Banks and property investors should brace for increased capital requirements
One of the drivers behind the recent bank rally has been a perception we are over the worst of the risks around increasing regulatory capital requirements. But are we? A report card from the Basel Committee on Banking Supervision indicates this view might be a little premature. If so, there could be ramifications for banks and property investors alike.
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Bill
:
Thanks Stuart for the thorough analysis.
Anz &cba seem to look the strongest from your analysis the catalyst could take some unknown time which I don’t want to see play out however it is clear this bubble is forming larger and larger..
The prudent solution is doing the opposite and although it produces no monetary gain patience will lead to eventual tightening cycle in the medium term
ammar habib
:
Thanks for that Stuart. How likely and when do you see these changes being introduced?
Stuart Jackson
:
Hi Ammar, The Basel Committee recently deferred the timetable for its final report until the end of 2017 (is was previously Feb 2017). APRA is expected to release its definition of “Unquestionably strong” sometime in the second half of 2017. The issue of the risk weighting applied to investment property loans would logically be resolved around the same time. However, it is likely that any changes, along with the broader changes to prudential regulations, would be phased in over time.
Cester
:
Thanks for the article. What would be useful is to understand the level of risk one is taking by placing cash in the big four banks in the event of significant defaults on investor loans due to a property crash. For example, say you had parked $1M in a bank; what is the risk of not getting the full amount back, and which of the big four banks are most exposed?
Stuart Jackson
:
Hi Cester, unfortunately that’s not a very easy question to answer. The major banks provide some details on their their stress test modeling of higher unemployment on the mortgage book. for example, CBA estimates that in the event that unemployment increased to 11% over 3 years, the cumulative impact would be losses of A$2.3bn net of mortgage insurance claims. NAB assumes an unemployment rate of 10.9% and estimates A$1.8bn of net losses. However, the reality is that if the property bubble is burst, resulting in a contraction in the construction industry as well as a significant increase in household financial stress, the impact will be felt more broadly across the loan book than just in mortgage loans. There would an impact on the quality of business loan books and consumer credit. The step up in regulatory capital requirements should reduce the impact on equity shareholders relative to what would have occurred 10 years ago, but the impact on the stocks would still be significant.