Rates Up, Lending Down

Today’s video post discusses the implications of the latest official lending data and announced rate rises.

Rates Up, Lending Down

We look at the latest RBA and APRA data and rates rises from some regional lenders

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Rates Up, Lending Down
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Investment Lending Crashes

APRA has released their monthly banking stats to the end of July 2018 today. As expected from our survey data, gross investment mortgage lending balances fell last month. Expect more ahead.

Total loans outstanding for all residential property – owner occupied and investment rose by 0.24% to $1.64 trillion, which would be an annual rate of 2.9%.  Within that lending for owner occupation rose by 0.38% to $1.09 trillion while lending for investment loans fell 0.25% to $557.4 billion.  As a result the proportion of loans for investment purposes fell to 33.9%, the lowest for years.

The monthly movements underscore the changes, (and remember the August 2017 drop was a blip created by loan reclassification at CBA from their residential books).

The monthly portfolio movements by lender really tell the story, with investor loan balances at Westpac, CBA and ANZ all falling, while NAB grew just a tad. Macquarie, HSBC. Bendigo Bank and Bank of Queensland grew their books, highlighting a shift towards some of the smaller lenders. Suncorp balances fell a little too.

The overall portfolios by lender continue to show CBA the largest owner occupied lender, and Westpac the largest investor lender.

Analysis of the 12 month portfolio movements also reveals the some of the smaller players, and Macquarie have grown their portfolios faster than the majors, and Westpac had the strongest growth among the big four. Market growth continues to fall, at 0.85%.

The tighter credit conditions are now biting – finally – which explains the recent spate of ultra-low rates on offer to lower risk new borrowers and those seeking to refinance who fall within the new criteria. But many are excluded, prisoners of higher rates as they do not fall within these now tighter (and rightly so) guidelines.

There will be howls of pain from the sector and calls to relax lending standards to “save” the economy, but these must be resisted at all costs. We must not return to the over lax lending of past days as this will simply build even bigger risks later. Time I fear to face the music.

Anyone now game enough to forecast a rise in home prices? I suspect not. We will see what the RBA data tells us about the non-bank sector, their data just came out. We will post on this soon….

I will be watching for a slowing in owner occupied growth, as confidence and sentiment ebbs away.

Super assets reach $2.7 trillion

Total superannuation assets reached $2.7 trillion at the end of the June 2018, up 7.9 per cent for the preceding 12 months, according to APR, via InvestorDaily.

APRA has released its quarterly superannuation performance statistics for the June 2018 quarter, revealing the Australian super sector has grown to $2,709.3 billion.

Total assets in the super sector increased by 7.9 per cent throughout the 12 months to 20 June 2018.

The $2.7 trillion super pool consisted of $631.6 billion in industry funds, $451.9 billion in public sector funds, $622.3 billion in retail funds, $56.1 billion in corporate superannuation, and $749.9 billion in SMSFs.

The annual industry-wide rate of return for entities with more than four members (i.e. non-SMSF money, equating to $1.76 trillion) was 7.6 per cent. The five-year average rate of return to June 2018 was 7.9 per cent (see below).

Source: APRA

Total assets increased by 3.6 per cent of $65.9 billion over the June 2018 quarter. At the end of the quarter, 51.3 per cent of the $1.7 trillion in non-SMSF money was invested in equities; 31.5 per cent was invested in cash and fixed income; and property and infrastructure accounted for 13.5 per cent.

Asset allocation – June 2018

Source: APRA

 

APRA Polices Banking Words

The Banking Act 1959 (Banking Act) places restrictions on financial businesses using certain words and expressions related to banking. APRA just released some updated guidelines.

Under sections 66 and 66A of the Banking Act, only persons that have been granted approval by APRA can use the following words or expressions in Australia in relation to their financial business (unless an exception in the Banking Act applies):

  • ‘bank’, ‘banker’ and ‘banking’;
  • ‘building society’, ‘credit union’, ‘credit society’ and ‘credit co-operative’;
  • ‘authorised deposit-taking institution’; and
  • ‘ADI’ (except where these letters are used as part of another word).

Similar words and expressions, whether in English or other languages, are also restricted. These restrictions apply to any ‘financial business’, meaning a business that includes or relates to the provision of financial services, whether or not in Australia.

APRA only grants permission for financial businesses that are not authorised deposit-taking institutions (ADIs) to use these restricted words or expressions in very rare or unusual circumstances.

If your business is a financial business that is not an ADI, and you wish to use a restricted word or expression, you need to make an application to APRA for approval.

If your business is not a financial business and you propose to use a company name or business name that contains a restricted word or expression, you are still required to obtain confirmation from APRA that section 66 or 66A does not apply before registering the name with the Australian Securities and Investments Commission (ASIC).

Under the Banking Act, there is no restriction on an ADI using the restricted expressions ‘authorised deposit-taking institution’ and ‘ADI’. An ADI is also permitted to use the restricted words ‘bank’, ‘banker’ and ‘banking’ unless APRA determines otherwise. Applicants for authorisation as an ADI should contact APRA about the circumstances in which it may be permissible to use a restricted word or expression.

It is an offence for a person to use a restricted word or expression in Australia in relation to a financial business, except where APRA has granted a consent or exemption, or where a statutory exception applies. The penalty for this offence is 50 penalty units for each day that a restricted word or expression is used. At the time of publication of these guidelines, 50 penalty units is equivalent to $10,500 for an individual and $52,500 for a corporation.

APRA has granted the following types of financial businesses a class consent under section 66, allowing them to use certain restricted words or expressions:

  • building societies;
  • credit unions;
  • trustees of ADI staff superannuation funds;
  • foreign banks issuing securities in parcels not less than $500,000; and
  • offshore banking units.

Australia’s proposals to improve comparability of bank capital are credit positive

The Australian Prudential Regulation Authority (APRA) has released a discussion paper proposing two options to improve the transparency, comparability and flexibility of Australia’s bank capital framework. Both options would be credit positive because each would improve the comparability of Australian banks’ capitalisation to global peers says Moody’s.

APRA’s proposals are not intended to change the quantum of bank capital, but to improve the comparability of reported capital ratios.

Australian banks’ reported capital ratios are generally lower than banks with comparable capital strength in other jurisdictions because of the regulator’s conservative implementation of Basel capital requirements. Banks using the internal ratings-based (IRB) approach to calculate capital ratios will be most affected. Investors’ better understanding of the true strength of Australian banks’ capitalisation will support the banks’ access to international capital markets where, in aggregate, they raise about two-thirds of their long-term debt. APRA’s first option would not change how Australian banks’ capital ratios are calculated. Instead, banks would use a regulator-endorsed methodology to report an additional “internationally comparable” ratio to facilitate comparison to global peers. This approach is broadly in line with current practice and IRB banks already disclose their own calculations of internationally comparable capital ratios, but the introduction of a regulator-endorsed methodology will add credibility and consistency to the calculation of the internationally comparable capital ratio.

APRA’s second option would remove aspects of conservatism in the definition of capital and banks’ calculation of risk-weighted assets (RWAs), making the calculation of capital ratios more consistent with global peers. Australian bank capital ratios would likely rise under this approach, so APRA would also lift minimum regulatory capital ratio requirements to ensure that banks retain the same level of capital. APRA also raised the possibility of increasing the size of the capital conservation buffer. APRA believes that increasing the spread before a bank’s capital ratio breaches this buffer will increase its capacity to begin a recovery action and for APRA to take supervisory action.

The key areas of conservatism within the current APRA capital framework largely relate to the calculation of RWAs. For example, APRA requires a minimum 20% loss-given-default assumption for residential mortgages, which is higher than in most jurisdictions. APRA also requires capital held at a Pillar I level for interest rate risk in the banking book, an approach that is not required under the Basel capital framework. The regulator’s definition of regulatory capital is also conservative in that it requires certain investments, tax assets and capitalized expenses to be deducted from capital.

To facilitate comparison to their global peers, Australia’s four major banks – Australian and New Zealand Banking Group Ltd., Commonwealth Bank of Australia, National Australia Bank Limited and Westpac Banking Corporation – have begun reporting their own calculations of internationally comparable Common Equity Tier 1 (CET1) capital ratios. On average, these self-reported ratios are 520 basis points higher than their headline regulatory CET1 ratio.

Conservative RWA calculations are the biggest driver of the differences between APRA and internationally comparable capital ratios Major Australian banks’ internationally comparable CET1 ratios are higher than APRA ratios

We note that APRA’s proposals come at time when other regulators are also proposing changes to their capital frameworks following the finalization of the Basel III capital rules by the Basel Committee. For example, Sweden’s regulator has proposed moving mortgages’ 25% risk-weight floor to Pillar I from Pillar II, which will increase RWAs and lower Swedish banks’ reported CET1 capital ratios. As a result, the difference between Australian bank capital ratios and their global peers may start to narrow, irrespective of APRA’s proposals. Depending on the outcome of a consultation on the discussion paper , APRA expects to release draft prudential standards in 2019 and finalise the standards by mid-2020.

Note: The bank ratings shown in this report are the bank’s deposit rating, senior unsecured debt rating and Baseline Credit Assessment

Time, money and ASIC ‘impeded’ APRA

The main issue with taking legal action against rogue super funds is that the process costs time and money, APRA has told the royal commission, via Investor Daily.

APRA’s Helen Rowell was the first witness to take the stand on Friday 17 August, where counsel assisting Michael Hodge was quick to try and gain insight into APRA’s role as a regulator of the $2.6 trillion superannuation sector.

Mr Hodge asked whether APRA would ever commence litigation against trustees, to which Ms Rowell explained that this is a “potential” action, but that other methods would be preferable, such as an enforceable undertaking.

One of the criticisms that has been made by the Productivity Commission in its draft report of APRA is that the “behind closed doors” nature of its activities is not effective for achieving what Mr Hodge called “general deterrence”.

Ms Rowell disagreed that APRA works behind closed doors but admitted the that no corporate trustee has been required to give an enforceable undertaking in relation to superannuation in the last 10 years.

In her statement, which was referenced by Mr Hodge during his questioning, the APRA deputy chair was asked a question by the Commission to explain any practical limitations or impediments on APRA seeking disqualification orders pursuant to section 126H of the SIS Act.

Ms Rowell’s statement included three impediments.

The first impediment is the resources and expense of gathering sufficient and admissible evidence in the form that would be required by a court. She noted that APRA does not have power to recoup costs of an investigation.

“The second point you make is the legal costs of the court process,” Mr Hodge read. “And then the third point is about the length of time involved with court processes.”

Mr Hodge asked Ms Rowell what the basis is for her judgment that court processes take a long time.

“Our previous experience in dealing with matters through relevant tribunals such as the AAT and observation of other court processes that occur in the wider financial sector,” she replied.

However, Mr Hodge highlighted that APRA hasn’t had any experience dealing with superannuation companies in the courts in the last 10 years.

APRA ‘waiting’ for ASIC

Later, Mr Hodge turned to the question of responsibility. The counsel assisting was eager to identify what action APRA was taking when breaches occur.

“Is there a limitation period on commencing a civil penalty proceeding for a breach of the sole purpose test?”

“I don’t know,” Ms Rowell replied.

Mr Hodge then asked whether APRA had received any suggestion from ASIC that ASIC will commence public enforcement action in relation to ‘fees for no service’.

“I don’t know the answer to that question,” Ms Rowell said.

Mr Hodge asked if it is satisfactory, from the perspective of APRA as a matter of general deterrence, that no proceeding has ever been commenced against a trustee on the basis of a contravention of the sole purpose test where the trustee is deducting money from members’ accounts and paying it to related party advisers who are not providing a service.

“I think it’s too early to form that conclusion because that work is ongoing and APRA has not made any final decisions about what action it may or may not take ultimately in relation to that matter,” Ms Rowell said, adding that APRA is allowing ASIC to complete its work and review.

“When you say APRA is waiting to see what ASIC will do,” Mr Hodge probed, “has there been any consideration at all within APRA in relation to this issue to date?”

Ms Rowell responded: “There has been discussions with individual entities and – on the matter and seeking to get a complete understanding of the issues as they pertain to the individual entities. There would be general discussions occurring at APRAs internal committees about, you know, what the issue was and what was being done to address it, and – and those sorts of things. As I said, I don’t believe that we have made any conclusions at this stage as to what further action, if any, we might wish to take.”

APRA to make ADI capital framework “more transparent, comparable and flexible”

The Australian Prudential Regulation Authority (APRA) has sought industry feedback on potential approaches to adjust the capital framework for authorised deposit-taking institutions (ADIs) to make capital ratios more transparent, comparable and flexible. Importantly, the proposals in this paper are not intended to change the quantum or allocation of capital.

The idea of harmonising with international comparable measures is a good thing in my book, but is this a case of “fiddling while Rome burns” in that the issues we are facing are more significant as lending is still too hot, and households are under the debt pump? But then APRA conveniently reverts to type with its narrow obsession on financial stability interpreted as capital ratios. Safe ground, but myopic.

In its current program of reform of the ADI capital framework, APRA is pursuing three principal objectives:

  • the quantum of capital – to achieve an overall level of capital that meets the ‘unquestionably strong’ aspiration set by the Financial System Inquiry (as set out in APRA’s July 2017 Information Paper);
  • the allocation of capital – to improve the risk sensitivity of current capital requirements, where possible, by more appropriately aligning capital requirements to underlying risks (as set out in APRA’s February 2018 Discussion Paper);
  • the comparability of capital – to improve the transparency, comparability and flexibility of the capital framework where possible, without materially jeopardising either of the other two objectives.

APRA is also considering measures to make the capital framework more flexible in times of stress. These measures include increasing the size of the Capital Conservation Buffer relative to the size of the minimum Prudential Capital Requirement and potential changes to the point of automatic regulatory interventions. Such realignment of regulatory capital ratios would enhance supervisory flexibility in times of financial or economic stress, either at an individual ADI level or for the banking system as a whole. It may also enhance the usability of capital buffers held by ADIs to manage their capital positions during periods of stress.

The prospective approaches are outlined in a discussion paper released today for industry consultation.

The approaches would not change the amount of capital ADIs are required to hold beyond the unquestionably strong capital benchmarks announced in July 2017.[1] Rather, APRA is considering whether to alter the way ADIs’ capital requirements are calculated and disclosed to facilitate greater domestic and international comparability and transparency of ADI capital strength.

Though Australia’s capital framework is largely based on internationally agreed minimum standards set by the Basel Committee on Banking Supervision, APRA takes a more conservative approach to the definition of capital and the calculation of risk-weighted assets in some areas. Consequently, Australian ADIs typically have lower reported capital ratios than overseas peers with comparable capital strength.

Chairman Wayne Byres said: “APRA’s robust capital framework improves the quality and quantity of the capital held by ADIs, but makes international comparisons more complex.

“The reliance of the Australian banking system on international markets for funding makes it important that investors understand and have confidence in their capital strength during ordinary times and in periods of market disruption.”

The discussion paper released today outlines two general approaches designed to aid ADIs in representing and communicating their capital strength:

Under one approach, ADIs would continue using existing definitions of capital and risk-weighted assets, but APRA would develop a methodology allowing them to improve the credibility and robustness of internationally comparable capital ratio disclosures; or Under a second approach, APRA would change the way ADIs calculate capital ratios to instead use more internationally harmonised definitions of capital and risk-weighted assets. To maintain the strength and risk-sensitivity of the capital framework, there would need to be corresponding increases in minimum ratio and/or capital buffer requirements.

APRA is open to considering these approaches independently or in combination, or indeed retaining its current methodology, and is seeking industry feedback on whether the benefits of the suggested approaches outweigh the regulatory burden and associated increase in complexity.

Separately, the discussion paper proposes measures to make the capital framework more flexible in times of stress, including by increasing the size of regulatory capital buffers relative to minimum regulatory capital requirements.

Mr Byres noted: “None of the changes under consideration would change the level of capital ADIs are required to hold to meet the unquestionably strong capital benchmarks. However, by modifying and realigning regulatory capital ratios, APRA will potentially have greater supervisory flexibility to react to situations of bank-specific or system-wide stress, and allow institutions to return to a position of sufficient capital strength.”

Adams/North – The Great Airbrush Scandal – Policy Failure Of The Year!

The latest in our series of discussions with economist John Adams. This time we look at the recent APRA stress tests and consider the consequences.

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

The John Adams And Martin North DFA Page:

John’s original article.

Banking Strategy
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Adams/North - The Great Airbrush Scandal - Policy Failure Of The Year!
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