Via the AFR:
Figures provided by the Australian Prudential Regulation Authority show that, to date, consumers and business owners had sought between $150 billion and $160 billion in loan deferrals.
This amounts to 6 per cent of all mortgages and 13 per cent of SME loans, prompting government concerns that the banks, too, are being stretched.
Australia Banking Association chief executive Anna Bligh said the whole sector was looking for clarity from the national cabinet meeting.
“As soon as businesses know when they can open and how long they can open for, then they can really start to plan,” she said.
These toxic assets are in state of limbo, via APRA:
Many banks are offering small businesses and other borrowers the option to defer their repayments for a specified period. To support this, APRA has provided a regulatory capital approach for these loans. This sets out that, over the next six months, banks do not need to treat the period of the repayment deferral as a period of arrears for capital purposes.
With the exception of small business loans (see question 2 above) ADIs should conduct a check at the end of the initial three month deferral period. The check should determine whether there is any objective evidence that it is no longer appropriate to maintain the regulatory capital approach, given for example more permanent changes in the borrower’s financial circumstances. ADIs should not be avoiding recognition of losses where inevitable.
This check is not expected to involve a full credit risk assessment, but nor should it be an automatic decision to extend the regulatory capital approach. ADIs can use information gathered through proprietary sources, credit reporting agencies and inquiries with borrowers where necessary to inform the check. There should also be a record to evidence the check.
ADIs should publicly disclose the nature and terms of any repayment deferrals given to a broad class of loans and the volume of loans to which they are applied. ADIs should also closely monitor the portfolio credit risk of this cohort of loans, and are required to report to APRA information on the volume and risk profile of this segment of the portfolio.
So, what will happen to them? Some will roll out of distress as the economy reopens. But just as many will reappear as other support measures, such as JobKeeper roll off.
Like in the US, there is Buckely’s chance of the toxic assets being absorbed by the private sector alone. Where they will go is taking shape at the AOFM. Yesterday at Banking Day:
A smart move by artisans of the craft, the soon to be in place forbearance SPV structure the ASF has put together for the industry shows the best of banking.
Banks and NBFIs need to crash the SFSF and AOFM funding pools, and this gateway won’t easily be put aside. The AOFM will be wielding big numbers before long.
The proposal is for a single SPV to cater for multiple asset classes and participating lenders.
The SPV offers a revolving sale facility to each participating lender to purchase COVID-19 hardship reimbursement receivables, a definition easily substituted with wider forms of credit.
The Structured Finance Support Fund will be the sole subscriber to a Class A Variable Funding Note (Class A VFN) for each participating lender.
The interest rate on the Class A VFN currently proposed by the AOFM is 5 per cent.
Participating lenders will provide first loss credit support to the SPV by subscribing to a Class B Note to credit enhance the Class A VFN.
It’s 10 per cent down on unsecured SME lending, which is what the AOFM mostly wants, and one per cent on mortgages.
It would be more honest, and better long term for moral hazard, to leave the banks with their schlock. Let the shareholders take the pain and recapitalise the banks.
Sadly, that is not how the world works these days so, instead, the taxpayer will guarantee the lot and bankers will laugh all the way to work.