APRA To Ease New Banking Entrance Requirements

APRA is reviewing its licensing approach for authorised deposit-taking institutions (ADIs). They propose new entrants could gain an interim licence and operate on a conditional basis for a period before transitioning to a full licence, with a view to increasing competition in the banking sector.

The discussion paper seeks views on the proposed amendments to introduce a phased approach to authorisation, designed to make it easier for applicants to navigate the ADI licensing process.

The phased approach is intended to support increased competition in the banking sector by reducing barriers to new entrants being authorised to conduct banking business, including those with innovative or otherwise non-traditional business models or those leveraging greater use of technology. In particular, the purpose of the Restricted ADI licence is to allow applicants to obtain a licence to begin limited operations while still developing the full range of resources and capabilities necessary to meet the prudential framework.

An overview of the phased approach is depicted below.

In facilitating a phased approach, APRA still needs to ensure community confidence that deposits with all ADIs are adequately safeguarded, and that any new approach does not create competitive advantages for new entrants over incumbents, or compromise financial stability. Therefore, reflecting their relative infancy, Restricted ADIs will be strictly limited in their activity and would not be expected to be actively conducting banking business during the restricted period.

The Restricted ADI licence will be subject to certain eligibility requirements and a maximum period after which they are expected to transition to an ADI and fully comply with the prudential framework or exit the industry.

APRA invites written submissions from all interested parties on its proposals for the phased approach to licensing new entrants to the banking sector.

Submissions close on 30 November 2017.

Submissions are welcome on all aspects of the proposals. In addition, specific areas where feedback on the proposed direction would be of assistance to APRA in finalising its proposals are outlined below.

Introduction of phased approach for ADIs​ ​Should APRA establish a phased approach to licensing applicants in the banking industry?
​Balance of APRA‘s mandate ​Do the proposals strike an appropriate balance between financial safety and considerations such as those relating to efficiency, competition, contestability and competitive neutrality?
​Eligibility ​Are the proposed eligibility criteria appropriate for new entrants to the banking industry under a Restricted ADI licence?
Restricted ADI Licence phase​ ​Is two years an appropriate time for an ADI to be allowed to operate in a restricted fashion without fully meeting the prudential framework? Is two years a sufficient period of time for a Restricted ADI to demonstrate it fully meets the prudential framework?
Minimum requirements​ ​Are the proposed minimum requirements appropriate for potential new entrants to the banking industry? Are there alternative requirements APRA should consider?
​Licence restrictions ​Are the proposed licence restrictions appropriate for an ADI on a Restricted ADI licence? Are there alternative or other restrictions APRA should consider?
Financial Claims Scheme​ ​Are the proposals appropriate in the context of the last resort protection afforded to depositors under the Financial Claims Scheme?
Further refinement​ ​Are there other refinements to the licensing process APRA should consider?

During the consultation process APRA may also look to arrange discussions of these proposals with interested parties

Home Loans Still Rising Too Fast

The latest monthly banking statistics for July 2017 from APRA are out. It reconfirms that growth in the mortgage books of the banks is still growing too fast. The value of their mortgage books rose 0.63% in the month to $1.57 trillion. Within that, owner occupied loans rose 0.73% to $1,017 billion whilst investor loans rose 0.44% to $522 billion.

Investor loans were 35.18% of the portfolio.

The monthly growth rates continues to accelerate, with both owner occupied and investor loans growing (despite the weak regulatory intervention).  On an annual basis owner occupied loans are 6.9% higher than a year ago, and investor loans 4.8% higher. Both well above inflation and income growth, so household debt looks to rise further. The remarkable relative inaction by the regulators remains a mystery to me given these numbers. Whilst they jawbone about the risks of high household debt, they are not acting to control this growth.

Looking at individual lenders, there was no change in the overall ranking by share.

But interestingly, we see significant variations in strategy working through to changes in the majors month on month portfolio movements.

ANZ has focussed on growing its owner occupied book, WBC is still in growth mode on both fronts, whilst CBA dropped their investor portfolio. We also saw a number of smaller lenders expand their books.

Looking at the speed limit on investor loans – 10% is too high -we see the investor market at 5% (sum of monthly movements), with all the majors well below the limit. But some smaller players are still growing faster.

We have to conclude one of two things. Either the regulators are not serious about slowing household debt growth, and the recent language is simply lip service (after all the strategy has been to use households as the growth engine as the mining sector faded), or they are hoping their interventions so far will work though, given time. Well given the recent auction results (still strong) and the loan growth (still strong) we do not believe enough is being done. Time is not their friend.

Indeed, later this week we will release our mortgage stress update. We suspect households will continue to have debt issues, and this will be exacerbated by interest rate rises in a flat income, high cost growth scenario many households are facing. The bigger the debt burden, the longer it will be to work through the system, with major economic ramifications meantime.

The RBA data will be out later, and we will see if there have been more loans switched between category, and whether non-banks are also growing their books. Both are likely.

 

 

Australia’s Proposal to Allow Local Mutuals to Issue Common Equity Tier 1 Capital Is Credit Positive

From Moody’s.

The Australian Prudential Regulation Authority (APRA) announced a proposal to amend the existing mutual equity interest (MEI) framework to allow Australian mutually owned deposit-taking institutions (ADIs) to directly issue common equity Tier 1 (CET1) eligible capital instruments. The current framework only creates CET1-equivalent capital, so-called MEIs, through the conversion of Additional Tier 1 (AT1) and Tier 2 capital instruments at the ADI’s point of non-viability. The amendment is credit positive because it would provide an additional option for mutuals to support balance sheet growth by raising high-quality capital. Australia’s mutuals have relied on retained earnings as their sole CET1 source because their mutual corporate status by definition has not allowed them to raise common equity.

APRA’s proposed amendment would allow mutuals to raise capital outside of extreme circumstances. The amendment also would provide a more efficient capital channel for mutuals to respond to growth opportunities. Mutuals thus far have relied on retained earnings accumulation as their primary source of CET1 capital. We view the proposal as an important step in levelling the playing field between mutuals and listed Australian ADIs, the latter of which have the ability to raise common equity.

We do not expect the amendment, if enacted, to strongly increase common equity issuance to replace retained earnings as a dominant CET1 capital source because of mutuals’ already-strong capitalization and the limits that APRA will set on such instruments. Australia’s mutuals have no urgent need to boost their capital ratios. The exhibit below shows that mutuals have consistently reported higher average CET1 ratios than other ADIs. As of the end of March 2017, their aggregate CET1 ratio was 15.8%, versus 10.3% for all ADIs.

Under the current MEI framework, which has been in place since 2014, Moody’s-rated mutuals have 2% of their total capital as AT1 and Tier 2 instruments. (Moody’s-rated mutuals make up approximately 50% of the mutual sector’s total assets.)

The regulator also limits mutuals’ ability to rely on MEI-created CET1 (either through conversion of AT1 and Tier 2 instruments or direct issuance). Specifically, APRA has proposed a 15% cap on the inclusion of MEIs in CET1 capital, and distribution of profits to MEI investors at 50% of ADIs’ net profit after tax on an annual basis.

We expect that MEIs will continue to account for only a minor share of mutuals’ capital, which alleviates the risk that the APRA proposal will incentivize mutuals to maximize their profitability to meet MEI investors’ dividend payment expectations. This scenario would conflict with mutual ADIs’ traditional business model that de-emphasizes profit maximization, and instead focuses on providing value to members via cheaper loans and higher-yielding deposits.

Why regulators have finally noticed the non-banks

From Mortgage Professional Australia.

There are two ways to bury bad news, and brokers have now experienced both. Method one is to run that news on a Friday when everyone’s mind is on the weekend, as APRA did when announcing curbs on interest-only lending on the final day of March. The 2017 Federal Budget took the other approach: burying bad news in more news, namely a controversial $6.2bn bank levy.

Whether increased regulation of non-banks is indeed ‘bad news’ is up for interpretation. Yet for an industry so jaded by regulation, the announcement that APRA will now have oversight of non-bank lenders – who were previously regulated by ASIC – has occurred with remarkably little in the way of reaction.

“Of all the things that were announced, that’s the biggest deal,” Martin North, principal of consultancy Digital Finance Analytics told MPA. “If APRA now has responsibility for them, they will have to make a decision about whether they require them to hold capital, which is probably not going to happen as they aren’t ADIs … but they will probably put a structure, or limits, or some other mechanism to reduce the risky lending behaviour.”

A work in progress

With just three paragraphs in hundreds of pages of budget papers, there’s little in the way of specific information on the new regulations. It has now been confirmed that the government will provide an extra $2.6m over four years to APRA to “exercise new powers” and collect data from non-authorised deposit-taking institutions. To assist with this the Banking Act of 1959 will be modernised, also enabling APRA to restrict lending to certain geographical areas.

Appearing before the Senates Estimates Committee in late May, APRA chairman Wayne Byres was pushed for more information on APRA’s role. Byres played down the degree of regulation. “If there is a systemic risk … APRA would have the capacity to introduce some rules which might help mitigate that. But that is very different to saying we take day-to-day responsibility for individual institutions.”

Nevertheless, uncertainty remains. Asked by Liberal senator David Bushby which institutions would be affected by APRA’s expanded powers, Byres was unable to provide an answer, as the government had yet to announce the actual powers APRA would have.

Byres was more specific about why the new powers were required. It was “in some sense” a consequence of restricting lending by ADIs to investors, which Byres suspected had pushed a large degree of investor lending into the nonbank sector. While Byres said the failure of individual non-banks was “a fact of life”, a build-up of risky lending in the sector could have more far-reaching consequences.

Investor and interest-only caps

Byres’ inability to specify APRA’s new powers (at the time of writing) leaves open the possibility of APRA capping investor and interest lending growth by non-banks at the same level as banks. At present, growth per lender is capped at 10% and 30% respectively.

APRA warned ADIs in March that lending by non-banks they fund “should not be growing faster than their own portfolio or materially faster than their own portfolio and also should be of a similar quality to loans they would be prepared to write themselves”, Byres told the Senate Estimates Committee.

Having experienced rapid investor lending growth from a small base, many non-banks would be hit hard by a percentage-based limit. In a furious article in Australian Broker magazine, ex-Pepper CEO Patrick Tuttle warned against “regulating the non-bank sector out of existence”, as well as depriving legitimate borrowers of funds and causing a sharp correction in house prices. Tuttle also claimed that non-banks had not been consulted by the Treasurer prior to the announcement.

The non-bank lenders MPA spoke to appeared to be unconcerned by the prospect of APRA oversight. Pepper Money said it was “business as usual”, claiming it had already taken note of APRA regulation of ADIs to ensure a balanced approach to lending, in addition to satisfying the demands of warehouse funders. Liberty CEO James Boyle supported the regulator’s efforts to lessen the risk of an inflated property market. Boyle argued that, with limited scale compared to the majors, non-banks already had to build balanced portfolios with diverse geographies, products and borrower types.

However, Boyle said, “as non-banks do not accept deposits, there is less need to apply measures primarily designed for depositors”. According to Boyle, the “very virtue of their difference” allows the non-bank sector to increase competition in the industry, providing better choice for customers. “We would say the government should continue to be sensitive with moves such as those proposed to not increase costs for consumers, stifle competition or shift responsibility for risk management from the regulated to the regulator.”

In MPA’s Brokers on Non-Banks survey, which will be published in August, hundreds of brokers were asked whether they’d continue using non-banks if they were regulated in the same way as banks.

The majority of brokers said they would, pointing out other advantages the non-banks have over the majors. As one Sydney broker explained, “they are proactive, adept and keen for business. Their hunger means that they meet the market and fill the niches the major lenders don’t”.

However, many brokers warned that already-high interest rates would become impossible to justify without correspondingly differing policies. “If non-banks were restricted by APRA, then likely their policy attractiveness would be lost,” commented a broker from Perth, “so the reasons to use them would be less. However, maybe they would keep their upfront approach, which I prefer to the majors’ ‘have to haggle to get a good deal’ approach.”

For decades non-banks have been trying to catch the eyes of consumers and brokers. Australia is only just beginning to wake up to its ‘shadow banking sector’, as Byres found at the Senate when he had to explain that shadow banking was “not illegal banking”. As APRA gradually elaborates on what ‘oversight’ really means, non-banks may discover their newfound popularity with investors is a double-edged sword.

APRA consults on changes to mutually owned ADIs’ capital framework

The Australian Prudential Regulation Authority (APRA) has released for consultation a discussion paper on proposed revisions to the capital framework for mutually owned authorised deposit-taking institutions (ADIs) to enable them to directly issue Common Equity Tier 1 (CET1) capital instruments.

In 2014, APRA developed a Mutual Equity Interest (MEI) framework for mutually owned ADIs that enables them to issue Additional Tier 1 and Tier 2 capital instruments that meet requirements for conversion into CET1 capital in certain circumstances. Because of their structure, mutually owned ADIs have traditionally not been able to issue ordinary shares that could qualify as CET1 capital.

The consultation announced today concerns proposed amendments to this MEI framework to allow mutually owned ADIs to issue CET1-eligible capital instruments directly. The proposed changes are intended to give mutually owned ADIs more flexibility in their capital management.

These proposed CET1-eligible capital instruments would share many of the same characteristics as ordinary shares and would, for example, be perpetual, subject to discretionary dividends and accounted for as equity. However, because these instruments are untested, APRA is proposing some restrictions on the amount that may be included in CET1 and, to accommodate the mutual corporate structure of issuing ADIs, proposes limits on MEI holders’ share of residual assets.

Following consideration of submissions received through this consultation, APRA anticipates it will release the final revised APS 111 in late 2017 for commencement as soon as practicable thereafter.

Australian Banks’ Stricter Capital Requirements Are Credit Positive – Moody’s

From Moody’s

On 19 July, the Australian Prudential Regulation Authority (APRA) announced that it will raise the minimum common equity Tier 1 (CET1) ratio for banks. The stricter capital requirements will make the banking system more resilient to any weakening of credit conditions, a credit positive.

Australia’s four biggest banks, the Australia and New Zealand Banking Group Ltd. (Aa3/Aa3 stable, a22), Commonwealth Bank of Australia (Aa3/Aa3 stable, a2), National Australia Bank Limited (Aa3/Aa3 stable, a2), and Westpac Banking Corporation (Aa3/Aa3 stable, a2), which use internal ratings based models for calculating risk-weighted assets, will be most affected. APRA increased the four banks’ minimum CET1 ratio 150 basis points to 9.5%, including a 1% charge for domestic systemically important banks (D-SIBs). Although the higher capital requirements will take effect in early 2021, APRA said that it expects banks to exceed the new requirement and have CET1 ratios of 10.5% by 1 January 2020 at the latest.

The minimum CET1 ratio for Macquarie Bank Limited (A2 stable, baa1), which also uses an internal ratings-based approach but is not a D-SIB, was similarly raised 150 basis points to 8.5%, effective 1 January 2020. For all the other banks, which use standardized models, the minimum CET1 ratio is 7.5%, a 50 basis point increase.

The new minimum CET1 ratio is an incremental increase from the banks’ current capital levels. The APRA has for some time indicated that it would tighten capital rules, and our Australian bank ratings fully reflect that possibility. To meet a CET1 target of 10.5%, the four big banks will need to raise their CET1 ratios between 40 and 90 basis points from their reported levels at March 2017 (see Exhibit 1). That translates into an aggregate capital shortfall of about AUD9.1 billion. However, the banks’ normalized annual internal capital generation is already around AUD6.5-AUD7.5 billion after dividend payments and dividend reinvestments. Also, in practice, they may need less additional capital because they have been actively reducing their risk-weighted assets by changing their business mixes.

Macquarie Bank’s CET1 ratio was 11.1% as of March 2017, well above its new 8.5% minimum. Smaller banks subject to a 7.5% minimum also mostly have CET1 ratios exceeding the requirement, so any capital shortage for them will be minimal.

The tighter capital requirement reflects the APRA’s concern about Australian banks’ reliance on foreign wholesale funding, which makes them vulnerable to sudden shifts in foreign investor sentiment. Australian banks issue around 70% of their long-term debt and 40% of their short-term debt to foreign investors (see Exhibit 2).
 The APRA has also flagged further increases in capital requirements in 2021. The regulator plans to increase the risk weights of certain assets, particularly for investor property loans and higher loan-to-value ratio loans. Although loss rates on mortgages remain low, housing loans make up 60% of Australian banks’ loan portfolios. Furthermore, a high and rising level of household debt has elevated risks within the household sector, making Australian banks’ credit quality more vulnerable to a shock. APRA also stated that its assessment of bank capital assumes that a framework for total loss-absorbing capacity will be introduced at a later date.

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.

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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.