APRA slams door on bank capital returns


Following Friday’s dreadful speech from APRA’s Charles Littrell, APRA Chairman John Laker delivered better in addressing liquidity requirements  and any prospect of bank capital return. On the first Laker said:

“We have already been offered advice that APRA should adopt the revisions without demur, although it is not always clear that commentators have fully understood the Basel III rules. There is devil – deliberate devil – in the detail. Take the expansion in the definition of high quality liquid assets. The revised Basel III rules give national authorities the discretion to include certain additional assets in a new Level 2B category, provided they fully comply with the qualifying criteria. These assets are residential mortgage-backed securities with a long-term credit rating of AA or higher; corporate debt securities with a long?term credit rating of between A+ and BBB?; and a selection of listed non?financial equities. But, note the qualifying criteria, which are fundamental and tight: these assets should be liquid in markets during a time of stress and, ideally, be eligible for use in central bank repo operations.

The argument is being put that if APRA were to designate particular types of assets as eligible HQLA this would encourage depth and liquidity in the markets for these assets. The designation would be self-reinforcing, so to speak. That may well be the case over time. However, the Basel III rules do not reward wishful thinking; they require national authorities to acknowledge the facts. Australia has been through the live stress of the global financial crisis – when financial markets were severally disrupted at times – and the behaviour of financial assets during this period will be a critical factor in our assessment of HQLA eligibility….some types of debt securities in the list of potential Level 2 assets are eligible collateral for the Committed Liquidity Facility that will be provided by the Reserve Bank of Australia. These include RMBS rated AAA or higher and some corporate debt securities.”

Right you are. On the second issue, if the banks actually had the chutzpah to return capital to shareholders, the APRA would likely not allow it:

A prudent board will also consider other factors, such as growth expectations, capital volatility, dividend policy and credit ratings, where relevant. Peer comparisons, whether domestic or international, are not sufficient, a lesson learned in the crisis. In short, the appropriate level of capital that an ADI targets and seeks to maintain is a more nuanced and forward-looking assessment than a focus on minimum prudential requirements would suggest. This needs to be kept front of mind when siren calls for share buy-backs, special dividends or higher dividend payout ratios get louder. And they surely will.

Let’s face it, if it’s not going towards stabilising the financial system, any additional capital should be going to tax-payers as fees for the guarantees that generate the additional capital.

Finsia Leadership Luncheon Series 22 March 2013.pdf by Heidi Taylor

David Llewellyn-Smith


  1. Thanks HnHs

    A much more balanced and informative speech from the Chairman, than from Charlie Boy.

    Of equal importance to your points above is

    “The Basel Committee is currently undertaking a substantial exercise on the denominator
    the measurement of risk-weighted assets
    aimed atensuring consistent implementation of the full Basel capital framework,including Basel II and Basel II.5, so as to maintain market confidence inregulatory ratios and provide a level playing field.”

    I’m not confident of any great change in RWAs of Mega Bank but the issue has been highlighted in public by the Chairman

    • Deep T – what says you re: this statement –

      “These assets are residential mortgage-backed securities with a long-term credit rating of AA or higher”

      Is APRA trying to tell us that those 16 – 17 billion RMBS the government purchased to help prop up the financial sector are AA rated? What a pile of …

      Denise Brailey in her senate testimony only last year said:

      “Mrs Brailey said international credit ratings agency Fitch Ratings had estimated that eight to 10 per cent of RMBS’s comprised low-doc loans and some $2 billion of loans were obtained fraudulently.

      “The government is holding tainted securities,” she said.

      “The government cannot be seen profiting from that fraud.”

      If 8 – 10 % of these securitized mortgages are simply fraudulent crap the banks offloaded at first opportunity, then how are rated AA? Anyone?

  2. I strongly disagree with the assesment that the RWA of the major banks will remain unchanged. Recent analysis from a number of central banks around the world has highlighted significant variance in RWA estimates for roughly similar portfolios. Essentially big advanced IRB banks are engaging in “parameter optimisation” to define acceptable RWA positions. I’m of the view that regulators will move to more closely align RWA outcomes between banks (i.e. reduce opportunities to game the system). A move of this sort (I acknowledge that it will take time) will indirectly impact the majors – and in my view (again)result in a relative increase in RWAs.

    As it stands though, we are already seeing revisions coming through to Basel III. Senior securitised tranches are being hit more heavily for capital (a change was warranted, but some changes are for the worse). Moreover, CDS protection looks like it will be hit with a higher capital charge. Changes like these show that the BCBS is still looking to tighten capital requirements (although the changes take time to implement) and on this basis, I do expect to see capital models being properly targeted in time. And this will ultimately flow through to the major banks.

    • Steve

      We are in agreement on the technicals which you are obviously on top of.

      However, my cynicism is pointed directly at Mega Bank fighting this change at every opportunity. RWAs of residential mortgages is the basis for Mega Bank having high returns on assets. Although the BCBS have highlighted residential mortgages as a focus for model arbitrage, change may be slow in Australia.

      What the BCBS has not done is admit the fault of some of the parameters for IRB models under Basel II. Until this is done, banks will have arguments to support their case for very low RWAs, until another failure occurs.

  3. I agree that there will be a lot of push-back from the majors – but I also believe that change is coming.

    Whilst I do suffer from cynicism at times, my optimism is in part captured in the the spirit of Laker’s comment regarding material inconsistencies and removing these from the process.

    For the record, my own preference in terms of capital adequacy requirements is along the lines of that proposed by Professor Admati et al. As for estimating RWA, I much prefer Basel I (though how does one remove the dependence on RA measures….) plus an outright leverage ratio. And liquidity is another discussion altogether.

  4. The public should be fully aware that APRA is in paid service of the banks. APRA is fully funded by a bank levy negotiated annually with the banks. This creates an inherent conflict of interest.

    A failed bank implies less revenue for APRA. Less profitable banks may resist increases in levy, reducing APRA funding. Rather than managing bank failures, there is an incentive for the regulator to prop up failed banks. We see this sort of dynamic operating overseas: the regulators, being paid by the regulated (in many ways), are using taxpayers money to prop up banks.