Stress Testing The Banks
Wayne Byres, Chairman of Australian Prudential Regulation Authority (APRA) recently made a mockery of the Banks’ self-administered stress tests.
In his speech entitled “Seeking Strength in Adversity: Lessons From APRA’s 2014 Stress Test on Australia’s Largest Banks” he made the following points:
- One bank’s stress test was built on the assumption that, in a scenario where house prices fell substantially, it would lose the same amount on a defaulted loan with a 60 per cent LVR (Loan to Value Ratio) as it would on one with a 95 per cent LVR.
- In another example, the average annual loss on housing loans that defaulted varied from 6 per cent at one bank to over 21 per cent at another, despite a common house price fall.
- In a further example regarding net interest income, estimates ranged from being 35 per cent lower to 3 per cent higher than the current year.
This speech appears consistent with the notion that APRA is preparing to increase IRB capital requirements for mortgages.
You can read Wayne’s speech here.
Chief Executive Officer of Montgomery Investment Management, David Buckland has over 30 years of industry experience. David is a deeply knowledgeable and highly experienced financial services executive. Prior to joining Montgomery in 2012, David was CEO and Executive Director of Hunter Hall for 11 years, as well as a Director at JP Morgan in Sydney and London for eight years.
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