Citi: Regulatory risk rising for banks

risk

Oh yeh, now we’re getting somewhere. The early moves are starting to grasp that the MB agenda for rates cuts and macroprudential policy  as solution for Australia’s looming economic ills has an implicit logic. Logic that can’t be denied forever. From Citi:

RBNZ mortgage RWA adjustments highlight rising regulatory risk – the RBNZ today announced increased risk weights for all high LVR housing loans. This review of the housing market comes in addition to the slated potential introduction of macro-prudential overlays announced in March 2013. In Jan 2013 (Examining the risks to our 2013 base assumptions) we identified regulatory risk as key sector risk.

While this is only a small initial direct impact on listed Australian Banks… – The four major Australian banks all have a large presence in New Zealand. For ANZ, the largest of the banks in NZ (~10% Group loans in NZ mortgages), a 12% uplift in mortgage capital as a result of this policy would impact Group RWA by a mere ~0.4%, or the equivalent to a ~$115m of additional capital hit to CET1.

…it is also symptomatic of what other regulators are doing – with peers offshore, including the policy arm of the Bank of International Settlements (as well as in the UK, Sweden, Norway…), critically examining the efficacy of bank capital modeling (a key plank of Basel II and III) and suggesting the employment of tools such as risk weight floors as a conservative response.

Leaving some risk of an increase here too… – given the largest single risk class in the Australian banking system is the mortgage portfolios, household indebtedness remains at cyclically high levels, bank modeling experience largely captures only prosperous economic times, a usually more conservative-than-peer regulator like APRA appears likely to closely consider a similar response.

…with a more disruptive impact to assumed capital returns – Assuming a mortgage risk weight floor of 20% for Advanced accredited banks (4 majors) would require as much as 87bps (~ one years capital generation) of additional CET1 capital for Westpac, the most affected bank.

banks

What was that about a special dividend?

David Llewellyn-Smith

David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal.

He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.

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Comments

  1. Lenders and Mortgage Insurers cap the value of their high LVR loans, and they apply exacting standards that most people would fail to meet. Interest rate discounts are lower at this level as well, so this would not be the most effective way of reducing risk, there are other market segments that are higher risk categories.

      • You make a fair point, but it’s not a bank. You won’t see the big four or the regionals advertise like that, because their agreement with their LMI provider won’t allow it.

        Without getting into the nitty gritty, under the agreements banks can get many things done at 90% LVR but nothing is conceeded by the LMI provider at 95%, hence my original point.

        You will probably find that the group are using the WA government funded “Keystart” plus the FHOG to reduce borrowings below 90%. Why don’t you give them a call and find out.

      • Big four banks also have an agreement not to fraudulently alter Loan Application Documents after the applicant has signed them in order to make the loan go through……BUT THEY DO! LMI’s won’t pay out if a broker has ‘fiddled’ the figures. Seeing as a lot of the major mortgage brokers are owned by the big four I find your ‘exacting standards’ are BS my friend.

      • Peter Fraser

        Well lending fraud certainly exists, and it’s a major problem. However the overwhelming majority of fraud is committed by borrowers who lie and provide forged documents to support their claims, and not by banks or brokers. Luckily most of it is picked up and the loan is denied – banks don’t want rubbish on their books, it becomes a maintenance cost for them.

        But I’m quite sure that you won’t believe that either.

        Cheers.

      • “However the overwhelming majority of fraud is committed by borrowers who lie”…..Hmmmmh. So your telling me banks never systematically sell mortgage notes to RMBS trusts without informing the borrower, and then still collecting payments despite no longer being in possession of the mortgage note ! THAT IS FRAUD ! You ought to be all tarred and feathered.

  2. Peter, put your money where your mouth is. Demand that the govt bank guarantee is EXPLICITICALLY denied!