Fast and Luci with the truth

stick fihure

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.


  1. Despite being logged on and member i cannot access the locked articles on computer or phone.

    • I had that problem. Try closing all open MB windows then reopen, login and give it a crack.

      Seems like a caching issue with the browser (atleast it was for me)

      Hope that works

  2. There is a good guide to the recent Norges Bank changes to Capital Adequacy Regs on pp34 of their recent financial stability report..

    in english here…

    I dont have time to find the direct link at the moment but you will also find that the

    Norges Bank Staff Memo 15/2012 ‘Effects of Changing Banks’ Risks Weightings’

    is a useful guide to their thinking (A mate in Oslo has SMS’d me the ref, I am sure it will be good stuff).

  3. migtronixMEMBER

    I see this coming to haunt more than just EMs and Ellis will be made a fool of…

    Ukraine’s financial problems had been mounting over many years, but it was the mere prospect of the Fed pumping fewer new dollars into the market each month that pushed the cost of rolling over its debt — that is, paying off old obligations with new bonds — beyond Kiev’s capacity to pay. Had the Fed stayed dovish, Ukraine could have at least delayed its financial crisis, and a crisis delayed can be a crisis averted.

  4. I dont get it, I’m not in banking so its probably just me not understanding the tools and methods BUT surely capital adequacy ratios are easily by passed by simply packaging the mortgages and transferring them to some “independent” but wholly owned company, OR better still creating a separate trade-able entity (to hold the mortgages) and using your retail bank / mortgage business to simply source these loans.

    Wow we can even create synthetic equivalents too these tradeable mortgage pools, that’d eliminate the need to assess mortgage risk individually and manage pesky people. I think I’m on to something…….and so the world goes round and round.

  5. Platypus logic indeed.

    This matters. This really, really matters.

    Soon, when the property bears are vindicated, the Australian banking oligarchy will need to make significantly higher provisions for bad and doubtful debts. The provisions made from current earnings last year are so small as to be nearly invisible and the banks paid bumper dividends, further boosting their market cap.

    In the last property downturn, 1989-90, Westpac wasn’t holding enough capital for its exposures and nearly went under. It was saved by Kerry Packer, at shareholders’ expense. He made a motza.

    Go and have a look. This is all on the record.

    Bank capital – the reason for Basel I, II and III – always looks plentiful in a boom. But that isn’t the measure. What matters is how much they have at the very bottom when activity stalls and the concrete canyons echo with the dingo call: Whoocoodanode! Whoocoodanode!

    Disclosure: DC owns ANZ shares.

    • I’ll have a read today, thanks David. Hopefully history repeats or at least rhymes.

      Why do you think property bears will be vindicated soon though? RBA is still dovish at this record low emergency OCR (without any emergency!), and the lower capital requirements above are inevitable (higher bank lending campaigns). Coupled with Australia’s insatiable debt and property thirst, this is a further recipe for price rises, no?

      • Property bears should have been vindicated in 2008, but just when it looked as though Mega Bank was at the point of global capitulation, our politicians – ever ready to sell out young Australians, rushed out and offered a broad based deposit and funding guarantee. Guaranteed our banks, guaranteed our high property prices and guaranteed our boomers super. Oh, and guaranteed young people will continue paying through the nose.

        What you’ve got to ask yourself is are our current crop of politicians any less motivated by their cohorts self interest to again doing whatever it takes to maintain the status quo?

      • Thanks for the link DC. I wonder if any of the career hacks from our party duopoly ever even read this stuff – they are clearly off with the fairies.

    • BubbleyMEMBER

      I had a really interesting conversation with a senior NAB person at a function over the weekend. We were talking about the Aus property market and I asked him about delinquencies.

      Unsurprisingly he said the Gold Coast is a basket case (his words not mine) He laughed when I suggested that the bank had become an unintentional land lords and said yes they had.

      Then he did surprise me, he said that they learned a lot from the last recession and this time the banks are not going to flood the market with mortgagee properties the way they did in the early 1990’s. This time they are going to hold onto them and release them slowly onto back onto the market so they don’t erode the banks capital.

      A very interesting conversation indeed. The banks know things are going to deteriorate and have a plan to deal with it when it happens.

      I was hoping we were going to see a repeat of the 1990’s sales or maybe the Las Vegas style foreclosures but it appears the banks dont intend to let that happen this time.

      • I think you may be dreaming. The Gold Coast has largely recovered and there is no property downturn except in isolated pockets where local employment has faltered – eg many remote mining areas.

      • no bubbley I don’t, but I know a bit about the Gold Coast. Had you posted that two years ago I would have agreed, but times have changed.

        It’s certainly not booming on the GC but it has improved considerably. I don’t have the links, but if you go back some years and look at the areas with the largest defaults the suburbs on the Gold Coast figured prominently, bit not so much now.

        One of the rating agencies came out with a suburb list very recently, I think that it was posted here. The Gold Coast depends on tourist numbers, both from overseas and domestic and tourist numbers depend on our dollar.

        Watch the dollar.

      • Re Gold Coast We bought a house there in December. Last week the neighbouring house, almost the same, sold for 10% more than we paid and it sold in a week. Two other houses have been sold in the small street with max time on the market three weeks and price about 10% above what we paid in December. I can only speak for two areas on the GC but both are certainly humming along…even acrreage sales where I am!

        Peter the ability of Banks to drip feed the market will depend on their foreign funding. My (current) theory would be that the US will keep on printing money until the USD collapses. We will keep on printing money with low IR’s with our asset sales underpinning the printing. So like you i don’t see an immediate crash. I’m guessing very high inflation scenario in due course.

        OTH I can tell you things in retail land are quite serious. Furhter I advedrtised a lowly paid storeman’s job last week. I must have about 80 to 100 applicants. So I wouldn’t want to be in the predioction business right now. What i do know is that RE is all we’ve got as a nation and sure as hell, running true to form, the RBA and Banks are going to be doing their damnedest to keep it all afloat even if it means the total destruction of the rest of the economy and all our futures.

      • Hi Flawse, great to hear from you. I reckon you bought well just as it started to rise on the Gold Coast – well done. The market in SEQ is getting quite strong now.

        RE the other – I disagree, we don’t need money from overseas. Our banks only borrow overseas because APRA make them tap long term debt because they think that will stabilise the system if there is a balance between short term debt and long term debt, but what our banks owe is in $AUD.

        We aren’t printing at all, I’m not sure why you think we are.

        Yep retail is struggling and manufacturing is worse. We need iron ore to fall further to stabilise the economy, but the price is stubborn.

      • Peter you are still riding that silly MMT horse and not thinking through the whole circle. Follow the money. Don’t stop at the first layer. Follow it right down and round.
        If we want to buy stuff we need foreign currency. The only way we get it is to sell assets. It’s just a fact. You can print unlimited A$ Getting them accepted is another matter. Currently they are accepted because foreigners can buy our assets with them. You stop that this currency is headed down. The crisis thereby generated will be something to behold.

      • “….,,but what our banks owe is in $AUD….,”

        PF – I am surprised that you keeping saying this when by now you must know that it is irrelevant.

        When an off shore party purchases a claim on future $AUS income (enters a lending agreement) there is exchange rate risk – swaps etc may move the risk but it is still there and affects the price.

        If the Australian banks have not accepted the risk they are paying someone to do so.

        It doesn’t matter if our banks borrow in $US and then buy $AUS or the foreigner lenders buy $AUS and lend them to our banks.

        The cost is quite low at the moment but as we have seen that can change quickly. If the $AUS starts sliding or US rates start rising the cost of securing $AUS deposits will rise and Oz term deposit rates will start to climb – the carry trade reversing.

        That is why APRA pushed the banks to pay more and borrow for longer periods (longer period more risk = higher prices).

        And yes the final loans are in $AUS – afterall $US are not much good for paying banking bills downunder.

  6. mine-otour in a china shop

    Yes the proof is the data – but every time that APRA attempts to deconfidentialise its ADI capital data the big banks cite reasons of commercial sensitivity and the threat to financial stability to block the disclosure of their models, methodologies, and adjustments.

    How do the commercial sensitivies of big banks outweigh APRA’s responsibility of Financial Stability and transparency to the rest of us Australians?

    If the banks want to argue that all is well then they should be made to reveal all to us, to allow us to do our own analysis. Alternatively Luci shoudl instruct APRA to ignore the banks blocking of full disclosure of its capital workings and calculations (and stress tests).

  7. disco stu,

    I am thinking along the same lines.

    Which is part of the reason for the “QE for Main Street” concept.

    If the mountain of debt across private and increasingly public sheets cannot be paid down due to slow growth prospects, demographics, hollowed out economy etc what are the options?

    I cannot see the pollies tolerating a massive deflationary bust of the type that usually involves excessive debt levels.

    They may tolerate a zombie economy approach like Japan tried but that involved public debt going off the charts and we do not have the luxury of running a massive trade surplus like the Japanese were at the time.

    So that leaves one politically palatable option.

    Get money into the hands of the public that does not involve an increase in interest bearing public debt.

    In olden days it was called money printing but that is a barbaric phrase.

    These days it would nothing more than the treasury issuing a non-transferrable non interest bearing bond to the RBA and asking it nicely to credit the Treasury ES account with a few accounting entries.

    That would allow the govt expenditures to exceed taxation by as much is required.

    It doesn’t involve handing out free money as the best approach would simply involve cutting taxes. i.e simply more money in the hands of the public to spend (or pay down debts).

    A slightly higher interest rate would encourage the deleveraging process.

    Of course a close eye would need to be kept on inflation but the RBA are good at that. But with plenty of people using the extra cash to pay down their debts the likelihood is that the govt will need to cut taxes more than initially expected.

    Reintroducing reserve requirements on the banks would be a sensible part of the process with the reserves gradually rising until they reach 100%.

    I appreciate that this blows most people’s minds (and I would prefer that it was not necessary) but can anyone really see an alternative other than watching the economy collapse into massive asset price deflation or more blatant thievery where the RBA forces some sections of the community to subsidize the debts incurred by others.

    Actually, come to think of it blatant thievery does seem a more likely option based on past behaviour of central banks.

  8. The purpose of the thread is being hijacked a bit but…..
    “Get money into the hands of the public that does not involve an increase in interest bearing public debt”

    With interest rates severely RAT negative, with no alternative but to make them increasingly so, and a society committed to consumption at the highest level that it can why would all/most of the money be used to pay down debt?
    Why wouldn’t we buy new cars? New coffee machines? More air conditioners? etc etc etc
    Effectively money you create, in this society as it now is, ends up in the external account adding to the CAD and requiring more asset sales to foreigners (our total solution to the CAD problems). IF we’re happy, as we have been, that the delivery of all our natural resource, farming, food processing assets, houses etc are in the hands of foreigners then yours is the best solution. IF….and i suppose we’d prefer that to any impingement of our lifestyle…

    “Of course a close eye would need to be kept on inflation”
    Inflation considerations and the CAD need to be conflated.The major reason for our low inflation is the CAD about which we are not worried because we cover it with asset sales. Well so far we haven’t been worried but I see now with higher Sydney house prices being generated by foreign investors that is a concern! Selling all the mines, farms and food processors doesn’t yet seem to matter much.

    No matter how you work it out the current standard of living has depended on rising debt or asset sales.. The maintenance of that standard, without painful reform, requires that process to continue and accelerate. All that is being proposed is a pea and thimble trick.

    Anyway screw the future generations! This is about us!

    • migtronixMEMBER

      We’ve been well and truly screwed already flawse! You bang on about over consumption, fair enough, but I would really really really like to see us creating shit instead of curbing consumption. Moving dirt doesn’t count.

    • Flawse,

      First off – this “QE for Main Street” concept is not ideal but it is a lot more preferrable to either:

      1. The RBA driving interest rates RAT negative and thereby forcing the subsidisation by savers of debts that were induced by those “bait rates”

      2. Attempting to “reset” the economy by a massive asset price deflation – though it does have old testament style appeal.

      You say why wouldn’t the money be spent on just more consumption? In part because higher interest rates are part of the strategy.

      The point of QE for Main Street is deleveraging not re-leveraging. The ability of banks to lend and to borrow off shore would be severely limited by the reintroduction of reserve ratios and regulations concerning off shore borrowing.

      Likewise the govt would be restricted from issuing govt bonds off-shore.

      As for the external account and the exchange rate, you don’t need to be Einstein to know will happen to the $AUS if the flogging of IOUs off-shore is put on a choker collar.

      The impact of a declining exchange rate ( until it reflects our trade performance) would be reduced demand for imports and an increased demand for locally produced import competing goods.

      There is some pain there for sure – rising prices for imported gadgets and luxury goods.

      Handled correctly “QE for Main Street” could hit more than a few targets with less pain.

      Banks back on the leash, govt debt restricted to what locals are prepared to buy, little off shore borrowing for unproductive residential real estate investment, an exchange rate that reflects trade performance.

      Keep in mind that it is the pain involved in the options currently on the table that is the main barrier to political action.

      If you wish to administer medicine, to stop the future being consumed by the present generation, sometimes a bit of honey helps the swallowing process.

      • migtronixMEMBER

        Huh? Pfh if they stop flogging new AUS$ offshore the existing stock will go through the roof not down…

      • Huh,

        What do you mean stop flogging $AUS offshore?

        I am not talking about controlling the sale of $AUS – a freely floating exchange rate is a good thing.

        I am talking about restricting the transactions that involve $AUS.

        If you cannot enter a transaction that requires $AUS you don’t need to acquire the $AUS.

        Regulate the ability of locals – especially the big 4 banks – to enter into categories of transactions that involve $AUS and the demand for $AUS falls.

        It is not really any different to the effect on the exchange rate of the introduction of export licences that limited the volume of minerals etc that can be exported.

        If you can’t buy the minerals because the volume cap for the year has been reached you are not going to acquire the currency – lower demand for the currency equals a lower price.

        Imagine the impact on the $AUS if APRA instructed the banks they had to reduce their borrowings off shore for mortgages by 5% a year until they reached 0%.

        That is $600B or thereabouts that foreigners will be selling to someone else.

      • Yup…forgot you’d be including all your previously often posted good recommendations. Still I think any rise in IR’s will crash the joint.

      • Mig
        What we flog offshore ois our assets and people need A$ to buy them so that keeps the A$ high. Normally running a CAD means we are trying to flog more A$ than we earn thereby the currency should fall…but it doesn’t because we are flogging assets at the same time.

        Note…Sure we’ need to raise productivity; we need to reorganise our industry; we need to get rid of the WHS stupidity that is going on; we need to stop waste on all fronts; we need to decentralise and spend capital on investment type infrastructure that has a distinctly export bias; we need a myriad of reforms that would allow us to sustain our current lifestyle without increasing debt. Such reform is not being contemplated even by MBers. It would require a lot of short to medium term pain. Any government trying that will have a very short life.

        So when you get your decline in the A$ a lot of our goods are going to become a lot dearer and people will not be able to afford them. You’re right. We’re already screwed. The answers lie back in time.

      • migtronixMEMBER

        So like this??

        “We say no to whites owning our land, and they should go,” Mugabe told supporters, according to The Christian Science Monitor. “They can own companies and apartments…but not the soil. It is ours and that message should ring loud and clear in Britain and the United States.,

        I know, I know but still that’s my whole thing with b_b too…

      • Mig

        I have my own opinions about what should have happened but they don’t matter diddlysquat. It’s all too late anyway.
        What matters to me is that people understand the consequences of what they are recommending.
        I don’t know why it is but very few, including nearly all teh high fallutin academics, seem to bother thinking anymore. So we get shallow ‘fairies at the bottom of the garden’ stuff.

        Our choices are now quite stark. I’d reckon with the natural resource wealth we have we can stave off disaster for a while yewt but it is at the expense of those who must follow us. You rant about the boomers…justifiably. The problem is that all the current ‘solutions’ being proffered, pfh and a few excepted, are just continuing the problems created by the boomers. The real problem being that the created problems grow exponentially.


    I sometimes sit back and really wonder – are these people at the RBA genuinely befuddled or just plain stupid?

    • BubbleyMEMBER

      Corrupted by their political masters.

      Oh but wait, the RBA is independent…. isn’t it?

  10. I’ve asked this before, but don’t offset accounts artificially inflate capital reserves in Australia?

      • Offset accounts are just savings accounts that have a 100% offset benefit against homeloan interest. They are counted as savings accounts.

        One could argue that the savings held in offset accounts do inflate the aggregate mortgage balances, but as long as we all understand the method of collating the data then we should be able to make reasonable observations.

        I’m not sure what you knowledge level is – have you used an offset account?

        EG a borrower has a $100,000 mortgage and has $10,000 in his offset account. Those savings are as available as they would be in a normal bank account, but instead of earning interest the savings reduce the interest on the loan so that interest is only charged on the net balance – IE $90,000.

        The funds in the offset account would be part of the banks “Depositors Balances” like any other savings account, not a type of capital reserve.

      • E.g. Rather than take a $400k loan, investor takes a $500k loan at Interest Only and moves $100k into the offset account.

      • Most good investors would have a significant buffer, although PPOR home owners would have less, and they don’t need a large buffer.

        Do you mean the borrowers cashflow?

        There are no loans being written now where the borrower can’t prove his/her ability to service the debts. That’s for both PPOR and IP loans – IP loans now have the protection of the NCCP Act which protects borrowers from overzealous lending. The regulations are comprehensive –
        If the lender doesn’t make sure that a borrower can meet the repayments the debt might be set aside by the regulator. This is a significant set of regulations.