Luci Ellis, RBA’s Head of the Financial Stability Department gave a speech last Friday, Reforming and Financing the Post Crisis Future . The hairs on the back of my neck picked up when I read the following:
APRA set the local rules to require banks using their own models to hold more capital against housing mortgages than a plain-vanilla version of the Basel standards would require. Banks in some other countries actually hold much less capital against mortgages than the big banks here do.
Is Ms Ellis playing very loose with the truth when she defends our “big banks” comparative capital levels? She cites no facts or actual comparisons with any bank in any other jurisdiction. Rather, she simply cites Box 6A in the RBA’s submission to the Financial System Inquiry which only states.
Model-based approaches tend to produce lower risk weights (and therefore capital requirements) on some lending exposures than those prescribed under the standardised approach, including for residential mortgages. The differences can be smaller in Australia than in many other countries because APRA has imposed a more conservative set of minimum requirements on the modelling choices of banks than the Basel rules. For example, APRA sets a 20 per cent floor on the loss-given-default assumption for residential mortgages that can be used in the model-based approach (compared with the 10 per cent floor under the Basel Framework; IMF 2014).
So Ms Ellis cites an official RBA document that uses words such as “differences can be smaller” to conclude, “Banks in some countries actually hold much less capital….”, and to argue that the big banks are much more conservatively regulated than other international banks.
This looks like platypus logic or stick figures to me. Perhaps Ms Ellis was referring to Norway which actually did have slightly less risk weightings on mortgages than Australia’s Mega Bank. If so you’re too late loose Luci. Due to the runaway Norwegian house prices, the regulator there recently doubled the risk weight and therefor capital required for residential mortgages.
Regular readers may have noted that international harmonization of Australia’s Mega Bank’s capital with international banks is a campaign of Deep T and now it seems a number of others including the Basel Committee under their proposed Pillar 3 reforms. No justification, detailed explanation or proof has ever been offered by Mega Bank to back up its assertion that APRA is actually harsher on its calculation of its capital ratios than any other regulator and that the capital harmonization adjustments provided in their reports and presentations are justifiable. This is a large issue which is not going away, but why is it so important?
Maintaining as low a capital base as possible, within the APRA rules, is of great advantage to the management of Mega Bank. So important that they are waging a fierce campaign in investor presentations, in the media, to politicians and to the Financial System Inquiry that their capital ratios would be much higher if they were regulated by regulators in other jurisdictions, ie APRA is too harsh. The result Mega Bank is seeking to achieve, is to ensure that no rules are introduced which may increase its capital base or even to have APRA give them some capital relief. Mega Bank being too big too fail and enjoying the implicit government guarantee doesn’t need to be strongly capitalized, the Australian taxpayer will provide what ever support is necessary to keep the gravy train rolling.
The real benefit to Mega Bank’s management is that a lower capital base means a higher return on capital which translates into much higher multi million dollar bonuses because Mega Bank’s reward structures for management revolve around rewarding for high returns on capital. All at the expense of the Australian tax payer and now it would seem with the support of the RBA.