A shudder will be going through APRA and the banks this morning after a speech last night by Stefan Ingves, chairman of the Basel Committee on Banking Supervision. From Bloomberg:
Global regulators may impose restrictions on the way lenders model risk and assign capital after a review of banks’ trading practices found wide differences in their number crunching.
A probe of banks’ calculation of the riskiness of their assets found “material variation” across the industry, Stefan Ingves, chairman of the Basel Committee on Banking Supervision, said in a speech in Cape Town.
Regulators could respond with tougher disclosure rules or “limitations in the modelling choices for banks,” Ingves said in the prepared remarks today. “The committee’s work on how banks calculate risk weighted assets also feeds into a broader concern that, in pursuit of risk sensitivity, the Basel III framework has grown too complex.”
Any reader that is familiar with the work of Deep T. will know that this is the key to the myth that Australia is the first country in the history of economics to have both extraordinarily overvalued dwellings and a safe banking system. It is largely made possible by the undisclosed risk-weightings for capital applied to mortgage lending by the banks. Without these weightings which materially reduce the bank’s need to carry capital, or put another way, increase their leverage, we would have a very different property market and economy.
This is no doubt what Joe Hockey had in mind when he recently said we would protect APRA’s discretionary powers of supervision, which is our answer to those, like Basel, who would like to see transparency brought to the use of risk-weightings.
Lengthy phase-in period (2019, or never) means any rule changes will occur long after our house bubble has burst.
Have the day off.
A little bird tells me that he/she is presently involved in a MegaBank project to move debt ‘assets’ off the books to an SIV at 25% discount on face value in order to meet Basel 3 provisions.
I wonder if the share holders will still hold equity in the SIV or will it be spun off
Allegedly the returns have been “guaranteed” by the bank in question.
Have we not learned ANYTHING from what has happened in the rest of the world over the past six years?
It is almost unbelievable how close this script is, with a 5-7 year lag.
Sigh, have you not learnt anything Ben. Repeat after me: it’s different here….
SIV with a 25% haircut = CDO
Joe Hockey?
My understanding is that our man Rudd has it covered. Should there be a systemic failure, your collective super and a large bank of printers will see it right.
“…discretionary powers of supervision”
That shouldn’t be so funny.
One really needs to take all this with a grain of salt I think. After the approved and ongoing modification of risk assets sanctioned in 2009 via FAS 157 in the US (allowing CDO’s, CDS’s etc) all to be marked to make believe in order to save insolvent Banks, it’s hard not to view a lot of this Basel prognosticating as much more than dressing up the shop window. It may liven up bank boardroom discussion for a bit, and…?
Based on the statistical data during the Great Moderation, when mortgage delinquency rates were at historical lows, APRA allowed risk weighting to be halved for the purpose of calculating capital provision.
On 27 September 2003, APRA announced “a concessional risk-weight of 50 per cent applies to loans that are fully secured by registered mortgage over a residential property, provided certain criteria are satisfied.” in media release titled, “APRA proposes changes to home loan risk weighting”.
http://www.apra.gov.au/MediaReleases/Pages/03_75.aspx
Australia was no smarter than the rest of the world in its complacency about the risk in housing credit. Self-congratulation about Australian regulation is not well founded.
How many people realise that Basle rules helped to contribute to the GFC?
Basle rules rated mortgage backed securities as “100%” security for the purposes of bank gearing, and other types of lending much lower, especially business lending.
Just one of many examples of controls and regulations having “pro cyclical” unintended consequences.
Basel is not in the business to ‘force’ anyone to do anything… You just have to see how Americans are dismissive of it.
APRA is a toothless tiger anyway. The great threat of loss of licence will NEVER happen (you imagine closing a bank?) and fines don’t seem to exist, if only in theory.
Words. All we have is words and the great belief – now pushed by the IMF itself – that the only way out is to spend which we can only do if we don’t reduce leverage.
I agree with ‘complexity’ point – as it applies to CDO – the smarter we try to be, the lower risk measurement accuracy is.