APRA defends the heart of the ponzi

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The AFR is reporting today that Australian Prudential Regulation Authority general manager of policy development Neil Grummitt:

…has floated changes to narrow the gap between how much capital major banks and the rest must set aside against home loans…Mr Grummit said APRA remained committed to having capital requirements that were “risk sensitive”.

…Sources within one of the major banks said it was unlikely Mr Murray would recommend changes that made it easier for smaller banks to write home loans, due to Mr Murray’s concern about the amount of credit already being pumped into the housing market.

We shall see. Murray did moot the idea that smaller banks could be allowed to shifted to risk sensitive capital requirements which would boost mortgage lending. So would government guarantees to non-banks, another suggestion.

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As for APRA, risk sensitive methodologies are the heart of the ponzi because they enable banks to reserve tiny amounts of capital against mortgages and operate with huge leverage. They must be thrown open to market scrutiny, as the Basel committee clearly intends.

About the author
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.