Have the Big 4 just flunked APRA’s stress test?

Australians are compelled to believe banks that produce super profits are some of the safest banks in the world. But is super profits really a sign of safety or an indication of dangerously high leverage and risk taking?

As we wait for the release of the David Murray Financial System Inquiry final report, strong indications are emerging our big four banks will need to hold more capital after flouting their privilege in calculating their own risk ratings.

Prior to 2004, and in tune with the Basel I accord, banks were allowed to apply a 50 percent risk rating to standard home loans. While every dollar of a business loan, for example, was deemed to be at risk, only 50 percent of a residential mortgage was thought to be at risk. With half the loan risk-free, the bank only had to keep half the Tier 1 capital required.

With the introduction of the Basel II accord published in June 2004, the Basel Committee on Banking Supervision thought it should cut standard home loan risk ratings to 35 percent for loans with a LVR under 80 percent. It also gave ‘Advanced Banks’ the privilege to rate their own assets, after all they were considered to have well developed risk management principals and would never put profit ahead of risk.

In Australia, the ‘Advanced Banks’ are our big four – ANZ, CBA, NAB, WBC and investment bank, Macquarie.

From Pillar 3 disclosures, the Australian Financial Review has calculated current risk-weights for our bank’s home loan portfolios. As required, our smaller non ‘advanced’ banks have risk weightings exceeding the minimum 35 percent. Bendigo is believed to be 39 percent, Suncorp – 40 percent and the Bank of Queensland – 44 percent.

But, according to the Australian Financial Review, Westpac believes only 15 percent of its standard mortgages are at risk (Perfect time for Gail Kelly to retire), ANZ – 18 percent, CBA – 19 percent and NAB – 23 percent. Macquarie is marginally better at 24.4 percent.

The Australian Banking Regulator, APRA, has just conducted its latest stress test on the Australian Banking System. The tests included 13 of our largest banks, accounting for 90 per cent of total industry assets. While previous stress tests included a slowdown in China and fiscal problems in Europe, this year the banking regulator focused on a collapse of Australia’s bubbling housing market.

Two stress scenarios were developed in conjunction with the Reserve Bank of New Zealand:

Scenario A consisted of a housing market double-dip triggered by a sharp slowdown in China. House prices fall by 40 percent and unemployment increases to 13 percent.

Scenario B focused on rising interest rates along with a plunge in commodity prices. Higher unemployment and higher borrowing costs caused a significant drop in Australia’s overvalued housing values.

A footnote in an APRA report noted “regulatory capital for housing held by Standardised banks was (just) sufficient to cover the losses incurred during the stress period.” But this “was not the case” for our Advanced banks.

According to the Australian Financial Review, this finding has been confirmed on Friday by APRA. The Australian Financial Review reports “The text was unclear as to whether the major banks had sufficient or insufficient capital held against their mortgage books to withstand the losses. But an APRA source confirmed to AFR Weekend that it was the latter, and that all residential mortgage capital was wiped out in the stress test.”

» Bank capital at risk from house bust – The Australian Financial Review, 15th November 2014.
» Seeking strength in adversity: Lessons from APRA’s 2014 stress test on Australia’s largest banks – APRA, 7th November 2014.
» Bank debt ratios expose Basel’s faulty risk weightings – The ABC, 8th October 2014.
» Major bank profits on home loans could halve – The Australian Financial Review, 25th July 2014.


  1. A little of Scenario A and a little of Scenario B, combined with government meddling at all levels, and here comes a decade or three of stagflation.

  2. What our banks should do is print $1 trillion from thin air at 0% and then put it in one of their Term Deposits at 3%. Call the windfall “Earnings per Share” and drive up the stock price in the process.
    Or they can define it as a divident and call it Tier 1 Capital.

    Isn’t that the Keynsian’ way to get out of trouble?

  3. The banks don’t care as they have the government in their pocket. Any financial crisis comes and they expect to be bailed out. If that happens Australia’s public debt will then be more like other OECD countries that have been financially pimped by their banks.

    A better approach would be to nationalise them all if a crisis occurs. Have the bankers and shareholders to take the loss.

  4. Jj – SBS article. Australia is about to fall off the edge of a cliff and all the economist in the SBS article can come up with is meaningless comments. They are meaningless as the current government has/will destroy any opportunity to create a ‘knowledge economy’ – the renewable sector is being killed off just at the point in time when the two biggest economies in the world promote renewable while our really dumb PM promotes coal.

    New industries do not just magically appear they have to have to be funded, supported and you most importantly need to know if any investment will yield a positive outcome. That is to understand what your national competitors are doing. Australia is NOT an ‘innovation economy’ we do not have a national ‘framework’ within which to effectively align what are scarce resources – we have lots of meaningless academic talking heads. Innovation and new product development is a hit and miss operation and analogous to hoping the inventor in a garage can come up with something new. Countries like Germany, South Korea, increasingly China, etc, ‘plan’ to be competitive and align their scare resources – R&D, government funding, training/education, etc, to out manoeuvre others.

    Australia has a perverse economy as it is massively distorted to financial services and property. Any crash will be compounded as the debt house of cards comes crashing down. There is nothing to prevent this as manufacturing and other sectors have been hollowed out.

  5. Spain is the exemplar of what Australia will look like in a few years time. When everyone who has invested all of their savings and have “gone all in” by borrowing as much as they can suddenly realise that the future does not look like the recent past, that is when we have a Minsky moment. Unemployment shoots up to 25% and property developments are abandoned or those that have been completed for overseas investors become derelict.

    Our banks will become insolvent. Sure, the economists will say that it is a liquidity shock, but an illiquid financial system is just a symptom of an insolvent banking system. Nobody wants to purchase someone else’s debt, just in case it is worthless.

    Of course this is how you let the irresponsible bankers off. Pretend that the banks are solvent while filling their balance sheets will lots of debt at zero interest, and borrow it back at 5% interest on the tax payers dime. Purchase the bad assets off them, wait a few years and voila the banks have traded their way from insolvency to solvency while the tax payers are left with a big bill and some really bad assets. Banks saved, no bankers held responsible or made an example of and all is fine and dandy.

    If you go back 30 years banks use to enforce their own prudential rules. If you couldn’t put together a health deposit of 15-20% they wouldn’t look at you. Now that we have moral hazard anything goes.

  6. @ David

    Dunno if I would compare Oz with Spain. We have more similarities with the Canadian economy.

  7. Banking “Stress Tests” are simply goal- seeked. optics for public consumption.

    The noteworthy points are as follows.

    1. A banks “assets” includes your home if you happen to have a mortgage, therefore only the banks profit disappears if you stop paying, it will happily then sell your home to another happy debt slave.

    2. If you are fortunate enough to have money in the bank, it legally belongs to the bank, therefore when .gov responds to a distressed banking situation and performs a “bail in”, you may or may not be able to get all your money back for some time, if at all.

    3. Most Governments will put major banks interests ahead of the public interest, this is because Big Banks are integral to the usurious monetary system, that we sheeple are forced to use. If the banks fail, the monetary system might break, taking the government, the welfare state, and potentially western civilisation with it.

    4. The international banking cartel is completely above any form of government or societal control, and the moneychanging elite have no intention of that fact changing anytime soon.

  8. House prices in China has just registered the largest drop on record. Commodities like iron ore hit a new five year low today. Unemployment is rising.

    Sounds like the real stress test is well under-way.

  9. So SWAGGIE … If buying an overpriced shoebox with a mortgage makes little sense, as does giving ya hard earned money to the banks, what should one do?

    Plenty of great information on what’s wrong here, but at this stage, I get all that – and would prefer viable solutions.

    Any ideas?


  10. @glenn.

    buy gold and especially silver at these prices/gold silver ratio.

    its the same as getting out of AUD but not having to buy USD or Euro.

    lunar series from perth mint.

  11. @ Glenn – Exactly! I’ve been asking the same thing for years. What are the other options? For today, not 5-10 years down the road.

    @ nsw2206 – you can’t ‘live’ in precious metals, or ‘eat’ precious metals, or even ‘trade’ precious metals for your morning coffee and muffin. Also, why would you buy a currency that you can’t spend in the country you live in? At the end of the day, we all need somewhere to live and somewhere to hold our hard-earned wages in order to trade, pay tax, and keep the economy going. Yeah cash is king, yeah Bitcoin is the future, and yeah I’m sure house prices will eventually drop. But when? The proverbial can will carry on being kicked down the road, we’ll all become debt-slaves, and our children will be even worse off. But meanwhile I have a life to live and enjoy quite frankly! So if buying an overpriced shoebox and holding AUD in a corrupt bank means avoiding a life of dispossession and destitution, then so be it. Pretty soon we’ll all be dead anyway.

    I’ve been fighting the good fight for years, doing my bit, yadda yadda. But this bear has run out of puff. I just can’t see anything changing anytime soon. The powers that be – the dark forces – are just too strong and too large in number for us and the like-minded people, on this site and others like it, to make any difference. I’m always the lone voice at the dinner party, surrounded by people who continue to say “the market will never drop”, “banks cannot fail”, “the Australian economy is the envy of the world” etc. It’s getting tedious. You know what? I’m starting to believe the bulls. Maybe we’re the crazy ones. Maybe property prices will simply never go down. Maybe they will just continue to print money ad infinitum. Maybe this is the new normal, and we all need to “suck it in”. I dunno. So on behalf of Glenn, and others asking similar questions, what are the viable solutions? Will someone please come up with some answers, because I don’t see jack-shit changin’ from where I’m sittin’ brother!

  12. NSW thanks for chiming in. Yep, I thought of metals. However, the problem is you have to keep it in the bank or somewhere else. History is riddled with stories of governments clearing out private wealth from the banks – and not too long ago.

    ” The problem with stockpiling gold on the brink of a dark age is thus simply another dimension, if a more extreme one, of the broader problem with intermediation. It bears remembering that gold is not wealth; it’s simply a durable form of money, and thus, like every other form of money, an arbitrary token embodying a claim to real wealth—that is, goods and services—that other people produce. If the goods and services aren’t available, a basement safe full of gold coins won’t change that fact, and if the people who have the goods and services need them more than they want gold, the same is true. Even if the goods and services are to be had, if everyone with gold is bidding for the same diminished supply, that gold isn’t going to buy anything close to what it does today. What’s more, tokens of abstract value have another disadvantage in a society where the rule of law has broken down: they attract violence the way a dead rat draws flies.

    The fetish for stockpiling gold has always struck me, in fact, as the best possible proof that most of the people who think they are preparing for total social collapse haven’t actually thought the matter through, and considered the conditions that will obtain after the rubble stops bouncing. Let’s say industrial civilization comes apart, quickly or slowly, and you have gold. In that case, either you spend it to purchase goods and services after the collapse, or you don’t. If you do, everyone in your vicinity will soon know that you have gold, the rule of law no longer discourages people from killing you and taking it in the best Nibelungenlied fashion, and sooner or later you’ll run out of ammo. If you don’t, what good will the gold do you? ”


    So you could say, I’m fishing for more answers.

    Surely everyone must be wondering the same thing???

    Any more ideas, suggestions pplllzzz.

  13. @glenn @rupert

    sure.. keep “your” money in the bank. good luck with that when the housing market busts.


    If you consider house prices as a function of available credit, then its easy to see that they have a long way to fall when theres a credit freeze. Also the AUD is falling.

    I don’t know why people seem to think that there’s going to be no food when the talk of buying metals comes up. Who’s talking about society collapse? I’m just expecting revert to mean of AUD and houses. And I’m expecting that to involve the banks taking the “deposits” of savers. Like Cyprus.

    A one ounce silver round costs ~$20 aud, and has more chance of being worth $50 one day than the $20.00 note. The $20.00 note has more chance of being worth $10.00. in the future. Inflation targets ensure it.

    Also I think people have lost sight that money – our dollars – are a currency – for ease of transacting. Not a store of wealth.

    Lending your “currency” to the bank – now unsecured despite the deposit g’tee who thinks the government has enough cash set aside to cover all the deposits – at a loss after tax. You’ve been hoodwinked.

  14. @ Glenn

    Buy hard assets without mortgaging yourself. Food producing land will always be top of the list. If you can’t afford it buy car parking spaces. Then collectible cars, works of art, rare coins & shares in gold and silver mines etc. Also some cash and gold and silver coins outside the banking system in case of a bank holiday. Do what you can no matter how small.

    Then learn to make something useful that you can sell or barter and make it the basis for a business. Not everybody during an economic downturn will be destitute. During the last big depression 40% of the population were not affected. ie . Government workers, wealthy people, medical profession some retirees. Find what they need and make it. Good Luck

  15. I would say I’m pretty much in the same camp as Rupert on this one. However, in my mind, with the numbers coming in, we are smack bang in the middle of a major down turn (environmental, economic, energy) you just can’t see the consequences playing out in full yet.

    IMJ we are all caught between a rock and a hard place. Things are not looking so pretty now, and they certainly won’t look any better in the hard economic times to come.

    In my mind, the best investment you can make is in the skills you can offer others, a community that cares, and small scale land management.

    Yet, I’m still scratching my head as to what to do with the little money I have???

    Answers please???

  16. @ Glenn

    Hi Glen, I think that that any personal action must be entirely ones own choice and be consistent with ones personal situation, and values. There is no one size fits all strategy or magic “investment” that is going to get people get through the inevitable coming changes. I think the trick is to identify where you personally rely most on the current system, then try to find small steps that you can take, to increase your personal independence and resilience. Some easy first steps for some people may include, becoming more knowledgable in managing and using alternate currencies. Cultivating close friendships and trusted networks, learning to grow healthy fruits and veggies. Acquiring a useful “stand alone” skill that may be useful now as well as down the line.
    Australia was built by hardy pioneers who made do with what was at hand. That was our heritage.
    Don’t let the current deceitful monetary system claim YOUR future.

  17. Steve Keen was advocating a debt jubilee a few years ago. I can imagine a bail-in would be part of this. However I and many others would be fuming if this applied to investment properties.

    A debt jubilee should only apply to the home that you live in. And not the whole debt. Someone purchasing an expensive property with a small deposit and then losing their job in a downturn should not be gifted the property. Seems fair to me.

    Rupert, you may well have run out of puff but you will be pushing shit up hill if you do become a mortgage slave.

    Maybe property prices will simply never go down.

    Does it matter? Be practical and do the sums and workout if it is less expensive to rent than buy. From what I understand that is the case in most places in Australia. Don’t argue with people at dinner parties, just tell them that it is less expensive for you to rent.

    However if it is not then you should buy. Don’t be belligerent if you don’t need to be.

    We live in a finite world. Economies cannot grow forever and housing bubbles cannot grow forever. It is simply impossible. The Irving Fisher line about “reaching a permanent high plateau” is always good to quote.

  18. David C,
    I agree, I have done the maths and with a 10% deposit on a property I am still about 10-15k better off a year (before maintenance and rates are applied)
    It is an even better discrepancy in nicer suburbs with good schools for our children where houses are 1 million dollars but you can get a descent rental for $450 in Perth now.

  19. I have to agree. We’ve been renting since 2009 since graduating. We’re 25.

    We do the maths every few months.

    It has NEVER been the case where owning a house makes us more money than saving and having cash in our managed fund/savings

    We rent a 1.2 million dollar house for $430 a week.

    We have over 300k in savings and house prices haven’t moved. We can almost buy a house outright but we won’t. Only if the rent covered the mortgage would we buy.

    We have three friends who have bought houses. They are miserable. Two have terrible neighbour’s they live in cheap suburbs in asbestos homes. It’s crazy. And they habe ZERO spare cash. One of them rents his place while living with parents. He can’t afford to stay in it. And the rents less than half the cost of the loan lol.

    Perth is so messed up.

    We’ve never had to pay rates. Stamp duty. Maintenance. We moved when the first place had bad neighbour’s and now live next to a park with only 1 neighbour. Heaven. and at the last renewal date I negotiated $20 off the weekly rent…

    So…. Why would I buy a house in perth when the loan repayment on the one I live in is $1600 pw with 10% down and I’m paying $430. I’m not dumb enough to sink all my savings into a house considering the managed fund pays 10%.

    You’d have to be a fkn retard to buy a house in Perth or WA

    And those idiots paying a million dollars for a house in canningvale, kelmscott etc wow…. talk about fkn yourself forever.

    No wonder there’s 1 rich person for every 99 poor people. Everyone in perth is pretty much a sucker.

    At the rate were saving we will hit our first million before we’re 30 on one government job and one working wage.

    If the exchange rate isn’t too bad we’ll leave australia once we hit a million. Why live with a 30 year loan in an isolated country when we can live loan free anywhere else in the world lol.

  20. Harry, I love the point’s you are making but lets get this right… you and your partner are 25, with 300k, and will have a million by the time you are 30? thats $2692 dollars a week ( not including interest over that time) in savings. Are you sure about that lol ? if so may I ask what kind of drugs you are selling? If I am wrong there, you must be the best paid, barely past being a graduate, young man in Australia. Also, I’m confused, the house you are staying in is worth 1.2 million – and you almost have enough money to buy a house outright, with 300k?? haha I think in a few months when you run those numbers again….you might want to get a little help with that.

  21. Swaggie, NSW2206, Rupert, Max,

    Thanks for the input. I probably should go back to the history books for a clearer idea of what may happen.

    I suppose we’re just gunna have to wait and see what 2015 brings.

    If a recession / depression should come, which will come first, the collapse of the housing market, or the banking system or the two at once?

    Maybe in the global economy we are now so intimately connected, the old rules simply no longer apply? Maybe what we are now in is part of a bigger more expansive phenomena playing out?

  22. Glad to hear your doing well Harry! Can I ask what managed fund you are with? 10% return sounds fantastic.

  23. @28 Glenn

    Be careful. Bubbles don’t burst because of recessions. Bursting bubbles CAUSE recessions. Witness the USA housing crash, it topped in 2005, panic arrived in 2007, banking crisis occurred in 2009.


    Similar boat here: Except I choose to leave a decent paying job and go into business (If I hadn’t done that we would have the $1m in cash/stocks/pm’s easily also). For me, I needed to be able to earn a living/create businesses, so I can always eat lol. Extreme? Yes, but I’m not going to sit back working for the man who decides when I loose my income. Unfortunately, I’m no longer 21 and free and easy, family pressures mean that we probably will buy in the next 12 months. It’ll be cash, so the collapse wont decimate us, but it will hurt all the same: It’s a pity, because for what we’re going to drop on an ordinary place SHOULD be getting us a palace, which we could then hire help for gardens, cleaning etc. But instead, we will be giving a massive chunk of cash to some greedy vendor:

    And this is where the government have really stuffed up:
    1 greedy vendor = decent house prices + excess disposable income for consumerism, hence more jobs

    But, the economists are so ignorant of the financial system, that they worry about GDP more than anything. Just like accountants who run companies to eeek out immediate profit, they destroy the long term wealth of their futures.

    I promised my wife when the bubble bursts she can have as many IP’s as she wants. At the time it was a massive arguement. But now, after seeing her friends (many highly paid) struggle financially with IP’s, and after learning the history of currencies vs. GOLD/SILVER and hard assets, she’s over the idea of IP’s.

    The upside for me/us, is that now that I’ve built traction in the business realm, when SHTF, I will have access to OPM, to snap up assets for cents in the dollar: That’s where the real transfer of wealth is, on the rebound after the collapse.

    For the sake of my pride, I wish I could hold off until after the pop, but I can’t: But I will be able to say to friends and family: This is all paid for in cash: while they sit and look at bank statements saying they have negative equity: & That’s if they are lucky.

  24. I was so pleased someone like Harry was explaining how it just doesn’t make sense to buy a home at the current prices and then half way through it was like someone slapped me across the face. Using the word retard as Harry does is a disgrace. Grow up! I am glad you live in WA.

  25. @Glenn

    Do not wait too long as I am picking that the fun will begin in January 2015. Secretly Australia has already started printing money for overseas currency demands and to weaken the dollar. In the Deflation/Inflation argument my pick is both to start with. ie assets down with commodities up then followed by massive money printing leading to runaway inflation. History shows that the Weimar Republic had deflation before their hyper-inflation.


  26. @ Max

    We will see deflation first as the public become more and more debt soaked and adverse to borrowing.

    I doubt we will see hyper-inflation: People don’t understand the real cause of it: Regular inflation does occur alongside currency printing, no doubt about that.

    But hyper inflation occurs when there is a loss of faith in the government to properly manage the currency. ie. a breakdown in society which we are still quite distance from: We still have much wealth in terms of commodities, minerals, oils and labour. Only if there is massive loss of faith in the government will there be hyper inflation.

    Cost of living pressures will likely increase with increase currency printing, but true hyper inflation: No.

    Check out Japan, they have been printing for years/decades, and recently announced they will double the base currency in short time: Yet they still battle deflation: Why? Because the public are debt soaked/debt adverse.

    I highly doubt we will see Australian’s with wheel barrows of cash for grocery shopping anytime soon.

  27. @matty

    It’s almost as if it were a deliberate policy of the money changers to encourage middle class over indebtedness.
    That way there is more political and popular support for the money printing end game without the inflation boogeyman.
    The money changers have studied and understood the Weimar hyperinflation and realise that a more indebted population, creates the potential for even more control over a countries monetary system than previously dreamed possible.

    If the voting middle class is heavily indebted, will they then support austerity and balanced budgets? Or will they turn a blind eye to .gov hand outs, budget deficits, and bond monetization?

    Look to japan for the answer to that question..

  28. Recently, we also decided to buy our own roof over the head, Matty. Ladies emotions not fulfilled for long time causes unnecessary trouble. One hard lesson & she will follow the footsteps forever.

  29. @ Swaggie

    You are absolutely right about a plan to get rid of the middle classes because they are the only challenge to total control of the wealthy privileged class. After their corporations move the well paid jobs overseas they have a problem with diminished spending power. Solution: relax the lending criteria so the middle classes can borrow against ever increasing asset valuations and still buy all the toys that make them feel wealthy. Australia’s biggest problem will not be government debt but private debt. One of the highest in the world per capita. Then checkmate, the lender always controls the borrower

  30. @average_bloke, thanks for that link, that was an interesting read, my thoughts? Simple, when money is involved the government, in this case the useless FIRB will just conviently look the other way. I believe most of this Chinese investment in Aussie property is “hot” money from corrupt Chinese communist party officials trying to launder or park their money.

    The banks, real estate agents, construction industry, state governments etc couldn’t give a rats arse that young Aussies are being priced out of home ownership, and that a massive property bubble has been created. Basically it all comes down to greed, and like an old saying I once read,”the world has enough for every mans need, not every mans greed”. Former prime minister Paul Keating was right, Australia has become the “banana republic”.

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