function), blurred roles and responsibilities for risk, and insufficient monitoring and oversight. Institutions acknowledged that historical underinvestment in risk management systems and tools has also contributed to ineffective controls and processes.
  • accountabilities are not always clear, cascaded, and effectively enforced. Institutions noted that, while senior executive accountabilities are fairly well defined within frameworks, there is less clarity or common understanding of responsibilities at lower levels, and points of handover where risks, controls and processes cut across divisions. This is further undermined by weaknesses in remuneration frameworks and inconsistent application of consequence management.
  • acknowledged weaknesses are well known and some have been long-standing. The majority of self-assessment findings were reported to be already known to boards and senior leadership. Nevertheless, some issues have been allowed to persist over time, with competing priorities, resource and funding constraints typically cited as the basis for acceptance of slower progress. It was observed that these issues are often only prioritised when there is regulatory scrutiny or after adverse events.
  • risk culture is not well understood, and therefore may not be reinforcing the desired behaviours. Institutions are putting considerable effort into assessing risk culture, but many continue to face difficulties in measuring, analysing, and understanding culture (and sub-cultures across the institution). It is therefore unclear if these institutions can accurately determine whether their culture is effectively reinforcing desired behaviours (or identify how it would need to be changed to do so).

While the self-assessments contained some in-depth self-reflection and acknowledgement by institutions of issues within their organisations, the assessments relating to the effectiveness of boards and senior leadership were notably less critical. Many self-assessments noted that the institution is generally well governed, with a respected and suitably challenging board, strong executive leadership teams and a good tone from the top, although at the same time acknowledging weaknesses spanning most or all chapters of the Final Report. This raises the question of whether boards and senior management have a potential blind spot when it comes to assessing their own effectiveness.

APRA accused of downplaying competition risks

A new report has found that APRA has “downplayed” and “dismissed” competition risks associated with its regulatory reforms, according to a new report, via InvestorDaily.

A new report commissioned by the Customer Owned Banking Association (COBA) and compiled by Pegasus Economics – titled Reconciling Prudential Regulation with Competition – has found that changes to the regulatory capital framework have undermined competition in the mortgage market.  

According to the report, the Australian Prudential Regulation Authority (APRA) did not give enough credence to competition risks when applying the internal ratings basis (IRB) method for calculating risk weights provided for under Basel II – a banking regulations framework designed to promote financial stability.

The report found that under Basel II, credit and operating risk weights determined under the standard method were “much higher” than those under the IRB method used by the major banks.

Research from the Reserve Bank of Australia was cited, in which the central bank found that at the end of June 2015, the average risk weight of residential mortgage exposures using the IRB method was 17 per cent, compared to 40 per cent using the standardised approach used by smaller lenders.

The report noted that as a result of the disparity, higher costs were incurred by lenders using the standard method, which influenced the pricing of lending products and, in turn, reduced competitiveness with major banks.

According to the report, due to the imbalance, the major banks have enjoyed a funding cost advantage in excess of $1,000 annually on a residential mortgage of $400,000.

“APRA downplayed as well as dismissed competition concerns during its implementation of Basel II and did not follow due process by completing the required competition assessment checklist in the Regulation Impact Statement it prepared for Basel II,” the report noted.

“The actions of APRA, in turn, implies the competition-fragility view of banking is endemic to the organisation.

“The outcomes arising from the interaction of the global financial crisis (GFC), coupled with the implementation of Basel II, vindicates the criticisms of Basel II from a competition perspective.”

The report went on to state: “Through its implementation of Basel II, APRA put smaller ADIs at a major competitive disadvantage and undermined competitive neutrality.

“The available evidence suggests the interaction of the GFC combined with the implementation of Basel II provided a major fillip to the major banks to the detriment of other ADIs.”

In addition, the report found that APRA’s decision to increase the average risk weight for IRB banks from an average of 16 per cent to a minimum of 25 per cent has prompted some lenders to engage in “cream skimming” by targeting home loans with the lowest risk profile, which focused competitive pressures on “high-demand” borrowers.

“Cream skimming has adverse consequences as it skews the level of risk in house lending away from the major banks and towards other ADIs who have to deal with an adversely selected and far riskier group of home loan applicants,” the report noted.

With APRA set to release a draft revised capital framework, the COBA-commissioned report called for policy measures that would ensure regulation does not continue to “stifle” competition in the banking sector.  

The recommendations include:

  • Addressing the lack of coordination between prudential regulation and competition policy and overcoming the “competition-fragility view” of banking, which the report stated would ensure that competition considerations are given due deliberation in prudential regulatory policy decisions through a statutory secondary competition objective for APRA.
  • Compelling IRB banks to hold more capital, which the report stated would reduce the fragility of the banking system and ensure benefits achieved from injecting greater competition into the banking system can be realised.
  • Increasing granularity for risk weights for banks using the standardised approach, which would “improve competition in home lending”.

Reflecting on the findings of the report, COBA CEO Michael Lawrence said it’s “timely” given the “acute need for a competitive and efficient home lending market”.

“Following the financial services royal commission, there’s a renewed focus on how regulators and government can improve competition in banking and ensure major banks are accountable without reducing financial stability,” Mr Lawrence said. 

He added: “The rules on risk weights mean there is too large a gap between the amount of capital that smaller banks must hold compared to the major banks.

“The report says APRA should be looking to close the gap in risk weights and it should ensure that it does so in a way that prevents the major banks cream-skimming the lowest-risk home loans.”

Mr Lawrence recently welcomed the passage of the Treasury Laws Amendment (Mutual Entities) Bill 2019 through both houses of Parliament.

The bill includes a new definition for a mutual entity as a company where each member has no more than one vote, changes to demutualisation rules to ensure that it is only triggered by an intended demutualisation, not by other acts such as capital raising, and the creation of a mutual-specific instrument that can be used to raise capital.

COBA has also published a ‘Comptetition Agenda’ahead of the federal election, designed to promote pro-competitive reform in the banking sector.

APRA Report Identifies Superannuation Failings

APRA has identified a number of areas where superannuation providers are falling short of their regulatory obligations, particularly when it comes to managing conflicts of interest, via Investor Daily.

A review of APRA’s 2013 superannuation prudential framework has found it met its original objectives but must keep evolving to ensure members’ interests are protected.

APRA commenced a post-implementation review of the framework introduced as part of 2013’s Stronger Super reforms in May last year, to assess how it had performed in the five years since it was introduced. Until the package of 13 prudential standards, supporting guidance and reporting standards came into force, registrable superannuation entity (RSE) licensees were not subject to legally binding prudential standards in the same way as other APRA-regulated entities.

The review found the prudential framework had materially lifted industry practices in key areas as governance, risk management and outsourcing. But it also highlighted the need for APRA to continue strengthening prudential requirements in several areas, including board appointment processes, management of conflicts of interest and life insurance in superannuation.

APRA’s review stated that appropriately managing conflicts of duty and interest is critical to ensuring that RSE licensees comply with their overarching obligation to act in the best interests of members.

“However, the Royal Commission noted a number of areas where RSE licensees appeared not to have managed their conflicts of interest appropriately, particularly with respect to related party arrangements,” the regulator said. 

While APRA’s review found that the key procedural requirements of its conflcits management framework (SPS 521) have “generally been met at an industry-wide level”, the regulator said it is not clear that the importance of effectively managing all potential conflicts of interest through a members’ best interests’ lens is embedded within the culture of all RSE licensees.

APRA’s proposed enhancements to mitigate conflicts of interest in superannuation include requiring RSE licensees to explicitly assess the impact of conflicts of interest on member outcomes and introducing a two-stage process for the consideration of conflicts of interest. 

“First establish interests held, then establish whether those interests give rise to a conflict,” the regulator said. 

APRA’s thematic review noted that policies underlying the conflicts management framework were in some instances too narrowly focused on conflicts arising in relation to responsible persons and did not cover conflicts arising for the RSE licensee as a whole. 

“This narrow approach undertaken by some RSE licensees tended to be characterised by a lack of consideration of how these conflicts might be perceived by external stakeholders,” the regulator said. 

“The thematic review also noted that, in many cases, the conflict identification process relied solely on self-identification by directors or responsible persons, with no independent review undertaken. It also found a lack of consistency across the industry in the identification and management of conflicts when dealing with intra-group services and product providers and other related parties. These inconsistencies arose, in part, due to inadequacies in the conflicts management framework for these types of RSE licensees.”

APRA Deputy Chair Helen Rowell said it was important that the prudential framework continued to evolve as the industry developed and regulatory priorities changed.

“The Stronger Super reforms deliberately focused on ensuring superannuation trustees that often manage billions of dollars on behalf of members had the necessary frameworks in place to effectively administer the fundamentals of operating their business,” Mrs Rowell said.

“As the industry has matured and lifted its practices, we have shifted our emphasis to ensuring trustees are focused on enhancing member outcomes, especially with last December’s package of reforms.

“We are already taking steps to strengthen the prudential framework in many of the areas highlighted by the review, and we will look to make further changes to incorporate its findings as we progress our superannuation policy priorities. This will include consideration of measures to address relevant recommendations in the financial services Royal Commission report and the report on the Productivity Commission’s superannuation review.”

Weaker Credit Impulse Signals More Home Price Falls, Despite New Record Debt

On the last working day of each month the RBA releases their Credit Aggregates and APRA their Monthly Banking Statistics for ADS‘s. Both are now out for March.

The headline news is the overall housing credit is up, to a new record of $1.82 trillion dollars up 0.31% from last month, or 0.31%. Within that owner occupied lending rose 0.32% to $1.22 trillion dollars and investment lending was flat. 32.7% of lending stock is for investment lending purposes, a slight fall from last month, whilst business lending as a proportion of all lending rose from 32.9% from 32.8% to reach $963.7 billion dollars. Personal credit fell 0.27% or $0.4 billion, to $147.1 billion, and continues to fall.

The annualised movements by category shows further weakness, with lending for owner occupied housing now at 5.7%, investment housing lending at 0.7%, giving housing overall growth of just 4% (though still higher than wages growth I would add). Personal credit fell 2.8% over the past year, while business lending rose 4.9% annualised. All these figures are on a seasonally adjusted basis

Turning to the APRA data on the banks, owner occupied lending rose 0.35% in March, while investment lending fell by 0.02%, giving total credit growth of just 0.2%. Over the past year owner occupied loans grew by 4.8% (compared with 5.7% at the aggregate level) and investor loans grew 0.4% (compared with 0.7% at the aggregate level). So the banks loan portfolios are growing more slowly than the market.

This can be illustrated by comparing the RBA and APRA data (warts and all) to show the non-bank sector is growing faster than the banks. Overall, they have over 7.5% of the market, which is up from the low in December 2016.

In addition, the rate of growth is significantly higher than the banks. Non-bank owner occupied loans are growing at an annual rate of 14%, while investment loans are 2.2%; both significantly higher than the ADI’s. Non-banks have weaker regulation, and more ability to lend. APRA has yet to truly engage with the sector.

Turning back to the individual lenders, the changes in their portfolios over the month show that Westpac and CBA offered the most new owner occupied loans, while ANZ dropped back, on both owner occupied and investment loans, while NAB dropped investment lending. HSBC, Macquarie and Member Equity Bank (ME) lend more than the regionals.

Overall market shares hardly moved, with CBA still the largest owner occupied lending, and Westpac the biggest investor lender.

Investment lending growth over the past 12 months has been anemic, but some lenders such as Macquarie are making hay. Of course the old 10% speed limit from APRA has gone now, but the relative growth highlights the fact that the four majors are well below market growth levels – and ANZ the weakest (which is why they said they wanted to lend more).

So finally, the total ADI lending book is at $1.68 trillion dollars, with owner occupied loans comprising $1.12 trillion dollars and investment loans $557 billion dollars, and comprising 33.2% of the portfolio – as the ratio continues to fall.

In conclusion, the credit impulse – the rate of change of credit being written is the most significant forward indicator of house price trajectory. The weak state of the market suggests more and significant price falls ahead. Yet despite all this, household debt will continue to rise. There is absolutely no reason to loosen lending requirements, or drop the hurdle rate on these numbers. More households will get into trouble ahead.

APRA Releases New Enforcement Approach

The Australian Prudential Regulation Authority (APRA) has released details on the future role and use of enforcement activities in achieving its prudential objectives.

Guiding principals include “risk-based”, “forward-looking”, “outcomes-based” and deterrence impact. Of course the question is, will it really make any difference? Here is the release.

APRA’s new Enforcement Approach, published today, sets out how APRA will approach the use of its enforcement powers to prevent and address serious prudential risks, and to hold entities and individuals to account.

The new Enforcement Approach is founded on the results of its Enforcement Review, which has also been published today. The Review, conducted by APRA Deputy Chair John Lonsdale, made seven recommendations designed to help APRA better leverage its enforcement powers to achieve sound prudential outcomes.

The APRA Members formally commissioned the Enforcement Review last November in response to a range of developments, including the creation of the Banking Executive Accountability Regime, the Prudential Inquiry into Commonwealth Bank of Australia, evidence presented to the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, and proposals to give APRA expanded enforcement powers, particularly in superannuation. Mr Lonsdale led the Review, supported by a secretariat within APRA. Mr Lonsdale also utilised an Independent Advisory Panel comprising Dr Robert Austin, ACCC Commissioner Sarah Court and Professor Dimity Kingsford Smith to provide external perspectives and advice.

While APRA’s appetite for taking enforcement action is closely linked to a number of other components of its supervisory approach, the Review was focused on enforcement activity and not APRA’s wider operations

APRA Chair Wayne Byres said APRA would implement all the recommendations, including:

  • adopting a “constructively tough” appetite to enforcement and setting it out in a board-endorsed enforcement strategy document;
  • ensuring APRA supervisors are supported and empowered to hold institutions and individuals to account, and strengthening governance of enforcement-related decisions;
  • combining APRA’s enforcement, investigation and legal experts in one strengthened support team, and ensuring resources are available to support the pursuit of enforcement action where appropriate; and
  • strengthening cooperation on enforcement matters with the Australian Securities and Investments Commission (ASIC).

Mr Lonsdale said the Review found APRA had, on the whole, performed well in its primary role of protecting the soundness and stability of institutions. But he said APRA could achieve better outcomes in the future by taking stronger action earlier where entities were not cooperative or open, and by being more willing to set public examples.

“APRA’s strong focus on financial risk has ensured the ongoing stability of Australia’s financial system, even during periods of financial and market stress, and protected the interests of bank depositors, insurance policyholders and superannuation members. But to remain effective, we must continue to evolve and improve, especially in response to the ways in which non-financial risks, such as culture, can impact on prudential outcomes.

“The recommendations of the Review will still mean that APRA as a safety regulator remains focused on preventing harm with the use of non-formal supervisory tools. However, APRA will be more willing to use the full range of its formal powers – such as direction powers and licence conditions – to achieve prudential outcomes and deter unacceptable practices,” Mr Lonsdale said.

Mr Byres thanked Mr Lonsdale and the APRA Review team for delivering a valuable piece of work that would sharpen APRA’s ability to hold entities and their leaders to account. He said enforcement activity is not intended to be a separate or stand-alone function, but rather a set of tools that APRA supervisors would use more actively, particularly in the case of uncooperative institutions. (See Figure 1)

“Having joined APRA only last October, John brought a fresh set of eyes to the task of examining APRA’s historical approach to enforcement. The Review acknowledges that as a supervision-led prudential regulator, APRA’s primary focus will always be on resolving issues before they cause problems for depositors, insurance policyholders and superannuation members, rather than relying on backward-looking actions after harm has occurred. In most cases, we will continue to achieve this through non-formal tools.

“However, formal enforcement is an important weapon in our armoury when non-formal approaches are not delivering prudential outcomes. Particularly as our powers have recently been strengthened in a number of areas, the new Enforcement Approach will ensure we make use of those powers as the Parliament intended. That means that in future, APRA will be less patient with the time taken by uncooperative entities to remediate issues, more forceful in expressing specific expectations, and prepared to set examples using public enforcement to achieve general deterrence. 

“With the release of APRA’s revised Enforcement Approach today, the new enforcement appetite comes into effect immediately,” Mr Byres said.

Mr Byres indicated support for the recommendations on legislative change, and that these would be referred to the Government for its consideration. He also welcomed the recent passage of the Treasury Laws Amendment (Improving Accountability and Member Outcomes in Superannuation Measures No 1) Bill 2019 as a useful complement to APRA’s renewed enforcement appetite. 

The Panel, led by Graeme Samuel, currently undertaking a Capability Review of APRA will take into account APRA’s new Enforcement Approach in its work.

The Final Report of the Review and APRA’s Enforcement Approach are available on APRA’s website at: https://www.apra.gov.au/enforcement. 

Non Banks Bloom As Credit Impulse Slows Again

The February data from APRA for ADI’s and the credit aggregates from the RBA were released today. The headline news is the rate of housing credit growth continued to slow.

This is quite starkly shown in the RBA’s 12 month series, with total credit annualised growth now standing at 4.2%. Housing credit also fell to the same 4.2% level, from 4.4% a month ago. The fall continues. Within the housing series, lending for owner occupation fell below 6% – down to 5.9% and investment housing lending fell to 0.9% annualised.

The seasonally adjusted RBA data showed that last month total credit for housing grew by 0.31%, up $5.6 billion to $1.81 trillion, another record. Within in that owner occupied lending stock rose 0.42%, seasonally adjusted to $1.22 trillion, up $5.11 billion. Lending for investment property rose 0.09%, or $0.5 billion to $595 billion. Personal credit fell slightly, down 0.07% and business credit rose 0.42% to $960 billion, up $4.06 billion.

The APRA data revealed that ADI growth was lower than the RBA aggregates. Some of this relates to seasonal adjustments plus, as we will see a rise in non-bank lending. The proportion of investment loans less again to 33.3% of loans outstanding.

Total owner occupied loans were $1.11 trillion, up 0.38%, or $4.2 billion, while investor loans were $557 billion, flat compared with last month. This shows the trends month on month, with a slight uptick in February compared to January, as holidays end and the property market spluttered back to life. The next couple of months will be interesting as we watch for a post-Hayne bounce in lending and more loosening of the credit taps, but into a market where demand, is at best anemic.

The portfolio movements are interesting (to the extent the data is reported accurately!), with HSBC growing its footprint by more that one billion across both investor and owner occupied lending. Only Westpac, among the big four grew their investor loans, with ANZ reporting a significant slide (no surprise they said they had gone too conservative, and recently introduce a 10-year interest only investor loan). Macquarie and Members Equity grew their books, with the focus on owner occupied loans.

The overall portfolios did not vary that much, with CBA still the largest owner occupied lender, and Westpac the largest investor lender.

The 12 month investor tracker whilst obsolete in one sense as APRA has removed their focus on a 10% speed limit, is significant, in that the market is now at 0.6% annualised.

But the final part of the story is the non-bank lending. This has to be derived, and we know the RBA data is suspect and delayed. But the gap between the RBA and APRA data shows the trends.

Non Bank annualised owner occupied credit is growing at 17.6%, and investor lending at 4.8%. It is clear the non-banks, with their weaker capital requirements, and greater funding flexibility are making hay. Total non bank credit for housing is now around $142 billion or around 7.8% of housing lending. This ratio has been rising since December 2016, and kicked up in line with the tighter APRA rules being applied to the banks.

We have out doubts that APRA is looking hard enough at these lending pools, especially as we are seeing the rise of higher risk “near-prime” offers to borrowers who cannot get loans from the banks.

So to conclude the rate of credit momentum continues to ease – signalling more home prices ahead. The non-banks sector, currently loosely regulated by APRA is growing fast, and just the before the US falls around the GFC, risks are higher here. And finally, and worryingly, household debt is STILL growing… so more stress and financial pressure ahead.

APRA seeks to modernise prudential standard on credit risk management

The Australian Prudential Regulation Authority (APRA) has proposed updating its prudential standard on credit risk management requirements for authorised deposit-taking institutions (ADIs).

Credit risk refers to the possibility that a borrower will fail to meet their obligations to repay a loan, and is usually considered the single largest risk facing an ADI.

APRA has released a discussion paper proposing changes to Prudential Standard APS 220 Credit Quality (APS 220), which requires ADIs to control credit risk by adopting prudent credit risk management policies and procedures.

APS 220 was last substantially updated in 2006, and there has been significant evolution in credit risk practices since then, including more sophisticated analytical techniques and information systems. APRA’s plan to modernise the standard was prompted by its recent supervisory focus on credit standards, and also reflects contemporary credit risk management practices.

The discussion paper outlines APRA’s proposals in the following areas:

  • Credit risk management – The revised APS 220 broadens its coverage to include credit standards and the ongoing monitoring and management of an ADI’s credit portfolio in more detail. It also incorporates enhanced Board oversight of credit risk and the need for ADIs to maintain prudent credit risk practices over the entire credit life-cycle.
     
  • Credit standards – The revised APS 220 incorporate outcomes from APRA’s recent supervisory focus on credit standards and also addresses recommendation 1.12 from the Final Report of the Royal Commission in relation to the valuation of land taken as collateral by ADIs.
     
  • Asset classification and provisioning – The revised APS 220 provides a more consistent classification of credit exposures, by aligning recent accounting standard changes on loan provisioning requirements, as well as other guidance on credit related matters of the Basel Committee on Banking Supervision.

To better describe the purpose of the revised standard, APRA also proposes renaming it Prudential Standard APS 220 Credit Risk Management.

The proposed reforms are due to be implemented from 1 July 2020, while an accompanying prudential practice guide (PPG) and revised reporting standards will be released for consultation later this year.

In a related development, APRA has also released a letter to industry expressing concerns related to ADIs’ increasing exposure to funding agreements with third party lenders, including peer to peer (P2P) lenders.

A copy of the letter to ADIs can be found on the APRA website at: https://www.apra.gov.au/letters-notes-advice-adis.

A copy of the discussion paper and draft Prudential Standard APS 220 Credit Risk Management can be found on the APRA website at: https://www.apra.gov.au/proposed-revisions-credit-risk-management-framework-authorised-deposit-taking-institutions