Last week, economist John Adams penned an excellent article exposing the way that the Australian Prudential Regulatory Authority (APRA) has airbrushed Australian history to paint over the huge housing risks facing the economy:
This event was predicated on the assumption that a downturn in China would lead to a collapse in demand for Australian commodities which would in turn lead, over a period of approximately three years, to:
a subsequent downgrade in sovereign and bank debt ratings leading to a temporary closure of offshore funding markets;
a sell-off in the Australian dollar;
widening in credit spreads;
Australian real GDP falling by 4 per cent;
unemployment doubling to 11 per cent; and
house prices declining by 35 per cent…
The conclusion of APRA’s industry stress test was that Australian ADIs would suffer capital losses on their residential mortgage books of $AUD 40 billion over an approximate three-year period, which, while damaging, would not result in any Australian banks failing.
This quantum of capital loss, APRA claims, would be equivalent to losses experienced in the United Kingdom in the early 1990s, but would be less than what was experienced by either Ireland or America during the GFC.
Alarmingly, APRA’s $40 billion capital loss calculation, to which no documentary evidence justifying the calculation has been published, has already been criticised and disputed by independent analysts.
Founder of LF Economics, Lindsay David, also took to Twitter to lambast APRA’s Panglossian modelling:
Now John Adams and DFA’s Martin North have teamed up to dissect APRA’s dodgy modelling and possible future scenarios:
Leith van Onselen is Chief Economist at the MB Fund and MB Super. He is also a co-founder of MacroBusiness. Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.
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