Tag: APRA

New Capital Requirements Will Strengthen Australian Banks – Fitch

The new higher target set for Australian banks’ common equity Tier 1 (CET1) ratios will support their credit profiles and bolster the banking system’s resilience to downturns, says Fitch Ratings. The four major banks should all be able to meet the requirements comfortably through internal capital generation and existing dividend re-investment programmes.

The Australian Prudential Regulation Authority (APRA) has increased the minimum CET1 ratio from 8% to 9.5% for the major banks – ANZ, CBA, NAB and Westpac – and has given them until January 2020 at the latest to meet the new targets. The capital requirements have been raised in response to the recommendation by a 2014 financial system inquiry (FSI) that Australian banks’ capital ratios should be “unquestionably strong”. The decision to focus on CET1 and take a long-term, through-the-cycle approach, rather than tying capital ratios to the top quartile of international banks, was in line with our expectations.

The major banks already have CET1 ratios that are 150bp-200bp above the current minimum in anticipation of the changes. This capital surplus is likely to fall to a more normal 100bp as the new standards are implemented, which implies CET1 ratios will rise to at least 10.5%, from an average of around 9.5% at end-2016.

It is possible that the major banks will issue fresh equity if they see a benefit in raising the extra capital ahead of schedule. There is also a chance that lending rates could be increased to offset the cost of holding more capital. However, the new capital requirements are unlikely to create significant pressures for any of the four major banks, with APRA estimating that the additional capital could be raised by the deadline without any changes in business growth plans or dividend policies.

The minimum CET1 ratio for smaller banks using standardised models is set to rise by about 50bp, but most already run surpluses above the current requirement and are unlikely to need additional capital.

APRA had hoped that the FSI recommendation could be addressed together with revisions to the risk-weighting framework that are currently being debated by the Basel committee. The new international framework is likely to raise internal-ratings based risk weights for investor mortgages and mortgages with high loan-to-value ratios. This change would further add to Australian banks’ capital needs, but strengthened capital requirements for mortgage lending are already part of APRA’s future regulatory plans to ensure banks are unquestionably strong – and it expects any further capital requirements to be met “in an orderly fashion”.

The paper that APRA released to announce the new minimum capital ratios also noted that capital is just one aspect of creating an unquestionably strong banking system, with liquidity, funding, governance, culture, risk management and asset quality also important. APRA reiterated that its supervisory philosophy will continue to assess all of these factors – as well as the operating environment – when assessing bank risk profiles. It also highlighted improvements since the 2008 global financial crisis in some of these areas, such as liquidity and funding.

APRA Imposes Higher Capital Requirements

APRA has announced the new capital ratios, to meet the‘unquestionably strong’ benchmark. The four major Australian banks will need to have CET1 capital ratios of at least 10.5 per cent by effectively increasing requirements for all IRB banks by the equivalent of around 150 basis points. For other ADIs, the effective increase in capital requirements to meet the ‘unquestionably strong’ benchmark will be around 50 basis points. All ADIs are expected to meet the new benchmarks by 1 January 2020.

There will be another paper from APRA later looking at risk weights for mortgages given the industry concentration, so more changes to come?

Loans will become more expensive! It also re-balances competition between smaller banks and the larger players, and makes a move to advanced IRB less attractive, which will be a pain for those players in transition! Banks will probably need another $10-15 billion of capital, which is manageable, but will depress returns, and require loan repricing some more. Around 10 basis points needs to be recovered to maintain current profitability. If applied to mortgages and small business borrowers only, we estimate this to be a 20-25 basis point hike (varies by bank, and business mix).

The Australian Prudential Regulation Authority (APRA) today announced its assessment on the additional capital required for the Australian banking sector to have capital ratios that are considered ‘unquestionably strong’.

The 2014 Financial System Inquiry (FSI) endorsed the benefits of a strong and well capitalised banking system and recommended that APRA set capital standards such that capital ratios of authorised deposit-taking institutions (ADIs) are ‘unquestionably strong’. The Australian Government subsequently endorsed this recommendation.

The FSI’s endorsement of the benefits of a strongly capitalised banking system recognised Australia’s reliance on foreign borrowings, the need to ensure that Australia’s financial system continues to provide its core economic functions, even in times of stress, and the benefits that flow from reducing the perception of an implicit government guarantee and the associated economic inefficiency this creates.

APRA has today released an Information Paper which outlines APRA’s conclusions with respect to the quantum and timing of capital increases that will be required for Australian ADIs to achieve unquestionably strong capital ratios. The analysis draws on international comparisons, as suggested by the FSI, as well as other information that allows capital strength to be viewed from different perspectives.

In its assessment, APRA has focussed on the appropriate calibration of Common Equity Tier 1 (CET1) capital requirements, recognising that CET1 is the highest quality capital and therefore most likely to engender confidence in an ADI’s financial strength.

APRA has distinguished in its analysis between those ADIs using the more conservative standardised approach to capital adequacy, and those banks that are accredited to use internal models to determine their capital requirements.

ADIs using the internal ratings-based (IRB) approach to capital adequacy

For ADIs that use the internal ratings-based approach to credit risk, APRA has concluded that it is necessary to raise minimum capital requirements by around 150 basis points from current levels to achieve capital ratios that would be consistent with the goal of ‘unquestionably strong’.

This calibration recognises that ADIs using the IRB approach are currently operating with a higher capital surplus above regulatory minimums, in anticipation of APRA’s implementation of the FSI’s recommendation. APRA therefore expects that some of the increase in minimum requirements might be met through the surplus these ADIs hold in excess of minimum regulatory requirements.

In the case of the four major Australian banks, APRA expects that the increased capital requirements will translate into the need for an increase in CET1 capital ratios, on average, of around 100 basis points above their December 2016 levels. In broad terms, that equates to a benchmark CET1 capital ratio, under the current capital adequacy framework, of at least 10.5 per cent.

ADIs using the standardised approach to capital adequacy

For ADIs that use the standardised approach to credit risk, APRA has concluded that it is necessary to raise minimum capital requirements by approximately 50 basis points from current levels to achieve capital ratios that would be consistent with the goal of  ‘unquestionably strong’.

Given the diversity of capital ratios currently reported by ADIs that use the standardised approach, it is not possible to translate this into an expected increase in actual capital ratios. Many ADIs already hold a capital surplus substantially in excess of current minimum regulatory requirements, and will likely absorb this increase within their existing capital resources without any need to raise additional capital.

Implementation and timetable

APRA considers that ADIs should, where necessary, initiate strategies to increase their capital strength to be able to meet these capital benchmarks by 1 January 2020 at the latest.

In parallel with this build up in capital strength, APRA intends to release a discussion paper on proposed revisions to the capital framework, designed to establish capital requirements that will underpin ADIs having unquestionably strong capital ratios, later in 2017. Subject to finalisation of the international reforms, this will outline the direction of APRA’s implementation of the forthcoming Basel III changes to risk weights as well as measures to address Australian ADIs’ structural concentration of exposures to residential mortgages. It will also outline options APRA is considering to improve transparency and international comparability of ADI capital ratios. Following the discussion paper, APRA expects to consult on draft prudential standards giving effect to the new framework in late 2018, leading to the release of final prudential standards in 2019 which are anticipated to take effect in early 2021.

APRA’s expectation that ADIs meet the capital benchmarks outlined in the Information Paper by 2020, a year ahead of the expected effective date of the new prudential standards, reflects the importance to Australia of ADIs having unquestionably strong capital ratios, and that this should be achieved in a timely manner. By 2020, five years would have elapsed since the release of the final FSI report. Against that background, APRA encourages ADIs to consider whether they can achieve the capital benchmarks more quickly.

APRA Chairman Wayne Byres said: “APRA’s objective in establishing unquestionably strong capital requirements is to establish a banking system that can readily withstand periods of adversity without jeopardising its core function of financial intermediation for the Australian community.

“Today’s announcement is the culmination of nearly a decade’s financial reform work aimed at building capital strength in the financial system following the global financial crisis. Australia has a robust and profitable banking industry and APRA believes this latest capital strengthening can be achieved in an orderly way.

“Capital levels that are unquestionably strong will undoubtedly equip the Australian banking sector to better handle adversity in the future, and reduce the need for public sector support. However, a strong capital position still needs to be complemented by sound governance and risk management within ADIs, and on-going proactive supervision by APRA,” Mr Byres said.

In combination, the increases outlined in the Information Paper will complete a significant strengthening of risk-based capital ratios within the Australian banking system in recent years. In meeting this new benchmark, for example, the four major banks will have, on average, increased their CET1 ratios by the equivalent of more than 250 basis points since the release of the FSI report.

The Information Paper is available on APRA’s website here: www.apra.gov.au/adi/Publications/Pages/other-information-for-adis.aspx

APRA Reach Extended To Non-ADI Lenders

The Treasury has released draft legislation for consultation which extends some of APRA’s powers to some non-ADI lenders.  This is an important move, not least because we are seeing signs of non ADI lenders expanding their market footprint as regulators bear down on the larger mainstream players. Smaller non-ADI’s with assets of below $50m appear to be exempt.

The consultation on the draft Bill will close on Monday, 14 August 2017.

It covers the “conduct of a non-ADI lender relating to lending finance including the lending of money, with or without security or any other activities which either directly or indirectly result in the funding or originating of loans or other financing, which has the ability to cause or promote instability in the financial system”.

APRA will be able to apply different regulations to non-banks, a sub-section of these lenders, or to specific lenders. This does not include responsible lending responsibility which fall under ASIC. APRA will need to consult with ASIC when planning intervention (which highlights again the problem of role definition between APRA and ASIC).

Corporations with a stock of debt on their books, and a flow of debt through their books, which does not exceed $50,000,000, will not be registrable corporations for the purposes of the Financial Sector (Collection of Data) Act 2001 (FSCODA).

A new power will be provided to APRA to make rules with respect to lending finance by non-ADI lenders, for the purpose of addressing financial stability risks. APRA will also be provided a power to issue directions to a non-ADI lender, in the case that it has, or is likely to, contravene a rule. Appropriate directions powers and penalties will also be introduced for a non-ADI lender that does, or fails to do, an act that results in the contravention of a direction from APRA.

As a result of these amendments, corporations whose business activities in Australia include the provision of finance, or have been identified as a class of corporations specified in a determination made by APRA, will become registrable corporations for the purposes of FSCODA.

This will widen the class of registrable corporations under the FSCODA and will ensure that all non-ADI lenders, within specified parameters, are captured by these amendments.
Corporations which are not considered to be registrable corporations for the purposes of the FSCODA will include those corporations: whose sum of assets in Australia, consisting of debts due to the corporation resulting from transactions entered into in the course of the provision of finance by the corporation, does not exceed $50,000,000 (or any greater or lesser amount as prescribed by regulations); and whose sum of the values of the principal amounts outstanding on loans or other financing, as entered into in a financial year, does not exceed $50,000,000 (or any other amount as prescribed by regulations).

It is important to note that these powers do not equate to ongoing regulation by APRA of non-ADI lenders. APRA will not prudentially regulate and supervise non-ADI lenders as it does ADIs.

Under the Banking Act 1959 (Banking Act), a body corporate that wishes to carry on ‘banking business’ in Australia may only do so if APRA has granted an authority to the body corporate for the purpose of carrying on that business. Once authorised by APRA, the body corporate is an authorised deposit-taking institution (ADI) and is subject to APRA’s prudential requirements and ongoing supervision.

There are other entities who, like ADIs, provide finance for various purposes within Australia, but are not considered to be conducting ‘banking business’ as they do not take deposits. Given there are no depositors to protect, these entities are not required to be licensed as ADIs and prudentially regulated by APRA. These non-ADI lenders currently only have to report data to APRA in certain circumstances.

Under current law, APRA has significant powers with which to address the financial stability risks posed by the lending activities of ADIs. For example, concerns in recent years about residential mortgage lending have led APRA to take specific prudential actions to reinforce sound residential mortgage lending practices by ADIs.

APRA currently has no such ability with respect to non-ADI lenders. This gap potentially undermines APRA’s ability to promote financial stability, as lending practices that APRA has curtailed or prohibited for ADIs may continue to be pursued by non-ADI lenders.

To address this gap, APRA will be given new rule making powers which apply to non-ADI lenders. These new powers will allow APRA to make rules relating to the lending activities of non-ADI lenders, where APRA has identified material risks of instability in the Australian financial system.

These powers are narrow when compared to APRA’s powers over ADIs. This is an appropriate outcome, given there are no depositors to protect in non-ADI lenders. When exercising these powers, APRA will have to consider efficiency, competition, contestability and competitive neutrality consistent with section 8 of the Australian Prudential Regulation Authority Act 1998 (APRA Act).

A separate but related issue is APRA’s ability to collect data from registrable corporations under Financial Sector (Collection of Data) Act 2001 (FSCODA). The current definition of registrable corporation in section 7 of the FSCODA has limited APRA’s ability to collect data, as corporations which engage in material lending activity are occasionally technically not required to register. This has inhibited the ability of APRA and the Council of Financial Regulators (CFR) to properly monitor the financial stability implications of the non-ADI lender sector.

APRA’s ability to collect data from non-ADI lenders will be improved by an alteration of the definition of registrable corporations in FSCODA. The new definition will seek to capture entities who engage in material lending activity, irrespective of whether it is their primary business.

 

 

 

Owner-occupiers are propping up the market

From The New Daily.

Australian regulators are trying valiantly to cool the property market by curbing investor lending, but demand appears stubbornly strong.

The latest housing finance data for May, published by the Australian Bureau of Statistics on Tuesday, showed a surge in owner-occupier lending is compensating for a drop in investor loans.

For the fourth month in a row, the total amount of money lent for mortgages across Australia declined slightly, from $33.3 billion in January to $32.8 billion in May.

Over the month, housing finance fell -0.3 per cent in value, on the trend measure, driven by a -1.5 per cent shrinkage in loans to investors.

However, owner-occupier loans rose +0.4 per cent in value over the month.

Owner-occupiers are surging back into the market, lured by the juicy rates on offer by the banks. The share of new loans going to investors has been gradually declining, from 40.3 per cent in January to 37.3 per cent in May.

The modest dent in mortgage lending may disappoint the Australian Prudential Regulation Authority, if indeed it is trying to cool the market overall. Or it might simply be satisfied that more owner-occupiers are getting in.

A comparison of mortgage lending in May each year shows that cheaper loans to owner-occupiers are blunting the impact of the investor rate hikes by the banks.

housing finance may

The big drops in 2015 were the last time APRA attempted to cool the market. As the chart above shows, the effect was temporary.

So the regulator had another go. In March this year, the regulator announced that banks would have to limit “higher-risk” interest-only loans to 30 per cent of new residential mortgages, down from 40 per cent.

The banks were also instructed to keep investor lending “comfortably below” the 10 per cent annual growth rate APRA imposed in December 2014 – which was interpreted as an even lower benchmark.

Banks have responded by hiking rates for investor and interest-only mortgages, gradually widening the gap relative to the Reserve Bank’s cash rate, in order to comply with the tighter rules.

The RBA estimated that, as of June, the standard variable rate for investors was an average of 5.8 per cent, up 30 basis points since November 2016.

And yet, price growth is stubborn.

The latest CoreLogic numbers had dwelling prices increasing by a huge 1.8 per cent in June, the strongest month-on-month increase in two years, despite small (possibly seasonal) dips in April and May.

Treasurer Scott Morrison has already claimed victory. He said earlier this month the Coalition government had achieved a “safe landing” for house prices by relying on APRA, as opposed to Labor’s “hard landing” of cutting tax breaks for investors.

First home buyers will be hoping he was right, as the supposed cooling has so far not translated to greater affordability.

It did take a few months for APRA’s 2015 crackdown to be fully felt. Many experts are predicting the market will cool further this year.

CoreLogic reported this week that the national price-to-income ratio – a popular measure of affordability – reached 7.3 per cent in the March quarter of 2017, up from 7.2 in 2016 and 6.1 in 2007.

The data firm also calculated that it would have taken 1.5 years of gross annual household income to save a mortgage deposit in the March quarter of 2017, compared to 1.4 years in 2016 and 1.2 years in 2007.

A recent Essential Media poll of 1025 people, conducted in June and July, found that 66 per cent believed housing to be unaffordable in their area for someone on an average income – and 73 per cent considered housing to have become less affordable in their area over the past five years.

Mortgage Lending Remains Too Strong

The monthly banking stats from APRA for May 2017 were released today. The banks lifted their mortgage books by $9.2 billion to $1.56 trillion, up 0.6% in the month, still well ahead of income growth, thus household debt is still rising. The APRA controls are not strong enough.

Within this, owner occupied loans grew 0.7% to $1,010 billion and investment loans grew 0.42% to $549.9 billion (higher than the 0.39% last month). The proportion of loans for investment purposes stands at 35.4% on  a portfolio basis.

Growth is accelerating, supported by stronger owner occupied lending – as expected seeing the change of emphasis we have seen from the banks.

Looking at the individual lenders, Westpac wrote the most investment loans (which may explain their recent moved to tighten criteria and reduce loan types).

There were small changes in market share, with CBA leading the way on owner occupied lending, and Westpac on investment loans, suggesting different risk profiles.

Finally, looking at the APRA speed limit, of 10%, the 12 month market growth for investment lending is sitting at 4.8% (sum of the monthly movements, as we still see a number of lenders above the limit, but not the majors.

A caveat, of course APRA uses its internal measures to assess growth, which may not be the same as the public disclosures.

So, we think further steps need to be taken to cool the mortgage market – too much debt is being loaded on to households in a rising interest rate, low/no income growth environment.  This also suggests home prices will continue to rise, after recent slowing trends were reported.

The RBA will release their credit aggregates shortly, and this will give a whole of market view. But debt growth just cannot continue at these levels.

APRA hires head of risk and data analytics

From Investor Daily.

APRA has appointed Westpac’s head of risk analytics to take up a new executive general manager role at the prudential regulator.

APRA has appointed two new executive general managers (EGMs) to its senior executive team, completing the regulator’s transition to a new organisational restructure that was announced in May 2017.

Westpac head of risk analytics and insights Sean Carmody will join APRA in the newly created role of EGM, risk and data analytics.

Separately, in an internal promotion, current APRA chief risk officer Ben Gully has been appointed EGM, specialised institutions division.

APRA chairman Wayne Byres said the appointments will “refresh” the regulator’s senior leadership team.

“Together with the appointments in May of four new senior executives, we have completed our organisational restructure designed to ensure APRA continues to respond to changes in the financial sector and deliver on APRA’s mission to protect the financial well-being of the Australian community,” Mr Byres said.

Financial Services Competition and Stability Not Polar Opposites

Wayne Byers spoke at the Roundtable Hearing for the Productivity Commission Inquiry into the State of Competition in the Australian Financial System, Melbourne.

To set the scene for my remarks today, I would like to start with APRA’s mandate. We are an independent statutory authority established for the purposes of prudential supervision of certain financial institutions – that is, providing assurance that institutions have the financial and operational resources to deliver on their financial promises to the community – and for promoting financial system stability in Australia more generally. In particular, we are responsible for protecting the interests of depositors, insurance policyholders and superannuation fund members.
In pursuing financial safety and stability, Parliament was mindful that safety should not be pursued at all costs. In particular, the Australian Prudential Regulation Authority Act 1998 (APRA Act) requires us to balance the objectives of financial safety and efficiency, competition, contestability and competitive neutrality and, in balancing these objectives, to promote financial system stability in Australia.1
However, in the context of this Inquiry, it is important to highlight a couple of points:
  • Firstly, that APRA does not have oversight of the entirety of the Australian financial system. Prudential supervision is considered warranted where, in the words of the Wallis Inquiry which led to APRA’s establishment, the ‘intensity of the promise’ is high, and information asymmetry impedes the ability of the typical customer to make an informed decision as to the soundness of their financial service provider.2 This includes bank deposits, insurance policies, and superannuation balances. Deposit-takers, insurance companies and superannuation funds make up a large proportion of the financial system, of course, but it is important to bear in mind – particularly in the context of any consideration of competition – that there are a great many financial products and service providers that are free to operate outside APRA’s purview.
  • And secondly, the various industry Acts from which APRA derives its specific powers focus more directly on APRA’s role to protect and promote the interests of a certain class of liability holders.3 We do this by maintaining a robust framework of prudential standards that establish minimum requirements – covering among other things financial soundness, risk management and governance – and a program of active supervision. Together, they are designed to minimise the risk of loss to depositors, policyholders and fund members, and promote financial stability.

    APRA’s prudential framework and activities necessarily focus in the first instance on financial safety and stability. APRA has no mandate to create or impose standards in relation to its ‘balancing considerations’ (that is, efficiency, competition, contestability and competitive neutrality). Rather, these balancing considerations are taken into account in designing and implementing our prudential requirements. We provide opportunities for industry feedback on competitive implications as part of our public consultation process. We are also giving more prominence to our own consideration of these issues when we issue proposals for consultation.

Although APRA uses both regulation and supervision to achieve its objectives, it primarily seeks to fulfil its mandate using a supervision-led approach. Common baseline regulatory standards are important but a common one-size-fits-all prescriptive rulebook, while notionally delivering a ‘level playing field’, is unlikely to be optimal. A focus on supervision provides us greater ability to tailor requirements to suit individual circumstances: in other words, supervision has greater capacity to be both risk-based and outcomes-focussed. This, in turn, is likely to maximise both the efficiency and effectiveness of the prudential framework. Our observation is that the supervision-led approach seemed to be a common feature of jurisdictions that emerged relatively unscathed from the financial crisis. The role of proactive supervision in helping to deliver a stable financial system was also acknowledged in the 2014 Financial System Inquiry report, and is consistent with the Government’s current Statement of Expectations for APRA.

In establishing and implementing the prudential framework for regulated institutions, APRA takes the approach that the framework should allow for proportionate supervision, such that smaller institutions are subject to expectations commensurate with the scope and complexity of their business.

To give a few examples:

  • small authorised deposit-taking institutions (ADIs) are subject to much simpler liquidity requirements than larger ADIs;
  • statistical reporting requirements are also commonly stratified by size of institution, to reduce reporting burden where the level of risk and complexity do not require more detailed information; and
  • APRA has been working with the mutual ADI industry (and ASIC) to develop a form of equity capital that can be issued without jeopardising mutual status of these entities.

It is sometimes asserted that there must be a trade-off between stability and competition in the financial system. That is not our view. Competition in the financial sector can bring welcome innovation and enhanced outcomes for customers, and good regulatory settings can deliver financially strong competitors, creating both financial stability and a dynamic and innovative marketplace for financial services. APRA prudential framework has in mind the maintenance of sustainable competition: that is, competitors who are there for the long term – that is, both in good times and bad. The 2008 financial crisis revealed too many business models that only worked in the good times, and ceased to provide services to consumers when adversity arose. The long-term outcome has unfortunately been a more concentrated system.

Having said that, there are times when it is important for APRA to actively temper competitive spirits within the financial sector. Our current interventions in relation to housing lending are a case in point. We have not been concerned with lenders competing on price or service standards, but we have been concerned that intense competition was leading to a material erosion in lending standards. This was unhealthy both for individual institutions, and the long-run interests of the community as a whole.

My comments thus far have largely focussed on competition between APRA-regulated entities. But the big competitive shifts in the Australian financial system have tended to come from new entrants – either non-prudentially-regulated entities competing against the regulated, or new regulated entrants arriving with a different business model from that of the incumbents. With that in mind, APRA is currently reviewing its licensing processes. As part of the review, we are considering the benefits and risks of adopting a two-phased approach to licensing for certain types of new entrant. Such an approach could bring new sources of competition by allowing new entrants time to establish the full complement of resources and systems necessary to be able to comply with all aspects of the prudential framework. At the same time, we need to be able to still assure the community that their bank deposits, insurance policies or superannuation funds placed with these new entrants are adequately safeguarded, and not create competitive advantages for small new entrants over small incumbents.

Finally, we see technology has a critical driver of the future shape of the financial system. We are very keen to see investment in new technology by financial firms – both newcomers and existing players – because it has the potential to achieve multiple objectives, by offering considerable benefit to the soundness, the efficiency and the competitiveness of the financial system.

With those remarks as background, I would be happy to take your questions.

 

APRA On Basel and Local Standards

Wayne Byers spoke at The American Chamber of Commerce in Australia Business Briefing on International standards and national interests.

He described the current state of play with Basel III:

Although the core components of Basel III – a strengthening of the framework for bank capital, liquidity and funding – was agreed in 2010, the final points of detail still remain to be agreed. This is frustrating for regulators and banks alike. A decade on from the onset of the financial crisis, I don’t think anyone could say it is being rushed! And with a number of bank failures just in recent weeks in Canada, Italy and Spain, at a time when economic conditions are not particularly volatile, I also don’t think anyone could say the need to be vigilant about strengthening the financial system has diminished.

Although the finishing line for Basel III is in sight, we still haven’t yet found the alignment of interests that will allow the drafters to put down their pens and publish the final version. What is at the heart of the delay? Ultimately, it is the difficulty in aligning national interests with the common good. To have a common standard, all jurisdictions – and there are 27 of them at the Basel Committee table, represented by 45 individual agencies, who operate by consensus – are essentially agreeing to give up some degree of freedom as to their own domestic standard-setting. In many cases, this won’t be problematic since – as I will come back to in a minute – the minimum standard produced around the table in Basel will be lower than one would want to apply domestically. But in others it may involve a genuine trade-off between domestic considerations and the benefits of consistent international practice. Those trade-offs can be hard, even for experts, to measure and assess, let alone explain to non-experts.

The good news, though, is that the effort to find agreement continues. And it was pleasing to see the US Treasury, in its first report in response to the President’s Executive Order on financial regulation, acknowledge that ‘U.S. engagement in international financial regulatory standard-setting bodies remains important’3 and that it ‘supports efforts to finalize remaining elements of the international reforms at the Basel Committee…to strengthen the capital adequacy of global banks.’4 At a time when there is genuine concern about the potential for fragmentation of global financial markets, such statements can only be welcomed.

Nevertheless, I think the current work in Basel will largely mark the end of the cycle, and we are largely done when it comes to major new international standards.

But the question is how to implement locally. In Australia he says

APRA does not see any case for implementing a domestic regulatory framework that is less robust than the international norms. Australia cannot simultaneously rely more than most on cross-border funding, and seek to be exempted from some or all of the regulatory requirements applying in other parts of the world. In any event, even if we attempted to implement a weaker set of domestic rules, international markets and counterparties would hold Australian banks to the international standards and measures anyway. So we see little value in trying to stand apart from the rest of the world, claiming to know better.

But it is also true that international standards are not always settled in the exact form that we would prefer if we had complete freedom to write the rules ourselves. We have a seat at the table, and seek to use our influence to shape the final form of any agreement, but compromise is inevitably necessary.

And the standards should be higher than the minimum:

…even within international standards, there are often areas in which national discretion is granted. That is, the standard allows a choice, usually on narrow technical issues, that is deliberately and explicitly left to the domestic authority. In these cases, we can make a decision we think works best for Australian circumstances and, regardless of the decision taken, still be seen as in compliance with the international standard.

But the most important factor in balancing international standards and national interests is that, at least in the financial regulatory world, international standards are minimum standards. It is quite open to us to improve upon them, reflecting our own circumstances. In Australia, we have long taken the view that we should aspire to a higher standard of safety than provided by solely adhering to minimum Basel standards. In part that reflects the nature of our highly concentrated banking system, and also the lack of pre-funded deposit insurance. We seek to ensure that Australia’s banking system is considerably more resilient than has generally been the case for international banking in recent decades. It is all too evident that the incidence of banking crises has been too frequent, their costs have been extraordinarily high, and many communities around the world are still wearing the consequences. We think we should try to do better.

So this leaves the door firmly open for higher capital ratio in the approach which we expect soon. Worth remembering that every 1% uplift on capital for the majors costs around $15bn, or slightly more.  We think it is likely the majors will be required to hold more capital, either by way of a counter-cyclical buffer, or a change to the DSIB buffer.  We also think mortgage risk weights may continue to rise.

Any change will put further upward pressure on mortgage interest rates.  Worth too reflecting on the UK announcement, we covered this morning, there the Bank of England is lifting the counter-cyclical buffer by 1%, half now and half in November!

Banks pull the broker lever as APRA pressures mount

From The Adviser.

In addition to rate hikes and policy changes, brokers are proving to be a convenient lever for the banks to pull as they strive to meet APRA’s limits on mortgage lending.

Banks are now approaching broker clients with owner-occupier home loans to refinance as they look to rebalance their mortgage portfolios and limit investor and interest-only lending.

In a recent The Adviser survey, brokers who had experienced channel conflict were asked which type of loan their clients had been approached by their bank to refinance.

Almost 74 per cent of brokers said clients with owner-occupier mortgages had been targeted. The survey also found that 84 per cent of the 766 brokers surveyed claimed the major banks and their subsidiaries had directly approached their clients to refinance over the last 12 months.

The figures come as Australian banks face ongoing pressure from the prudential regulator to cap investor lending growth at 10 per cent and limit the interest-only loans as a proportion of all new lending to 30 per cent.

Commenting on The Adviser’s channel conflict survey results, Digital Finance Analytics principal Martin North said banks are currently “powering up” their acquisition of owner-occupier loans to offset a reduction in investor and interest-only lending. He said this is being done through their proprietary channels “at the expense of brokers”.

Earlier in the year, CBA stopped refinancing investor mortgages through the third-party channel. Any CBA customers with an investor home loan looking to refinance would have to visit the bank directly.

“Two or three months ago, CBA said they were really looking to drive more momentum through their branch channels and offset the volumes through brokers. Westpac also showed in their latest results a little bit of a fall in broker momentum,” Mr North told The Adviser.

“There is a change of strategy from these lenders. They are less willing to take business from third-party channels for that particular category because they are trying to control the volume of those particular loans at the moment, thanks to the imposed speed limits and the need to reduce interest-only loans. It is a way of giving priority to their own channels,” he said.

Morningstar expects that a change in the broker strategies of Westpac and CBA in recent months could have a detrimental impact on broker market share.

“Changes in mortgage distribution strategy by Australia’s two largest mortgage banks CBA and Westpac will over time likely slow the growth rate of home loans sourced through brokers,” Morningstar analyst David Ellis said in a recent research note.

Over the last year 84 per cent of brokers have had one or more of their clients approached directly by their lender to refinance. Over 47 per cent of brokers admitted they had lost commission through clawback as a result of a client being refinanced by the lender directly.

However, despite these findings, MoneyQuest managing director Michael Russell is adamant that channel conflict is not a systemic issue.

“Under no circumstances have I witnessed any systemic channel conflict condoned by a lender,” Mr Russell told The Adviser. “I just have not witnessed it.”

Brokers slam APRA’s ‘sledgehammer’ approach to IO loans

From The Adviser.

The Australian Prudential Regulation Authority has been castigated by brokers for its nationwide “sledgehammer” crackdown on interest-only loans, which have been labelled as “myopic” and “devastating” for regional Australia.

Damian Collins, managing director of Momentum Wealth in Perth, told The Adviser that APRA’s moves to limit the flow of new interest-only loans were based on a “sledgehammer” approach that neglected to consider the impact on areas outside of Sydney and Melbourne.

He added that “everyone outside of Sydney and Melbourne should be feeling fairly aggrieved” by the measures.

Mr Collins said: “We got told in WA [in April], that for investor refinances, [lenders] are not doing them… so, you can tell APRA is definitely putting the pressure on the banks to manage their loan book growth, which is strange because in WA there aren’t a lot of investors doing anything at the moment.

“So, I guess [APRA] aren’t really looking at it state by state, they’re just looking at it as a global pull and finding any way they can to make changes.”

The Momentum Wealth MD went on to say that some of his clients in WA had previously been able to borrow around $2 million and, within a couple of months of the macroprudential measures being announced, that figure dropped down to $700,000.

“We used to have some lenders that, for our clients that had three or four properties already, would have assessed existing debt at actual rate, so they might be paying 4.5 per cent. But, pretty much all the lenders now have switched to servicing everything at 7.5 or 7.25 per cent, so for existing investors with a decent portfolio, it’s certainly made it a lot tougher.”

Mr Collins lamented that the regulator had not taken a state-by-state approach.

He said: “It is quite staggering… Maybe they should say: ‘Right, for investor growth in [postcodes] 3,000-3,200 or 2,000-2,200 (or whatever those postcodes are [in Melbourne and Sydney]) any properties secured by IO loans in those postcodes we’re restricting’. But, there is just a blanket ban nationally, it’s crazy. And it has certainly affected not just Perth but pretty much everything outside of Sydney and Melbourne.

“It’s like taking a sledgehammer to the problem and certainly has affected investors across the country… You’d think [APRA] would be able to do it better, but they haven’t,” he added.

Touching on the crackdown on interest-only loans in particular, Mr Collins said that the penalties now made this type of loan practically redundant for investors. According to the Momentum Wealth managing director, the repayments on some interest-only loans are the same now as P&I.

He said: “It’s at the stage now where, for a lot of our investor clients, we’re saying: ‘Get a P&I loan, it’s just not worth paying that premium for paying interest-only.’”

However, while Mr Collins said he expects interest-only loans to go “back to normal” in the future, he was “struggling to see how it’s worthwhile to pay that higher rate for interest-only at the moment”.

‘The most devastating manifestation in the financial sector since the GFC’

Roger Ward, director at Cairns Mortgage Brokers, agreed, labelling lenders’ response to APRA mandates as “city-centric” and “damaging” to investment in regional Australia.

He said: “It should be stated that there is no housing bubble in almost all of the rest of Australia. These lending restrictions are being applied nationally and already are driving down investment in regional Australia, an area which needs additional investment, not less.

“Most places in regional Australia have not experienced the growth in real estate asset values like Sydney and Melbourne and look to be casualties to this developing panic in the financial sector over the Sydney and Melbourne ‘housing bubble’.”

Condemning the “myopic” APRA policies, he said the recent changes to interest-only lending policies look to be “the most devastating manifestation in the financial sector since the GFC and is already costing investment dollars in regional Australia”.

He continued: “It’s my professional opinion that APRA and the banks are going to crush investment in regional Australia, all for fear of a housing bubble in our capital cities.”

Echoing Mr Collins, Mr Ward argued that APRA should have called on lenders to address the “hyper-investment issue” in Sydney and Melbourne on a postcode basis.

For example, he suggested that that investors buying in Melbourne and Sydney should have to provide at least a 20 per cent deposit, and that there should be foreign investment restrictions on certain postcodes in Sydney and Melbourne.

He suggested that these measures “would have dealt with the core issue” without affecting the regions, and could even potentially benefit regional Australia as the “frustrated appetite of investors” would lead them to invest elsewhere.