Stress-testing a captured APRA

From the boys at LF Economics:

So yesterday APRA came out and said that if unemployment rose to 11%, House prices fell by 35%, and the Chinese economy tanked, that the Australian banking system would be able to withstand the economic stresses associated with this type of economic destruction.

So let’s use a bit of history as a guidance and put it to the test using the most abnormal of leniencies to assess whether APRA is full of cow-pat.

What history tells us from housing crashes in the past in other jurisdictions is that when house prices crash by 35% that the riskiest borrowers (those with the highest outstanding loans to income ratio’s and/or the lowest buffers) are totally wiped out alongside those who lose their jobs long enough to run out of savings and default on their mortgage.

As an example, those borrowers in the US just prior to the GFC who had a total liabilities to income ratio higher than 6x income were at a very high risk of default (and many did) when the GFC arrived. Those with a debt to income ratio of  8x or higher were all but guaranteed to go into foreclosure and lose everything they had.

Furthermore, it was all but guaranteed that those who were living beyond their means on the slimmest of income buffers (income – debt repayments- cost of livings) would too be foreclosed upon as the cost of risk rose.

Before even going there and factoring in job losses, the above two cohorts (the highly leveraged and those living beyond their means) alone represented a dangerous fringe of borrowers in the US that cost its economy, and its banking system very dearly when house prices fell.

The Oz banking stress test.

With limited data available here in Australia on banks mortgage books, it has been incredibly hard to find a sample of a banks mortgage book over the years to be able to conduct a stress test of some sort. But several weeks back, The Royal Commission released Westpac’s mortgage book sample that was used in APRA’s highly secretive ‘Targeted Reviews’. These reviews were never meant to see the light of day. But with good fortune, the Royal Commission ascertained these reviews and released Westpac’s, including the mortgage book sample. This mortgage book sample consisted of 420 loans issued over the 2015/16 period.

If this mortgage book sample has any resemblance to the greater mortgage market in general then it would be fair to say that stress testing this sample in a way that gives more benefit of the doubt than we should be giving…should be able to give insight whether a bank like Westpac….indeed the banking system in general would be able to survive in real life the elements that APRA used to conduct its stress test.

Now before we get to the figures I think it’s important to note that in relation to the data in the mortgage book sample, we assume that the data is correct. Yes correct! So correct, that for the sake of this stress test on this mortgage book sample we assume that the borrowers actually earn as much in income as the data suggests they do. Furthermore, we assume that the borrowers monthly costs of living data is accurate…despite some of this data pretty much implying that a fair cohort of borrowers will neither purchase a car, go on a nice holiday or buy any family members Christmas presents over the life of the loan.

We also assume that the total and existing liabilities of borrowers were not modified (reduced) to make borrowers appear more creditworthy than what they really are.

For the purpose of this stress test, and with history telling us that borrowers with the highest leverage ratios and lowest buffers are those who get wiped out, we snippet out the absolute fringes from the mortgage book sample to illustrate the collateral damage that coincides with an all-out economic catastrophe as APRA used in its stress test.

And just to give more than any reasonable absolute benefit of the doubt; instead of calculating credit write-offs of borrowers leveraged 8x or more, we assume that only borrowers who are leveraged 11x or more when the loan was issued are wiped out. Furthermore, we assume that borrowers whom only have a monthly uncommitted income of $70 or less also go into receivership. The findings do not double dip if a borrower has both 11x leverage to income and a uncommitted monthly income of $70 or less. We also assume that borrowers outside of the scope of the selected fringe thresholds ‘do not’ lose their jobs, or for any other reason default on their liabilities.

The findings.

Westpac mortgage book sample value – $397,364,308.15

Number of borrowers in mortgage book sample – 420

Number of borrowers who fail in the stress test according to our assumptions – 44

Sum of debt held by borrowers with total liabilities 11x income or greater – $41,180,593

Sum of debt held by borrowers with an uncommitted monthly income of $70 or less, but leveraged less than 11x – $14,345,483.91

Percentage of borrowers who fail the stress test – 10.48%

Proportion of mortgage book sample value that fails stress test – 13.97%

Losses to the banking system if scaled: $298 Billion


Despite giving more than the benefit of the doubt on highly questionable data, if Westpac’s mortgage book sample has any broader resemblance or correlation with the broader profile of the Australian household debt market, there is simply no way Australian banks would ever survive APRA’s implied elements used in its stress test once you factor in the further losses outside retail banking in real life….. In other words, there would simply be too much distressed debt, not even the funds from the Committed Liquidity Facility will have enough to cut the mustard to cover the shortfalls. And this is just based on the assumption that fringe borrowers leveraged 11x income or greater, and/or have less than $70 a month buffer wont repay will default in an economic disaster.

In ending, the results of APRA’s stress test further provide evidence that they are a captured regulator.

That really deserves a hearty laugh.


  1. Of course they’re captured. Economics 101 says to look at the incentives.
    It’s due to the revolving door between government and the banks. Many of the top compliance officers at the banks are ex-APRA. It’s a great career path into the banks. I’m sure APRA head Wayne Byres will move on in a year or two to a lucrative chair of a big bank.

    • where is the data required to do the numbers?
      how can they say everythings ok, without the data

      • Because they are making stuff up. Also known as lying.

        Cause you’ know – they have a mortgage to pay. And the extra social status from looking the other way, pays for invites to industry events, attractive lobbyists who provide the occasional hummer, glowing media coverage, a spouse who rewards their social standing by being properly attentive, and overseas holidays.

        Its a good gig if you can get it.

    • New stage 2 careers as Risk managers at the bank gets heaps more than APRA graduate salaries.

  2. Scary, but what a bloody fantastic way to say how utterly corrupted, fraudulous and on the brink of disaster the Australian housing and banking markets are, plus, how utterly criminal Australian politicians and institutions are.

    I’m not pinning my hopes on the Government guarantee of banking deposits.

    • Wino ShinyfaceMEMBER

      Yep and so many politicians have multiple ip’s , something will get thrown at the situation, some massive bail out

  3. AOFM needs to be pulled into line to stop its buyback program……..some of the few liquid assets on Australian bank books are being hoovered up by the RBA

    We all know that in a crisis the only buyer of Australian mortgages will be the taxpayer. That is why it could be worse than the 1890’s……..then banks had between 30-50% of deposits on hand as bullion, gold legal tender coins, municipal bonds etc.( loan/deposit ratio matters in a crisis )… they have all these lovely mortgages, but they don’t take mortgages at Coles, so someone has to exchange mortgages for legal tender.

  4. Difficult to increase principal repayments enough to knock down debts 11x earnings.

    Don’t lose your job, lads! Don’t get pregnant, ladies!

    • Certainly don’t get pregnant ladies. You want kids? We can import those by the plane load. If you insist however that’s fine but hand them over to the state when they’re a few weeks old, they’ll raise it to be an obedient drone.

  5. That is all good, we know there is the hughest of HUGE wipe outs coming, but, what are you gunna do about it
    How about the punter in melbourne, x banker, who has held onto a huge holding of village road show stock which has fallen from over 7 dollars to about 1.60 current. the AFR has the story.
    that is stupid, dont be a rabbit in the spotlight. Move all your money to cash now.

      • boomengineeringMEMBER

        I’ll second that, where.? in the mattress maybe, wait a minute jam tins maybe safer.

      • U need enough cash about the house to last 3 months
        the balance in gold in a non bank safe depository.
        These nos back up the M North nos, and my call is they are 3x too low
        If anything like these defaults take place the joint will seize.
        North told us the next most vulnerable were the pensioners who have no ability to start over.
        so if you add the young affluent who will fall over is short time and the pensioners who can hold out for maybe a year, there is half the population in the can.
        the first thing u will see is heaps of SUV’s on the market,
        and a happy Flawse as many are forced to forgo holidays abroad.
        PS the majority of people are now employed inthe service industry, when the economy hiccups the service industry will fail
        So job losses through the roof.

      • Guys
        I was once due to be picked up from a remote bush airstrip after a field survey
        all i had was my equipment, my notes, money and some water.
        when the plane didnt arrive to get me, that night and most of the next day,
        i learnt just what is really valuable.

      • Lol. I’m fair skinned and blue eyed so I’ve been a hat wearer all my life, unlike my now tumour ridded and scarred and facially peeled mates.

        I’ve also spent a lot of time in the States and seen these hats. The US cavalry Stetson is a great hat, and I was looking at buying a new one online just the other day. Didn’t go with though because they’re expensive, and without trying it on it would be impossible to confirm fit. Next time I go over there I’ll probably pick one up.

  6. robert2013MEMBER

    It’ll never happen. No deposit guarantee needed just ever increasing numbers of migrants.

  7. HnH wasnt the US govt saying all the same kind of BS before the US GFC? Be interesting to compare. Cant believe these people have jobs……..

  8. How much of the $300B is an actual loss to the bank and how much is recouped through recourse to the security? 90%? 80%?

    • Who is gunna catch a falling knife
      Who is gunna value the “security”
      What is the real nett asset backing of the “security”

      • SO
        that lady is surfing at Kirra, I’m there right now.
        who ever wrote this is outa date:
        “From glitzy Surfer’s Paradise to laidback South Stradbroke Island, the Gold Coast is justly famous for its beaches, theme parks, shopping, nightlife and glorious hinterland.”
        Fact: everything now is nearly the opposite WW

      • SO
        Out at amberley the classrooms are along the side of the runway about 3/4 mile from the end of the strip
        We would be in class there when the F111 would pre take off test its terrain following radar, in the early days,
        we would all get headaches, but it was put down to stress, cos we we were all too stupid for the class, and the heat.
        My VA man at Currumbin was there as well, must have been more affected that me, cos he IS mad.
        some how he survives, now in charge of the joint.
        Ah the old days !

        Kirra breaks mostly from the east, but can oscillate from SE to NW

    • They refer at the beginning to a 35% fall in house prices but don’t factor in that explicitly nor the average equity (though safe to assume no one who goes into default will have any buffer at all, otherwise they would do a voluntary sale).

      My gut feeling is that they omitted this, which is wrong but I do agree that trying to sell into a market with that level of unemployment and defaults would not be pretty. They wont realise anything like 80% and the LMI insurers will be in liquidation well in advance of this, so that avenue will be useless.

      I will be a cash buyer in this scenario, but not for things like units where nobody in the building can afford to pay the strata. But, if for the sake of argument I were looking a unit in this scenario, it would be for not more than 10% of current prices – and I am deadly serious about that. e.g. that $780,000 OTP 2BR in Parramatta that was discussed yesterday, I would not pay more than $80,000 for.

      I would guess (hope) the floor on prices in this cash only scenario would be higher, but how much??

      • Friend of mine went to an open day thingy at a newly built block in Paramatta, all the agents and punters were of Chinese extract except himself. Small 2 bed unit somewhere up in the sky for around circa $800k. It took him several attempts to get the disinterested and dismissive agents to give him info on the various strata costs and other magic fees. Turns out that they were around $16kpa or $400 per week all up including council rates etc.

  9. reusachtigeMEMBER

    I often wonder if any of you ever send these articles to the people you call out, or at least tag them and associates on social media…

  10. This is fcuking frightening. Those numbers in the scenario are incredibly conservative, so the real explosion is gonna be a lot worse.

    We are fcuked.

  11. FiftiesFibroShack

    OK. The LF assessment is so ugly that APRA should provide an official explanation as to why their assessment is correct and the LF assessment is wrong.

    Something is way off.

    • Wino ShinyfaceMEMBER

      i don’t think LF have considered Lachlan’s point above – the banks can still sell the houses like they did on the quiet during the GFC

      but its still ugly

      oh I can see you have already seen it don’t worry

  12. APRA: “Isn’t this gown gorgeous. The material is so fine that I can barely feel it against my skin. The colours so beautiful, yet so subtle.”
    LF: “You’re naked.”

  13. Your super – safe as a bank?
    As I understand it, the Federal Government has guaranteed deposits up to $250,000 per account holder per bank. A superannuation fund is an account holder.
    So, according to APRA, all superfunds (over 4 members) hold “cash” of $180,000M (March 2018). (One assumes it is AUD and it is in some form of bank deposit ?)
    There are about 200 such superfunds and if they hold deposits at 10 ADI’s each, then the value of guaranteed deposits is $500M
    That’s a big potential gap if depositors are “bailed in” in a crisis, and one the Regulators will have to think about very carefully if they ever dare to go down that path. We are talking of millions of individuals losing on average 10% of their super – let alone the loss they will suffer on bank share prices.
    What am I missing?

  14. The RBA will print money and the government will nationalize banks that fall over…don’t worry its been done before!

    • I don’t think it will even get that far. They’ll nationalize the LMIs and the banks will be made whole by the taxpayer.

      • Jumping jack flash

        Government doesn’t want to run a broken bank, a broken LMIer, or anything, including the country. They’re just in it for the perks and the post political career options.

        Taxpayer money will just be handed over to whoever needs it.
        Everyone is TBTF.