Tag: APRA

Non Banks Lending Runs Ahead

The analysis of the monthly banking stats out last week gives us the opportunity to look across the non-bank sector, relative to the banking sector by comparing the APRA data with the Reserve Bank data series.

We have plotting the rolling 12 month trends, and this chart shows the results.

The striking observation is the relatively stronger growth rate relative to the banks supervised more directly by APRA. Granted APRA does have some responsibilities for the non-bank sector, but appear not to be their main focus.

All lenders have the same obligation with regards to responsible lending, but non-banks are generally more flush with cash, and less constrained by the capital requirements which crimp ADI’s.

Thus we can expect the growth on non-ADI mortgage lending to continue at a faster pace than the bank sector. As a result, we think more risks are building in the financial system.

APRA takes action against IOOF

The Australian Prudential Regulation Authority (APRA) has announced a number of actions against IOOF entities, directors and executives for failing to act in the best interests of superannuation members.

APRA has commenced disqualification proceedings and is seeking to impose additional licence conditions and issue directions to APRA-regulated entities in the IOOF group.

APRA has issued a show cause notice setting out APRA’s intention to direct IOOF Investment Management Limited (IIML) to comply with its Registrable Superannuation Entity (RSE) Licence and impose additional conditions on the licenses of IIML, Australian Executor Trustees Limited (AET) and IOOF Ltd (IL). These entities have 14 days to respond to this notice.

The proposed conditions and directions to comply with conditions seek to achieve significant changes to the identification and management of conflicts of interest by IIML, AET and IL and facilitate APRA’s ability to take further enforcement action should this not occur. The proposed additional conditions on the licences of IIML, AET and IL are based on issues and concerns raised by APRA since 2015 relating to the entities’ organisational structure, governance and conflicts management frameworks, and require the entities to address these within specified timeframes. The proposed directions for IIML relate to an independent report issued by Ernst & Young, the findings of which provide a reasonable basis to conclude that IIML has breached section 52 of the Superannuation Industry (Supervision) Act 1993 (SIS Act), Prudential Standard SPS 520: Fit and Proper and Prudential Standard SPS 521: Conflicts of Interest.

APRA has also commenced proceedings in the Federal Court of Australia to seek the disqualification of five individuals that, at relevant times, were responsible persons of IIML and Questor Financial Services Limited (Questor). The proceedings also seek a court declaration that IIML and Questor (which at the material times were RSE Licensees owned by IOOF Holdings Limited) breached the SIS Act.

The individuals included in the disqualification proceedings are Managing Director Chris Kelaher, Chairperson George Venardos, Chief Financial Officer David Coulter, General Manager – Legal, Risk and Compliance and Company Secretary Paul Vine, and General Counsel Gary Riordan.

The Concise Statement seeks disqualification orders and declarations in relation to breaches of sections 52 and 55 of the SIS Act and Prudential Standards, and associated conduct. As outlined in the Concise Statement, APRA considers that IIML, Questor and the relevant individuals did not appropriately acknowledge and address issues concerning conflicts of interest raised by APRA from 2015 to date. In particular, APRA identified that on three separate occasions in 2015, Questor and IIML contravened the SIS Act by deciding to differentially compensate superannuation beneficiaries and other non-superannuation investors for losses caused by Questor, IIML or their service providers, with superannuation beneficiaries being compensated from their own reserve funds rather than the trustees’ own funds or third-party compensation.

If successful, the disqualification proceedings would prohibit the above individuals from being or acting as a responsible person of a trustee of a superannuation entity.

APRA Deputy Chair Helen Rowell said APRA had sought to resolve its concerns with IOOF over several years but considered it was necessary to take stronger action after concluding the company was not making adequate progress, or likely to do so in an acceptable period of time.

“APRA’s efforts to resolve its concerns with IOOF have been frustrated by a disappointing level of acceptance and responsiveness to the issues raised by APRA, which is not the behaviour we expect from an APRA-regulated entity,” Mrs Rowell said.

“The actions we are now taking are aimed at achieving enduring change to ensure that the trustees of the superannuation funds operated by IOOF fully meet their obligation to put the interests of members ahead of all other interests.

“Furthermore, the individuals included in the proceedings have shown a lack of understanding of their personal and trustee obligations under the SIS Act and at law, and a lack of contrition in relation to the breaches of the SIS Act identified by APRA.”

The Credit Impulse Weakens Further In October

The RBA and APRA both released their statistics today to end of October. The data clearly shows the mortgage flows are easing, which is a key indicator of weaker home prices ahead. Remember it is the RATE of credit growth, or the credit impulse we need to watch. Essentially, for home prices to rise, the rate of credit growth needs to accelerate, and the reverse is also true as can be clearly seen.

The RBA credit aggregates   shows that overall credit rose by 0.4% last month, or 4.6% over the past year. Housing credit rose by 0.3% in October, or 5.1% over the past year. Business credit rose 4.7% over the past year and 0.6% in October. Personal credit fell 1.6% over the year, and broad money rose by 1.9%, compared with 6.8% last year – the credit impulse is easing!

Total housing lending rose by 0.28% to $1.78 trillion. Within that owner occupied lending rose 0.42% or $5 billion to $1.2 trillion while investment lending rose by just 0.1% to $593.6 billion.  Investment loans fell to 33% of all loans, down from 38.6% in 2015.

Business lending was 32.7% of all lending, lower than 2015.

The monthly flows continue to show significant noise…

… but the annualised figures show the fall in housing lending across the board.

Turning to the APRA banking stats, we can look at individual lender portfolios.  We see that Westpac and ANZ both reduced their investor loan portfolios between September and October, while NAB and CBA grew theirs.

Macquarie Bank is still growing its investor pools (well above the now obsolete APRA 10% speed limit).

ADI portfolios hardly moved overall with CBA still the largest owner occupied lending, and Westpac the largest investment lender.

We can still plot the annualised movements of investor loans, and we see a small number of lenders well above the 10% speed limit (which was removed a few months ago). Significantly many lenders are well below that rate.

At an aggregate level, lending by ADIs was up 0.3% in the month, with investor loans flat, and owner occupied loans at 0.46%.

The proportion of investor loans fell again in stock terms to 33.6%.

Total ADI lending rose to $1.66 trillion, up 0.3% of $5 billion. Owner occupied loans rose 0.46% to $1.1 trillion and investor loans rose 0.004% to $557.4 billion.

In fact some smaller banks, and non-banks are growing their portfolio faster than the majors, thus the rotation across the sectors continues.

We expect credit to continue to grow more slowly ahead, and this will lead home prices lower.

 

 

APRA Extends Timeline For Capital Reforms And Reduces Minimum Ratio

The Australian Prudential Regulation Authority (APRA) has released its response to submissions on the introduction of a leverage ratio requirement for authorised deposit-taking institutions (ADIs).

APRA also announced that it is proposing to align the implementation of a range of revisions to the capital framework for ADIs, including the proposed leverage ratio, with the timeline set out in the Basel III framework.

The leverage ratio, which measures the proportion of an ADI’s assets that is funded through equity (capital) rather than debt, is designed to supplement risk-based capital requirements by providing stakeholders with an alternative perspective on ADIs’ capital strength.

APRA released proposals in February 2018 to incorporate a minimum leverage ratio within the ADI prudential framework. Most submissions broadly supported the introduction of a minimum leverage ratio, but raised concerns about the calibration of the minimum requirement and calculation methodology. In response, APRA has proposed to:

  • set the minimum requirement for ADIs using the internal ratings-based approach (IRB ADIs) to determining capital adequacy at 3.5 per cent, rather than 4 per cent;
  • keep the leverage ratio for ADIs that use the standardised approach to determine capital adequacy (standardised ADIs) at 3 per cent;
  • allow standardised ADIs to use Australian accounting standards, rather than the more complex Basel III methodology, to calculate certain parts of the ratio; and
  • require IRB ADIs to largely follow the Basel III methodology to calculate their leverage ratios.

ADIs’ leverage ratio requirements are outlined in the draft amended Prudential Standard APS 110 Capital Adequacy; APRA is also introducing a new reporting standard, ARS 110.1 Leverage Ratio. APRA is seeking industry feedback on the draft standards and invites interested parties to provide submissions by 22 February 2019.

Small ADIs that qualify for the simplified prudential framework – which is intended to introduce more proportionate and tailored prudential requirements for smaller and less complex ADIs – will be exempt from the leverage ratio requirements, but will still be required to report to APRA under ARS 110.1. Although still consulting on its final design, APRA is considering an eligibility threshold for the simplified framework of $15 billion in total assets, which will be complemented by other qualitative measures.

APRA is now proposing that revisions to the capital framework, initially outlined in February 2018,  will come into effect from 1 January 2022, the internationally agreed implementation date set by the Basel Committee on Banking Supervision. APRA had originally proposed an implementation date of 1 January 2021, but is proposing to revise this based on industry concerns about the business impact of moving ahead of international competitors.

APRA bracing for end of ‘economic summer’

APRA is undertaking work to keep Australian’s financial institutions secure if and when the economic summer ends, said newly appointed deputy chair, via InvestorDaily.

APRA’s deputy chair John Lonsdale made the comments at FINSIA ‘The Regulators’ event saying that Australia had endured 27 years of continuous expansion but no summer lasts forever.

“Australia’s unprecedented period of uninterrupted economic growth may have years yet to run. We hope it does.

“But when our economic summer inevitably ends – and winter, autumn or just an unseasonal cold snap arrives – the work that APRA is undertaking means Australians can be confident that the financial institutions they rely on are resilient,” he said.

Mr Lonsdale said that over the coming year APRA would focus on policies and actions to withstand any conditions, starting with a review into the regulators enforcement strategy.

“The review will make recommendations on which enforcement issues APRA should consider acting on, what factors we should take into account, and whether there are any practical or legislative impediments to us pursuing a stronger approach,” he said.

Without pre-empting the review, Mr Lonsdale said the authority was willing to consider a strong appetite for formal enforcement action but would remain true to it’s purpose as a regulator.

“We will, however, remain a supervision-led, rather than enforcement-led, regulator with a focus on pre-emptively tackling problems before they compromise an entity’s ability to meet its obligations to beneficiaries, or rectifying adverse outcomes in the best interests of customers.”

Mr Lonsdale said the group would continue into 2019 looking at cases of misconduct that had been raised during the royal commission which may see more enforcement action taken.

“We are also re-examining cases of potential misconduct by regulated entities raised during the royal commission where the evidence presented was either new to APRA or contradicted what we had previously been told,” he said.

APRA would also continue to administer and monitor the BEAR to ensure it is being followed by all the players in the industry said Mr Lonsdale.

“We are actively making sure the regime is firmly embedded in the major banks – and preparing other ADIs to implement it – rather than assessing whether it is yet achieving its objectives,” he said.

Mr Lonsdale said the following year would also see APRA make further advancements towards implementing the final elements of the complex Basel III capital framework for ADIs.

“A key component is rethinking how Australia’s relatively more conservative capital approach can be explained to provide greater transparency about the strength of our banks and more flexibility in times of stress,” he said.

The authority was also working on developing a formal prudential framework for recovery and resolution, to help stressed institutions restore themselves or in extreme cases manage orderly failure of entities beyond help.

“Our ability to create such a framework has been enhanced by the recently passed legislation expanding APRA’s crisis management powers, which provided a clear basis to make prudential standards on resolution.

“These are powers APRA hopes never to need; however, possessing a strong framework to manage failures and crises is a critical component of a resilient financial system,” he said.

APRA was also working with super groups to finalise member outcome packages as well as moving towards an aligned framework for private health insurance with that used in life and general insurance.

Mr Lonsdale finished by saying APRA keenly awaited the final report of the royal commission and would react to its recommendations.

“Both the report, and the government’s subsequent response to its recommendations, will become high priorities for us once they are made known, and we are confident that the financial system will ultimately emerge stronger from the scrutiny,” he said.

Major Banks To Take Another Funding Hit; Thanks To APRA

APRA has released a paper on Loss-Absorbing Capacity of ADI’s.

It shows that currently major Australian banks are at the lower end of Total Capital compared with international peers. As a result of proposed changes, major banks (Domestic systemically important banks in Australia, D-SIBs) will see their funding costs rise – incrementally over four years – by up to five basis points based on current pricing.  This is intended to build in more financial resilience by lifting the capital requirements, centred on tier 2. Other banks may also be impacted to an extent.

If the D-SIBs were to maintain an additional four to five percentage points of Total Capital they would have ratios more in line with their international peers. But not in the top 25%, and the banks overseas are also lifting capital higher… so some tail chasing here! Is this “unquestionably strong”?

Under the proposals, each D-SIB would be required to maintain additional loss absorbency of between four and five percentage points of RWA. It is anticipated that each D-SIB’s Total Capital requirement would be adjusted by the same amount.

By way of background, the Australian Government’s 2014 Financial System Inquiry (FSI) recommended APRA implement a framework for loss absorbing and recapitalisation capacity in line with emerging international practice, sufficient to facilitate the orderly resolution of Australian ADIs and minimise taxpayer support (FSI Rec 3). The Government supported this recommendation in its response to the FSI.

APRA’s role is not to eliminate failure altogether, but to reduce its probability and impact. This role is set out in APRA’s statutory objectives under the Australian Prudential Regulation Authority Act 1998 and the Banking Act 1959, which require APRA to protect depositors and pursue financial system stability. In performing its functions, APRA will balance those objectives with the need for efficiency, competition, contestability and competitive neutrality in the financial system.

Disorderly failures are inconsistent with APRA’s objectives, as they are highly disruptive to depositors and have an adverse impact on financial system stability. Australia has not experienced a disorderly ADI failure in recent history, though the failure of HIH Insurance Limited (HIH) in 2001 provides an example of the adverse consequences of a disorderly failure of an APRA-regulated institution. In that instance, policyholders were severely affected and essential insurance services to the broader community became unavailable for a period of time.

Conversely, orderly resolution of an ADI would occur when a problem is identified and escalated early enough to allow APRA and other financial regulators to manage and respond in a manner that protects the interests of depositors, stabilises the ADI’s critical functions and promotes financial stability. Achieving an orderly resolution does not necessarily mean a crisis is averted, rather the manner in which an ADI’s failure is managed would result in better outcomes given the circumstances.

APRA’s statutory powers were recently strengthened by the passage of the Financial Sector Legislation Amendment (Crisis Resolution Powers and Other Measures) Act 2018.

The effectiveness of resolution planning will be a focus for APRA over the coming years. APRA is in the process of developing a formalised framework for resolution planning and will consult further on this in 2019.

The proposals in this discussion paper focus on the availability of financial resources to support orderly resolution.

These proposals would ensure ADIs have adequate financial resources available to support orderly resolution in the highly unlikely event of failure. This will be achieved by adjusting, where appropriate, an ADI’s Total Capital requirement.

These proposals are distinct from APRA’s work on ensuring ADI capital levels are ‘unquestionably strong’, which relates to the ongoing resilience of institutions and is in response to a separate FSI recommendation (FSI Rec 1).

APRA is proposing an approach on loss-absorbing capacity that is simple, flexible and designed with the distinctive features of the Australian financial system in mind, and has been developed in collaboration with the other members of the Council of Financial Regulators. The key features of the proposals include:

  • for the four major banks – increasing Total Capital requirements by four to five percentage points of risk-weighted assets

  • for other ADIs – likely no adjustment, although a small number may be required to maintain additional Total Capital depending on the outcome of resolution planning, which would inform the appropriate amount of additional loss absorbency required to achieve orderly resolution. This assessment would occur on an institution-by-institution basis.

Tier 2 capital instruments are designed to convert to ordinary shares or be written off at the point of non-viability, which means they will be available to absorb losses and can be used to facilitate resolution actions. Tier 2 capital instruments have been a feature of ADI capital structures in various forms since being introduced as part of the 1988 Basel Accord. These instruments have been used as part of resolution actions in other jurisdictions, supporting orderly outcomes.

It is also important that holders of instruments which are intended to be converted or written off in resolution understand the distinctive risks of these investments. In the context of AT1 instruments, APRA has noted that it is inadvisable for investors to view such instruments as higher-yielding fixed-interest investments, without understanding the loss-absorbing role they play in a resolution.15 In the case of the Australian ADIs’ Tier 2 capital instruments, these are mostly issued to institutional investors, who are likely to understand the risks involved.

As ADIs will be able to use any form of capital to meet increased Total Capital requirements, APRA anticipates the bulk of additional capital raised will be in the form of Tier 2 capital. The proposed changes are expected to marginally increase each major bank’s cost of funding – incrementally over four years – by up to five basis points based on current pricing. This is not expected to have an immediate or material effect on lending rates.

APRA proposes that the increased requirements will take full effect from 2023, following relevant ADIs being notified of adjustments to Total Capital requirements from 2019.

In addition to the proposals outlined in this discussion paper, APRA intends to consult on a framework for recovery and resolution in 2019, which will include further details on resolution planning.

APRA Chairman Wayne Byres said one of APRA’s core functions as Australia’s prudential regulator is to plan for, and if required, execute the orderly resolution of the financial institutions it regulates.

“The resilience of the Australian banking system continues to improve, underpinned by the build-up of capital over the last decade.

“However, no matter how resilient financial institutions are, the possibility of failure cannot be entirely removed. Therefore, in addition to strengthening the resilience of the financial system, it is prudent to plan for the unlikely event of failure.

“The events of the global financial crisis demonstrated the impact that failures can have on the broader financial system and the subsequent social and economic consequences.

“The aim of these proposals and resolution planning more broadly is to ensure that the failure of a financial institutions can be resolved in an orderly fashion, which protects the interests of beneficiaries and minimises disruption to the financial system,” Mr Byres said.

Written submissions are open to 8 February 2019.

Shock Announcement Collapses Confidence And Trust In Australia’s Financial System

Economist John Adams and I discuss the renewal of Wayne Byres’ tenure at APRA. What does it signal via-a-vis The Royal Commission?

The John Adams And Martin North DFA Page

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Economics and Markets
Economics and Markets
Shock Announcement Collapses Confidence And Trust In Australia’s Financial System



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Shock Announcement Collapses Confidence And Trust In Australia’s Financial System

Economist John Adams and I discuss the renewal of Wayne Byres’ tenure at APRA. What does it signal via-a-vis The Royal Commission?


The John Adams And Martin North DFA Page

Please consider supporting our work via Patreon

Please share this post to help to spread the word about the state of things….

APRA gets $58m funding boost to enhance supervision

The government has announced that it will boost APRA’s funding by $58.7m and extend the appointment of its chair Wayne Byres despite the criticism the regulator copped from the royal commission, via MPA.

“The new funding will allow APRA to reinforce the resilience and soundness of our financial system at a time of significant reform,” Treasurer Josh Frydenberg said in a statement.

Besides supervising several industries, APRA’s current agenda includes the implementation of the new Banking Executive Accountability Regime (BEAR) and monitoring and targeting issues in the housing market to retain stability, which it previously dealt with by introducing speedbumps on interest-only and investor lending.

The new funding will be provided over four years to enhance APRA’s supervision across regulated industries and its ability to identify and address new and emerging risk areas, such as cyber, fintech and culture. It will also allow APRA improve its data collection capabilities and provide for a review of its enforcement strategy.

Frydenberg said Byres’ reappointment as chair for another five years was “important for stability during this time of significant reform in Australia’s financial system”.

In the royal commission’s interim report, however, it asked whether the regulatory architecture needed to be changed, and questioned whether APRA’s regulatory and enforcement practices were satisfactory.

“APRA is obliged to look at issues of governance and risk culture through the lens of financial system stability. Understood in that light, APRA’s lack of action in response to the widespread occurrence of the conduct described in this report may, perhaps, be more readily understood,” the report said.

But, the commission said that didn’t excuse APRA from not taking any steps to identify the major banks’ deficiencies in governance and culture as they became increasingly apparent.

“Regulatory complexity increases pressure on the regulator’s resources and may allow entities to develop cultures and practices that are unfavourable to compliance,” the commission wrote.

Prior to this latest funding injection, APRA’s estimated budget for 2018-19 was $682m, according to the royal commission

Home Lending Momentum Eases In Sept 2018

APRA released their monthly banking statistics for September 2018. This includes the total balances by ADI broken by investor and owner occupied lending.  Total lending grew by 0.21% in the month to a total of $1.65 trillion, or 2.5% annualised. Within that lending for owner occupation rose by 0.36% to $1.09 trillion and investor loans fell 0.03% to $557.4 billion.

Investment loans now comprise 33.72% or the portfolio.

Looking at the individual major players, we see that only NAB grew their investment loan portfolio in the month, among the big four.  Macquarie and Bendigo are lifting investor loans the most by value. ANZ dropped their balances the most.

This had little impact on overall market shares.

And the investor loan portfolio at the market level grew 1.35%.

We will look at the RBA aggregates in a separate post, but investor lending momentum continues to drift lower. Its surprising the owner occupied lending remains so strong, but that may change ahead.