Joye: Big bank home loan profits could halve

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The AFR’s Chris Joye has published a detailed article today explaining the skinny regulatory capital buffers held by Australia’s big banks and why they are so low. Joye also estimates that the five internal ratings-based banks – the Big Four and Macquarie – could face a near doubling of their capital requirements in the event that the Murray Financial System Inquiry lifts their mortgage risk-weights in line with the smaller banks, building societies and credit unions:

…the four major banks have average home loan risk weightings of just 18.5 per cent. Macquarie is a bit higher at 24.4 per cent. In contrast, Suncorp, Bendigo and Bank of Queensland have average risk weightings of 41.1 per cent.

This means that across the major banks’ $1.5 trillion of home loans, they leverage, on average, their core equity capital 65 times (or hold only 1.6¢ of capital for every dollar of loans). This is more than double the 30 times leverage used by the regionals…

The inquiry could recommend permitting smaller banks to cut their risk weightings and increase leverage, which would bring returns closer to the majors. A more sensible outcome would be to raise the minimum risk weighting for “advanced” banks to, say, 30 per cent or 35 per cent, which is still well below regional levels and the pre-2004 standard of 50 per cent.

Our analysis indicates that adopting a minimum 30 per cent (35 per cent) risk weighting on residential mortgages would require the majors to raise $15.1 billion ($21.5 billion) of extra equity capital, lower average leverage to 39 times (33 times), and reduce average returns on equity to 25 per cent (22 per cent).

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While this would be a great result, facilitating improved safety and restoring competitive neutrality to mortgage lending, I remain skeptical that Murray will recommend measures that would significantly interrupt the banking cartel’s ability to generate over-sized profits.

Unconventional Economist
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  1. migtronixMEMBER

    The inquiry could recommend permitting smaller banks to cut their risk weightings and increase leverage, which would bring returns closer to the majors

    They wouldn’t double-down would they? Time to look at rural property…

  2. No doubt the enquiry will recommend more debt & more leverage for the banks. These things are always a smoke screen.
    How many research papers come out of the RBA, APRA, BIS, OECD. The end result of all that effort is always more debt.

    Why would this enquiry be any different ?

  3. I was thinking of an easy transparent means of reining in the To Big To Fail Mega bank.

    Any loan with a Loan to Value Ratio of above a given percentage would be a non recourse loan.

    It seems too simple and workable that perhaps it has been suggested before. I don’t recall if it has?

    What do you think ? could this work and protect mug punters from themselves by making lenders carry the risks.

    • Yep that would work, more over all loans should be non recourse.

      A bank will get bailed out if it goes the way of the pair, a family won’t.

      The banks should understand that if they want the public to underwrite their books then it is the bank that takes on the risk.

      That’s not the name of the game though is it, interest only payments and irreconcilable debt as a road to modern slavery, that gents is the primary objective.

      We seem all too ready to be distracted by the fallout rather than see the bigger picture.

      Xfactor, Dancing with [email protected], My kitchen sucks and bickering over the BS pit out by the IPCC is all working toale sure we don’t collectively examine the state of our fiat monetary system.

      Money as debt, Google it read it and think on it.

      House prices, $AU, wars all fall short of the biggest issue since early 1900’s.

    • I’m pretty sure they used to be in the Dark Ages – the 70’s. Above a serviceable ratio ( 33% of gross main income earner’s wages?) the loans were considered as ‘predatory lending’ and the lender had limited recourse to any default. Sounds good to me!