Tag: APRA

ADI Mortgage Lending In November Up, Just A Little

APRA has released their monthly banking stats to the end of November 2019. They are of course in the process of a major revision of these statistics, but we are now beginning to get some trend data down to the individual ADI level. The data is based on gross balances outstanding by owner occupied and investment loans, but it does not show where new loans were added, or loans repaid. So little flow data can be imputed.

Total owner occupied loans rose 0.51% or $5.58 billion dollars in November to $1.09 trillion dollars, while investment loans fell 0.01% or $75 million dollars to $643 billion dollars. The share of loans for investment purposes fell again to 37%.

The trend movements show some improvement relative to earlier months. Total loans rose 0.32% in the month, which would given an annualised 3.8%.

The RBA data released before Christmas showed that total loan growth over the past year for mortgages fell to the lowest ever (2.9%), which suggests that non-banks may be lending less now. But we cannot be sure of this.

We can also look at individual lenders. The relative shares of the largest players hardly changed, with CBA the largest owner occupied lender, while Westpac has the largest share of investment loans.

However, the relative movements this month underscored divergent results from lenders. CBA and Macquarie both saw significant growth in loans in the month, with Macquarie writing net more investment loans than any other lender at $718 million dollars. Bendigo Bank and AMP Bank are also chasing investment lending. On the other hand, ING dropped their investment loan balances, alongside the other big lenders, with NAB down $661 million, ANZ down $263 million and Westpac down $602 million. Suncorp and Credit Suisse both dropped their owner occupied and investment loan portfolios.

Finally, the relative proportion of loans for investment purposes reveals that Macquarie has 44.8% of its loans for this purpose, Westpac at 44.5%, NAB at 42.6% and Citi at 37.7%. Bearing in mind investment loans are intrinsically more risky, this is worth watching.

So, some small uplift in net volume of loans, but not equally spread across the sector, which suggests different players have different underwriting settings.

And the growth in lending suggests the household debt ratio is set to continue to rise, despite its already stratospheric level.

APRA Publishes Executive Accountability Statements

The Australian Prudential Regulation Authority (APRA) has published a document outlining its governance arrangements, along with accountability statements for its senior executives.

The paper, titled Governance and Senior Executive Accountabilities, describes APRA’s internal governance and accountability arrangements and is supported by individual accountability statements for senior executive roles and an accountability map. The accountability statements cover all four APRA Members, as well as APRA’s six Executive Directors, APRA’s Chief Risk Officer and Chief Internal Auditor.

Today’s release responds to recommendation 6.12 of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry: that “each of APRA and ASIC should internally formulate and apply to its own management accountability principles of the kind established by the Banking Executive Accountability Regime (BEAR).”

APRA accepted the recommendation and committed to meeting it by 31 December 2019.

APRA’s Governance and Senior Executive Accountabilities document is available on the APRA website at: https://www.apra.gov.au/governance-and-senior-executive-accountabilities.

APRA Launches Westpac Investigation

The Australian Prudential Regulation Authority (APRA) has today formally commenced an investigation into possible breaches of the Banking Act 1959 by Westpac Banking Corporation (Westpac).

APRA will focus on the conduct that led to the matters alleged last month by AUSTRAC, as well as the bank’s actions to rectify and remediate the issues after they were identified. The investigation will examine whether Westpac, its directors and/or its senior managers breached the Banking Act – including the Banking Executive Accountability Regime (BEAR) – or contravened APRA’s prudential standards.

Given the magnitude and nature of the issues alleged by AUSTRAC, APRA is aiming to ensure that fundamental deficiencies in Westpac’s risk management framework are identified and addressed and that Westpac and those responsible are held accountable as appropriate.

In addition, APRA will:

  • impose an immediate increase in Westpac’s capital requirements of $500 million, to reflect the heightened operational risk profile of the bank. This brings the total operational risk capital add-ons that Westpac is required to hold to $1 billion, following the increase announced by APRA in July 2019; and
  • initiate an extensive review program focused on Westpac’s risk governance. The review program will include risk management, accountability, remuneration and culture. An element of the review will be an examination of the steps Westpac has been taking to strengthen risk governance in recent years, including through its self-assessment.

APRA Deputy Chair Mr John Lonsdale said: “AUSTRAC’s statement of claim in relation to Westpac contains serious allegations that question the prudential standing of Australia’s second largest bank.

“While Westpac is financially sound, there are potentially substantial gaps in risk governance that need to be closed.

“Given the nature of the matters raised by AUSTRAC, the number of alleged breaches and the period of time over which they occurred, this will necessarily be an extensive and potentially lengthy investigation.”

The investigation affords APRA the opportunity to exercise legal powers that have been expanded and strengthened since 2017’s CBA Prudential Inquiry, including enhanced investigative powers and the implementation of the BEAR in 2018.

APRA will conduct its investigation simultaneously with an investigation by the Australian Securities and Investments Commission (ASIC), as well as AUSTRAC’s legal proceedings, with each agency cooperating where appropriate.

The scope of APRA’s investigation is below.


Attachment – Scope of APRA’s investigation into Westpac

The prudential matters that are the subject of APRA’s investigation are:  

Whether Westpac, its directors, and/or its senior managers have contravened the Banking Act 1959 and the prudential standards by engaging in, and in the way they responded to, the conduct set out in and otherwise related to the AUSTRAC proceedings.  

In considering possible contraventions of the Act and the prudential standards, the investigation will examine whether:  

(a) Westpac’s governance, control and risk management framework was adequate; and appropriately implemented;  

(b) Westpac’s accountability and remuneration arrangements were adequate, and appropriately implemented to effectively manage non-financial risks;  

(c) there has been a failure to comply with accountability obligations under the Banking Executive Accountability Regime;  

(d) there has been a failure to comply with the requirements of the prudential standards including Prudential Standard CPS 510: Governance, Prudential Standard CPS 520: Fit and Proper, and Prudential Standard CPS 220: Risk Management; and

(e) there was a failure to promptly notify APRA of any significant breaches and/or a breach of accountability obligations.

APRA flags setting countercyclical capital buffer at non-zero default level

APRA remains in a low risk bubble, according to their paper today, which keeps the counter-cyclical buffer at 0. However they flag that may change ahead. I have to say this seems perverse, given the high debt levels and low economic performance and increased risks. Plain weird, and a million miles off the Reserve Bank NZ’s approach.

The Australian Prudential Regulation Authority (APRA) has decided to keep the countercyclical capital buffer (CCyB) for authorised deposit-taking institutions (ADIs) on hold at zero per cent, but has flagged the likelihood of a non-zero default level in the future.

The CCyB is an additional amount of capital that APRA can require ADIs to hold at certain points in the economic cycle to bolster the resilience of the banking sector during periods of heightened systemic risk. It has been set at zero per cent of risk-weighted assets since it was introduced in 2016.

In its annual information paper on the CCyB, APRA today confirmed it considers that a zero per cent CCyB remains appropriate at this point in time based on an assessment of the systemic risk environment for ADIs.

Among the factors APRA considered in making its decision were:

  • low credit growth;
  • minimal change in the risk profile of new housing lending;
  • movements in residential property prices, particularly recent growth; and
  • increased entity costs due to operational risk events and misconduct.

After carefully examining these dynamics, APRA concluded that the current policy setting remains appropriate.

In conjunction with the other agencies on the Council of Financial Regulators, APRA will continue to closely monitor financial and economic conditions. APRA reviews the buffer quarterly, and may adjust it if future circumstances warrant this.

However, the information paper notes that APRA is also giving consideration to introducing a non-zero default level for the CCyB as part of its broader reforms to the ADI capital framework.

APRA Chair Wayne Byres said: “Given current conditions, and the financial strength built up within the banking sector, a zero counter-cyclical buffer remains appropriate.

“However, setting the countercyclical capital buffer’s default position at a non-zero level as part of the ‘unquestionably strong’ framework would not only preserve the resilience of the banking sector, but also provide more flexibility to adjust the buffer in response to material changes in financial stability risks. This is something APRA will consult on as part of the next stage of the capital reforms currently underway.

“Importantly, this would be considered within the capital targets previously announced – it does not reflect any intention to further raise minimum capital requirements.”

APRA expects to commence the next stage of its ADI capital consultation in the first half of next year. APRA’s revised capital framework is currently scheduled to come into effect from 1 January 2022.

The countercyclical capital buffer information paper is available on the APRA website at: https://www.apra.gov.au/countercyclical-capital-buffer-0

APRA’s MySuper Heatmap Is A Nightmare

From the excellent James Mitchell, at The Adviser. If the prudential regulator was hoping to provide clarity on MySuper products it has failed miserably.

Call me ignorant, but when APRA announced the launch of its MySuper heatmap, I didn’t envision downloading an Excel spreadsheet and navigating multiple tabs in order to decipher what the hell I was looking at. If this monstrosity is intended to be fit for public consumption then the average Australian better have a financial adviser by their side, if for no other reason than to decode the thing. 

Fortunately, the team who put the spreadsheet together included a “user guide” on tab 4 (see below). Crikey!

There is also a colour legend and a glossary of definitions for terms such as “strategic asset allocation” and “net investment return”. 

My fear is that the average Australian super member looking to compare funds will struggle to comprehend what APRA’s heatmap actually means. Particularly when you consider what the financial literacy of an average Australian actually looks like. 

Back in August, Compare the Market and Deloitte Access Economics released the second edition of The Financial Consciousness Index, which measures the extent to which Aussies are conscious or aware of their ability to affect and change their own financial outcomes, encompassing their willingness to act, and the extent to which they are able to participate in financial matters.

Australians scored 48 per cent on average on the index, which means they are just into the “conscious” band and out of the “it’s a blur” band.

Meanwhile, ASIC’s 2018 Financial Capability initiative noted that two in three Australians don’t understand the investment concept of diversification and only 35 per cent know what their super balance is. 

With this in mind, it’s difficult to fathom how APRA’s overly complex Excel spreadsheet is going to translate, let alone be used as a guide, to everyday Australians. 

FSC CEO Sally Loane warned against the misuse of the thing and said it should not be used to rank superannuation products. 

“It is really important to understand that the heatmaps are a point-in-time analysis, which is a useful tool for APRA in its supervision activities, but it doesn’t tell the whole story when it comes to members’ retirement outcomes,” Ms Loane said. 

“Particularly for life cycle products, which adjust investment strategies over a person’s lifetime, the headline numbers in the heatmap don’t reflect the actual experience of a member in that fund, and could be misleading if viewed in isolation.”

The FSC noted that the heatmap may tell you that other funds have had higher returns over five years, but if you’re close to retirement you might be far more concerned with how your fund is managing the risks of a market downturn to safeguard your retirement savings.

Some of the heatmap’s other failings are that it doesn’t tell you how your super has performed over your lifetime, it can’t tell you whether your fund invests in accordance with your ethical and philosophical beliefs, and it doesn’t tell you what additional services they offer to help you manage your savings. 

“If you have concerns about whether your super fund is right for you, talk to your fund or speak to a financial adviser,” Ms Loane said. 

Ms Loane said that while the FSC hoped APRA would continue to refine its MySuper heatmap methodology, the proposal to extend the exercise to choice products was highly problematic.

“The broad variety of choice products in the market, the complexity and bespoke nature of platforms and wraps where individuals choose their investment strategies, and the lack of direct comparable data, [make] it extremely difficult to translate heatmapping beyond MySuper and we urge APRA to not only be cautious in proceeding with this exercise but to engage deeply with industry,” she said.

APRA proposes major uplift in transparency around banking data

The Australian Prudential Regulation Authority (APRA) has proposed substantially increasing the volume and breadth of data it makes publicly available on authorised deposit-taking institutions (ADIs), including banks, credit unions and building societies.

The move towards greater transparency and scrutiny of the banking sector is aimed at increasing accountability, supporting competition and lifting overall industry standards.

In a letter to industry today, APRA outlined plans to determine that all data collected for its quarterly ADI publications should be considered non-confidential, allowing it to be published. APRA currently publishes less than 1 per cent of the ADI data it collects due to legal restrictions contained within the Australian Prudential Regulation Authority Act 1998 (APRA Act). This change would allow APRA to significantly increase this figure.

From 2020, APRA proposes publishing:

  • entity-level ADI data related to currently published industry-level quarterly data;
  • remaining historical data in these forms that individual ADIs are required to provide APRA, which will be published with a three-year lag; and
  • commentary received by APRA from individual ADIs explaining material revisions to, or large movements in, their data.

The proposal supports APRA’s strategic policy of increasing the transparency of data it collects, and aligns with Government open data policies.

APRA’s Executive Director for Cross-Industry Insights and Data, Sean Carmody, said: “APRA is committed to increasing transparency about the institutions and industries we regulate.

“Under these proposed changes, APRA intends to publish – for the first time – a range of information about individual ADIs, including their financial performance and property exposures.

“As with the recent inclusion of data from credit unions and building societies in our Monthly ADI Statistics publication, these changes are aimed at further strengthening the ADI sector by enhancing accountability and encouraging competition. They will also assist other regulatory agencies that rely on APRA data, as well as analysts, policymakers and others who use our publications.”

Under the APRA Act, APRA must consult ADIs and their representatives, including industry associations, before determining any new data to be non-confidential. A 12 week consultation is now underway and concludes on 28 February 2020. APRA is encouraging all interested parties to make submissions on issues including what, if any, data should remain confidential.

APRA intends to consult on forms not included in this consultation at a later date.

More details on the consultation, including the letter to industry, can be found at: https://www.apra.gov.au/confidentiality-of-data-used-adi-quarterly-publications-and-additional-historical-data

Deleveraging Despite Low Rates And “Booming” Housing Markets….

The end of the working month heralds another set of credit stats from both the RBA and APRA. The RBA reports via their Credit Aggregates, which is all credit stock in the system, while APRA reports on the banks (ADI’s) and also provides some individual lender loan stock data. And which ever way you look at it, credit growth is still anaemic, as the “great deleveraging” continues. And given the weak credit impulse, home prices may also be growing more slowly than many are claiming, though that is another story, for another day.

The RBA said that housing credit growth overall was 0.3% higher in October, compared with 0.2% in September. This translates to an annual rate of 3% to October (3.1% last month), compared with 5% just a year back.

Monthly owner occupied lending rose 0.4% while investor housing lending was flat. Personal credit fell another 0.6% in the month, and business lending was down 0.1%. As a result total credit rose just 0.1%, down from 0.2% last month. Broad money was higher though.

Over a rolling 3 months view, owner occupied credit grew 1.3% while investor credit was down 0.2%, other personal credit was down 1.8% and business credit was up 0.6%.

Looking across the rolling 12 month view, housing credit growth dropped from 3.1% to 3%, with owner occupied lending at 4.8% and investor lending down 0.2%. Business credit was 2.7% higher, and personal credit dropped by 4.7%.

As a result, total credit was just 2.5%, as lower as its been for many years, although broad money rose 4.2%.

APRA’s new data series continues to contain some surprises. Total lending stock by the banks rose to $1.73 trillion, up 0.2% in the month.

The share of investor loans continues to fall, to around 37.2%, and this is explained by investor loan stock falling by 0.21% in the month, compared with a rise of 0.44% for owner occupied loans. The series still looks a bit weird, so we wonder if there are still reporting issues.

The individual banks stocks of loans varied, with CBA extending their book (consistent with our industry research, as one of the easier lenders at the moment), along with Macquarie – both of which grew both investor and owner occupied pools. NAB and ANZ dropped investor loans, but extended owner occupied loans. But Suncorp and Westpac dropped BOTH investor and owner occupied loan balances (assuming the reporting is correct – lets see if we get a reversal next month).

Finally, market shares hardly changed, with CBA the largest owner occupied lender and Westpac the largest investor loan provider.

Given the weak credit growth, this puts into sharp contrast the reported rises in home prices. We know transaction volumes remain low, but our industry contacts indicate a stronger pipeline of applications. Despite this the run-off of existing loans is translating to low net growth.

Even then, loan growth is still strong relative to income growth. But actually the most significant element is the fall in business credit, as more sectors come under pressure.

These results appear to be at odds with the RBA’s glass half full view of the economy, and may indicate more weakness in the GDP out-turn next week.

ASIC and APRA issue updated MoU

The Australian Securities and Investments Commission (ASIC) and Australian Prudential Regulation Authority (APRA) have committed to strengthen engagement, deepen cooperation and improve information sharing.

The agencies today published an updated Memorandum of Understanding (MoU).

The updated MoU follows on from the recommendations of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry[1]. APRA and ASIC are also working closely with Government on the legislative changes required to implement these recommendations.

ASIC Chair James Shipton said the updated MoU builds on the open and collaborative relationship across all levels of the agencies.

‘ASIC and APRA will continue to proactively engage and respond to issues efficiently to deliver positive outcomes for consumers and investors.

‘The MoU facilitates more timely supervision, investigations and enforcement action and deeper cooperation on policy matters and internal capabilities.’

APRA Chair Wayne Byres said enhanced cooperation reinforced the twin peaks model of regulation that has operated in Australia for more than 20 years.

‘ASIC and APRA share an interest in protecting the financial wellbeing of the Australian community and achieving a fair, sound and resilient financial system,’ Mr Byres said.

‘Strengthening engagement is a key priority of the ASIC Commissioners and APRA Members. We will continue to work closely together to enhance regulatory outcomes and achieve our respective mandates.’

This MoU, which will be reviewed on a regular basis, is only one aspect of how ASIC and APRA are establishing closer cooperation. Led by ASIC Commissioners and APRA Members, the agencies are regularly meeting under a revised engagement structure and working together on areas of common interest, including data, thematic reviews, governance and accountability. Both agencies are committed to detecting prudential and conduct issues early and working to revolve them efficiently and effectively. 

The updated MoU is available on the ASIC website here.

APRA consults on further amendments to the ADI leverage ratio

The Australian Prudential Regulation Authority (APRA) has released for consultation a response letter and draft prudential standard on the leverage ratio requirement for authorised deposit-taking institutions (ADIs).

This consultation sets out APRA’s response to industry’s previous submissions and also incorporates changes by the Basel Committee on Banking Supervision to the international standard.

The consultation letter and draft prudential standard are available on the APRA website at https://www.apra.gov.au/leverage-ratio-requirement-for-authorised-deposit-taking-institutions

The proposals outlined in this letter relate solely to the leverage ratio requirement for ADIs that apply the internal ratings-based (IRB) approach to credit risk. 

Subsequent to APRA’s November 2018 consultation, the Basel Committee released a revised leverage ratio standard that amended the treatment of client cleared derivatives. The revised treatment allows banks to apply the standardised approach to measuring counterparty credit risk (SA-CCR) to its client exposures. This amendment seeks to ensure that the leverage ratio does not discourage banks from providing client clearing services. 

APRA is proposing to adopt the Basel Committee’s revised treatment for client cleared derivatives. The amendments that would give effect to this proposal are marked-up in the accompanying draft revised APS 110. 

The calculation of the leverage ratio as a minimum capital requirement requires IRB ADIs to calculate counterparty credit risk for derivative exposures using a modified version of SA-CCR. This approach is different to the current calculation of the leverage ratio for public disclosure, which requires the use of the current exposure method (CEM). 

APRA will allow IRB ADIs to adopt modified SA-CCR early for the purpose of their leverage ratio disclosures under Prudential Standard APS 330 Public Disclosure. IRB ADIs that intend to adopt modified SA-CCR early will need to seek APRA’s prior approval. For this purpose, an ADI must provide APRA with an outline of the implementation process and testing conducted to ensure that the early adoption of modified SA-CCR has been implemented correctly. The ADI must also provide a waterfall of its leverage ratio exposure measure calculation using modified SA-CCR that can be reconciled against its SA-CCR calculations under the risk-based capital framework. Where APRA is satisfied with the ADI’s implementation, it will provide the ADI with written approval to adopt modified SA-CCR early. 

Those IRB ADIs that adopt early will be required to state that they are using modified SA-CCR in their public disclosures. This is a transitional issue that will be resolved from 1 January 2022, at which time all IRB ADIs will be required to use modified SA-CCR to meet both the minimum capital and public disclosure leverage ratio requirements.