As widely expected, the Australian Prudential Regulation Authority (APRA) has announced our big banks will need to raise their average risk weights on Australian residential mortgage exposures from approximately 16 per cent to at least 25 per cent, but still shy of the 35 per cent required by our smaller banks. The affected banks have until the 1st July 2016 to get their ‘houses’ in order.
This will require our banks to raise billions in new capital. ANZ told AAP they would need to raise $2.3 billion, Westpac would need another $3 billion.
The Financial System Inquiry had recommended average risk rates for IRB banks be increased to between 25 and 30 per cent.
The move to strengthen our banking system comes as our internal ratings-based (IRB) institutions, Australia and New Zealand Banking Group (ANZ), Commonwealth Bank of Australia (CBA), Macquarie Bank, National Australia Bank (NAB) and Westpac Banking Corporation (WBC) were found flouting their privilege in calculating their own risk ratings, putting super profits ahead of stability with the knowledge that naive taxpayers will be on hand to bail out these “too big to fail” banks. (‘Australian banks not the safest in the world – far from it.‘)
APRA indicates this is an “interim measure” and further tightening of risk ratings and enhanced capital adequacy requirements can be expected once the Basel Committee releases a review of it’s international framework towards the end of the year.
» APRA increases capital adequacy requirements for residential mortgage exposures under the internal ratings-based approach – 20th July 2015
» APRA’s home loan rule changes could push up rates by 0.65pc: analyst – The ABC, 21st July 2015.
» Have the Big 4 just flunked APRA’s stress test? – Who crashed the economy?, 16th November 2014.
Note the term “Risk Weight rating” actually means we do not want the public to know how over leveraged we are. This mathematical con job needs to be converted to percentage of assets to debt so we really know how insolvent they are. The average European Bank only needs a 4% drop in their asset prices to wipe out their capital. It appears the Big 4 have even less security to debt, which explains why the government gets very nervous with talk of the housing price bubble deflating.
Accepting LVRs higher than 75% or so just wasnt done by any prudent lender 3 decades ago. The fact that a private companies loan risk decisions need to be regulated shows how far out of control the “Greed is good” mentality has progressed. It remains to be seen whether all the high LVRs issued will come back to bite them on the ass as the Australian economy and wages continue to decline.
@Max D. Leverage – So true:
Chris Joye: It’s time to act on bank capital
“Westpac only needs to suffer an increase in its residential mortgage default rates to 3.3 per cent before it wipes out all the equity it holds against these assets. That default rate, by the way, is less than levels experienced by British banks during the global financial crisis, and a fraction of the rates recorded in the US…”
It won’t take much to knock the banks for six.
Local dollar down over 40%.Bargains for overseas investors.For OZ youth the nightmare is compounding.
Usury is a horrible financial process which steals the future labour and productivity of the people by turning over the money from the producers to the parasites.
@Max D Leverage
What you say is correct, but the major banks here in Australia have a bail out fund (paid for by the Aussie tax payer), so basically the banks don’t care what they do as they know that if the s_ _t hits the fan with the property market, ie.mass mortgage defaults, the government will bail them out.