Tag: APRA

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. 

Credit Impulse Dies Some More

We are getting to the rub now with the RBA releasing its Credit Aggregate data to end September 2019. This is loan stock data, reflecting the net effect of new loans coming on, old loans repaid, refinancing, and any reclassification which occurred in the month.

Over the month of September, total credit grew by 0.2%, with housing also at 0.2%, business at 0.4% and personal credit down another 0.7%. Owner occupied lending was a little firmer, but investment lending faded again.

For the year ending, total credit grew by 2.7%, the lowest since June 2011, Housing at 3.1%, the lowest at least since 1977, and business at 3.3%. Personal credit fell 4.4% over the year.

Given the strong link between home prices and housing credit, this suggests home prices will continue weaker ahead. And this, after all the recent adjustments to lending standards and rates.

The APRA data also shows some swings between lenders during the month (or reclassification, we cannot tell). NAB, ANZ and Westpac all dropped their investment loan balances, while Macquarie dropped their owner occupied loans.

APRA Loosens Capital For FHLDS Loans

APRA is proposing to adjust its capital requirements for authorised deposit-taking institutions (ADIs) to support the Government’s First Home Loan Deposit Scheme (FHLDS). The scheme aims to improve home ownership by first home buyers, through a Government guarantee of eligible mortgage loans for up to 15 per cent of the property purchase price.

Recognising that the Government guarantee is a valuable form of credit risk mitigation, APRA is proposing to reflect this in the capital framework by applying a lower capital requirement to eligible FHLDS loans.

APRA intends to give effect to this lower capital requirement by adjusting the mortgage capital requirements set out in Prudential Standard APS 112 Capital Adequacy: Standardised Approach to Credit Risk (APS 112).

Specifically, recognising both the minimum 5 per cent deposit required of borrowers and the Government guarantee of 15 per cent of the property purchase price, APRA proposes to allow ADIs to treat eligible FHLDS loans in a comparable manner to mortgages with a loan-to-valuation ratio of 80 per cent.

This would allow eligible FHLDS loans to be risk-weighted at 35 per cent under APRA’s current capital requirements. Once the Government guarantee ceases to apply to eligible loans, (this could be because the borrower pays down the loan to below 80 per cent of the property purchase price, refinances or uses the property for a purpose that is not within the scope of the guarantee.) ADIs would revert to applying the relevant risk weights as set out in APS 112. 

APRA invites feedback on this proposal, which will be subject to a two-week public consultation. APRA intends to release its response, including additional information on implementation for participating ADIs, as soon as practicable after the consultation period. 

Written submissions on the proposal should be sent to ADIpolicy@apra.gov.au by 11 November 2019

Disappearing Branches And Disappearing ATM’s [Podcast]

We look at the latest stats from APRA on branch and ATM networks, both of which are shrinking fast.

https://www.apra.gov.au/authorised-deposit-taking-institutions-points-of-presence-statistics

Digital Finance Analytics (DFA) Blog
Digital Finance Analytics (DFA) Blog
Disappearing Branches And Disappearing ATM’s [Podcast]
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APRA to not appeal IOOF judgment

The Australian Prudential Regulation Authority (APRA) has advised that it will not appeal the Federal Court decision to dismiss APRA’s court action against IOOF entities, directors and executives.

The case examined a range of legal questions relating to superannuation law and regulation that had not previously been tested in court, relating to the management of conflicts of interest, the appropriate use of superannuation fund reserves and the need to put members’ interests above any competing priorities.

APRA had initiated the action last December due to its view that IOOF entities, directors and executives had failed to act in the best interests of their superannuation members. Before taking the court action, APRA had sought to resolve concerns with IOOF over several years but considered that it was necessary to take stronger action – through use of directions, conditions and court action – after concluding the company was not making adequate progress, or likely to do so in an acceptable period of time.

After receiving the judgment on 20 September, APRA reviewed the reasons for the decision and concluded that it will not appeal the matter.

APRA Deputy Chair Helen Rowell said the judgment nevertheless raised some issues of wider importance for APRA in its supervision of superannuation trustees. APRA is considering any further action that may need to be taken in relation to these, such as revising its prudential standards or seeking legislative amendments, to ensure that member interests are protected to the maximum extent possible.

APRA notes that, notwithstanding the decision not to appeal the judgment, additional licence conditions that APRA imposed on IOOF in December remain in force and APRA’s strengthened supervision focus on ensuring that IOOF implements the changes needed to comply with these conditions continues.

APRA On Changes To Capital For NZ Subsidiaries

The Australian Prudential Regulation Authority (APRA) has launched a review of the capital treatment of authorised deposit-taking institutions’ (ADIs’) investments in their banking and insurance subsidiaries. It is open for consultation until 31 January 2020. APRA intends to finalise the changes to the Prudential Standard in early 2020 with the updated Prudential Standard to come into force from 1 January 2021.

At first review, this looks like some of the Australian majors will large New Zealand subsidiaries will need to hold more capital (which costs), or shrink their off-shore operations in New Zealand. But more analysis will be required to determine the true impact relative to their Australian businesses and capital holdings.

This review was prompted in part by recent proposals by the Reserve Bank of New Zealand (RBNZ) to materially increase capital requirements in New Zealand. The RBNZ’s proposals and APRA’s processes are a natural by-product of both regulators working to protect their respective communities from the costs of financial instability and the regulators continue to support each other as these reforms are developed.

APRA is proposing to change the capital treatment for these exposures and this particular proposal is the most significant amendment to APS 111. In developing the proposal, APRA has considered long-established trans-Tasman arrangements provided for in the Australian Prudential Regulation Authority Act 1998 and the RBNZ’s enabling legislation, under which the agencies assist each other in the performance of their regulatory responsibilities. This is particularly important given the four major Australian banks are the shareholders of the major banks in New Zealand.

APRA’s capital requirements currently permit ADIs to leverage their investments in banking and insurance subsidiaries, whether domestic or offshore, and as such do not require dollar-for-dollar capital for these investments at the parent company level. This treatment raises the risk that capital held by the parent ADI is not sufficient to support risks to its depositors.  Any reforms by other regulators to materially increase their capital requirements, including those proposed by the RBNZ, could exacerbate this risk.

At current levels of equity investment, APRA estimates the existing treatment provides an uplift to the average Common Equity Tier 1 (CET1) Capital ratio across the four major Australian banks of around 100 basis points for their equity investments in New Zealand banking subsidiaries. As a consequence, capital available to support risks to Australian depositors could be overstated.

As APRA is more concerned about large concentrated exposures, it is proposing to limit the amount of the exposure to an individual subsidiary that can be leveraged to 10 per cent of an ADI’s CET1 Capital. This means capital requirements are increasing for large concentrated exposures, as amounts over the 10 per cent threshold would be required to be met dollar-for-dollar by the ADI parent company. APRA is less concerned about small equity exposures in banking and insurance subsidiaries and so capital requirements will decrease for small exposures. Amounts under the 10 per cent threshold would be risk weighted at 250 per cent and included as part of the related party limits detailed in APRA’s recently finalised Prudential Standard APS 222 Associations with Related Entities (APS 222).

The diagram outlines the boundaries between a full deduction approach (dark blue line), the current treatment (grey line) and the treatment proposed in this Discussion Paper (light blue line). These represent the boundaries that balance the size of the investment with the capital required under the limits in APRA’s prudential framework for equity investments (APS 111) and related entities (APS 222).

A full deduction approach will result in dollar-for-dollar capital for this investment, regardless of the size of the investment. The treatment under the current APS 111 is a 300 per cent (if the subsidiary is unlisted) or 400 per cent (if the subsidiary is unlisted) risk weight for this investment. The proposed treatment in this Discussion Paper for this investment will depend on the size of the investment; for an equity investment below 10 per cent CET1 Capital, the investment is risk weighted at 250 per cent, with amounts above the 10 per cent CET1 Capital threshold deducted from CET1 Capital. Under the proposed treatment, capital requirements are decreasing for small exposures and increasing for large concentrated exposures.

APRA has calibrated the proposed capital requirements so they are broadly consistent with the Basel treatment of a banking group’s equity investments in non-consolidated financial entities, and also with the current capital position of the four major Australian banks, in respect of these exposures (i.e. preserving most of the existing capital uplift).  

APRA is not proposing a full dollar-for-dollar capital requirement for an ADI’s equity investments in these subsidiaries, in recognition of the benefits of subsidiaries that are subject to prudential regulation, and that ownership of banking and insurance subsidiaries generally provides some beneficial diversification. However, as these exposures increase in size, the concentration risk associated such investments start to outweigh the diversification benefits. Requiring dollar-for-dollar capital for amounts above 10 per cent CET1 Capital reduces the risks to Australian depositors of increasing levels of these exposures.
 
The finalisation of the RBNZ’s proposed capital reforms, will, in all likelihood, require higher capital requirements for banks in New Zealand. Should Australian ADIs fund higher capital requirements in New Zealand by retaining the profits of their New Zealand subsidiary banks in those subsidiaries, no material additional capital, in aggregate, is likely to be required by Australian ADIs.

Other proposed changes to APS 111 include:

  • promoting simple and transparent capital issuance by removing the allowance for the use of special purpose vehicles (SPVs) and stapled security structures; and
  • clarifying and simplifying various parts of APS 111, which comprise the bulk of the proposed changes.

APRA does not consider its proposal to remove the use of SPVs and stapled security structures as material as these structures have not been a feature of ADI capital issuance since 2013 and, in the case of stapled security structures, less attractive for ADIs under the Basel III capital reforms.

APS 111 is open for consultation until 31 January 2020. APRA intends to finalise the changes to the Prudential Standard in early 2020 with the updated Prudential Standard to come into force from 1 January 2021. APRA is open to working with impacted ADIs on appropriate transition.

The Credit Impulse Hiccups In August 2019

Both the RBA and APRA released their respective credit aggregates to end August today. And its not running to script, despite the rate cuts, some stronger buying signs in some housing markets (but on low, low volumes), and increased competition for loans. Overall credit growth rates continue to decline.

The RBA data over the rolling 12 months showed that credit growth dropped to 2.9%, compared with 4.5% just one year ago. That is the slowest rate of growth since 2011. It peaked in 2015 at 6.6%.

Housing sector growth rose 3.1% over 12 months, compared with 5.4% a year back and from a high of 7.4% back in 2015. Within that owner occupied lending fell to 4.7%, compared with 9.1% back in 2016, and investment lending rose at just 0.1% over 12 months, compared with 10.8% back in May 2015.

Business credit growth eased back to 3.4% annualised, from 3.8% a year ago, and 7.4% back in 2016, reflecting weaker business confidence and concerns about the local and international economic outlook.

Annual personal credit is down 3.4%, compared with down 1.4% a year ago, and up 0.3% in 2015.

The more noisy one month series shows that owner occupied lending rose 0.3%, compared with 0.9% in 2015, investment lending fell 0.1%, compared with a rise of 0.9% in 2015, business credit rose 0.2%, way lower than peaks of more than 1% in 2015 and 2017, and personal credit fell 0.2% again.

Note the RBA makes seasonal adjustments to the data – though they do not disclose the basis of these adjustment, and this year has been far from typical.

They also say:

Historical levels and growth rates for the financial aggregates have been revised owing to the resubmission of data by some financial intermediaries, the re-estimation of seasonal factors and the incorporation of securitisation data. The RBA credit aggregates measure credit provided by financial institutions operating domestically. They do not capture cross-border or non-intermediated lending.

So more data noise. And talking of that the new APRA data is all over the shop. They started running a parallel series in March, and as we discussed last month, the proportion of investment loans in the stock data have risen.

Overall credit stock of housing loans for the ADI’s is running at 0.36% and appears to be rising since April. However, the swings between growth in investor and owner occupied loans are massive, (and in opposite directions). This is not a sign of good data collection in my view.

The overall portfolio market shares indicate that CBA remains the largest lender for owner occupied loans, with a 26.1% share, followed by Westpac 21%, and ANZ at 14.7%. In investment lending, Westpac remains a clear leader, with 28.6% of all lending, followed by CBA at 24% and NAB at 17.5%.

The monthly movements tells an interesting story, with CBA driving the largest growth in owner occupied loans (2.3 billion), while dropping investment loans by a small amount. Westpac extended its investment loans by $0.6 billion, and owner occupied loans by $1.3 billion. NAB and ANZ both lost investor share and ME Bank lost owner occupied and investor loans. Other lenders picked some of these up.

Finally, our analysis of the proportion of individual bank portfolios in investment loans (generally more risky in a down-turn), shows that 44.9% of Westpac’s portfolio is investment lending (worth $185 billion), compared with an ADI market average of 37.4%. NAB is at 43.4% and Macquarie at 43.7% and Bank of Queensland at 42.7%. On the other hand CBA is at 35.6% and ANZ at 35.3%.

Data from our surveys suggests weakening demand for credit, and if this eventuates, it is quite possible recent home prices will be confirmed as a bear trap. While some down traders and more affluent households are in the market, many other segments are sitting this one out.

Remember that falling credit growth will translate to falling home prices, the math is that simple. And more rate cuts won’t help much at all!