Too big to fail banks are too big for regulation

Concerns are mounting that Australia’s big banks are disregarding risk and may not be capitalised enough to withstand a conceivable property correction.

Today, the Australian Financial Review reported Sydney home prices are growing five-times faster than wages. Such rapid increases in property prices over one’s ability to service the mortgage has caused ratings agency Moody to warn the risks of mortgage defaults in Sydney and Melbourne is increasing.

According to Moody, a single breadwinner household in Sydney would be spending an “unsustainable” 70 per cent of their income on the mortgage. With interest rates at abnormal lows, levels not seen in decades, fear is starting to mount the risk of default and delinquency will multiply when interest rates return to more normal levels.

This view is one shared with the banking regulator, the Australian Prudential Regulatory Authority (APRA), who last year opened its macro-prudential tool kit and provided guidelines to the banks to stress test buyers with a minimum 7 per cent mortgage rate, providing borrowers a buffer for when rates return to normal.

The Australian Financial Review revealed last week (‘How National Australia Bank circumvents rules to stop a property bubble‘), National Australia Bank is not abiding by these guidelines for more risky property investors who currently own one or more investment properties and are seeking new mortgages to expand their portfolios. Rather, a confidential NAB mortgage calculator shows it is applying the current mortgage rate, which can be as low as 4.29 per cent.

This comes on top of earlier reports showing National Australia Bank has increased lending to property investors by 13 percent last year, when APRA said it would not like to see growth exceed 10 per cent – another macro-prudential measure.

The big banks imprudent desire to operate with razor thin capital to enhance super profits could be significantly impacted by Australia losing its coveted AAA credit rating, a result likely with further deterioration of the federal budget and a dysfunctional government. The Financial System Inquiry (FSI) chairman David Murray said today if the government lost its AAA rating, the downgrade would hit our banks who rely on foreign funds underwritten by the federal Treasury. Murray, CEO of the Commonwealth Bank of Australia between 1992 and 2005, holds the view our banks are under-capitalised and a growing risk to the economy as they lend excessively to our “housing casino”.

Robert Mead, PIMCO’s head of portfolio management in Australia has weighed support into the debate saying banks should raise more capital to protect against the potential fallout from over extended households. (‘PIMCO calls on banks to do their bit and raise capital‘)

Mead told Fairfax, “In five months since [the introduction of macro-prudential tools] we’ve seen a continuation of a strong property price rally in certain markets,”

With many of the banks ignoring APRA’s macro-prudential guidelines, Mead commented “These sorts of macro tools are important, but don’t appear to be working.”

“The way to reduce this risk is to have a banking system that is even more robust. Asking banks to raise more equity capital is a way to de-lever the system, and I would argue the long term benefit to the shareholder is that their bank becomes more resilient.”

The Murray FSI report last year published findings of a stress test conducted by APRA showing a mining downturn, rising unemployment and a housing correction “would be sufficient to render Australia’s major banks insolvent in the absence of further capital raising.” (‘Australian banks not the safest in the world – far from it.‘)

» David Murray says banks would be hit by AAA credit downgrade – The SMH, 28th April 2015.
» Risk of mortgage defaults rise in Sydney, Melbourne – Yahoo Finance/AAP, 27th April 2015.
» How National Australia Bank circumvents rules to stop a property bubble – The AFR, 23rd April 2015.
» Sydney home prices are growing five-times faster than wages – The AFR, 28 April 2015.
» PIMCO calls on banks to do their bit and raise capital – The Sydney Morning Herald, 28th April 2015.


  1. Keep up the great reporting! The papers are beginning to throw down some similar news now (as it’s becoming quite the thrilling story) but it’s always nice to have an unbiased third party backup those findings.

    I also thought it was quite funny Moody quoting 70% as “unsustainable” as that’s what I recommend people put towards their mortgage in order to kill it the quickest! We’ve been maintaining this impossible percentage for the better part of 2 years now haha 😛


  2. 70% would be unsustainable for the economy. Once the wealth effect wore off, shops and businesses would have to close as practically all disposable money would be going overseas to pay for the foreign funding of the housing bubble, rather than to consumption. Jobs would be lost and the vicious cycle repeats.

  3. Why do they need to bolster reserves? They’re entitled to $380B courtesy of the federal government.

    Don’t raise reserves…It’ll hurt my dividends.

    Watch the exodus of the rich from the Aussie banks and the housing market as to signal the top.

  4. All the better the Federal government should let the banks go bankrupt and guarantee our savings directly. Create a Reserve Bank of Australia that is truly a Federal institution and not a private one as it is now. But I doubt this will happen as the Federal government is owned by these same groups and they are pawns to be used to control the will of the voter who is indifferent and apathetic to anything other than increasing their own personal wealth.

  5. Forgive my ignorance..

    Q: how do banks raise capital? Are mortgagee’s homes considered bank owned capital? Can and do defaults benefit the banks in any/which way?

    I don’t have a mortgage and don’t work in banking, just curious.

  6. “Our Banks” are majority owned and controlled by offshore banks with combined turnovers bigger than the Aust. GDP. So a big pussy like APRA is of little concern to them. The government will certainly not withdraw the guarantees as it will be then blamed for their collapse. The solution is for the people to refuse to deal with these vampire squids on the face of humanity. So sell their shares move your mortgage and change your accounts to small banks or credit unions and send them the message that we will not tolerate their risky behaviour that endangers our standard of living.

  7. @Matty
    That’s exactly right, in the event of the economy going seriously pear shaped, the Aussie banks will get a government (financed by us the taxpayer), bail out, just like the U.S. did back in 2008 with the GFC.

    Think of the government as a reverse “Robin Hood”, the politicians rob from the poor and hand the loot to their bankster masters.

  8. I’m curious why our big 4 private banks (and Mac is the 5th) are underwritten implicitly or otherwise by The Commonwealth. Why isn’t there a clear delineation? Shouldn’t we be demanding that the Banks stand on their own feet and are appropriately capitalised?

    I wonder how CBA stacks up against Lehman… I need a financial advisor in Melb who can assist with setting up a “short” on these fuckers.

  9. Theo, on the contrary, the government will not let the banks go bankrupt and will steal our savings to bail them in! Deposit levy is still foreshadowed in the Budget, it’s theft from already put-upon savers, no question about it.

  10. I would prefer to nationalize the lot if the financial system collapsed. Bailing them out would just enable them to carry on a before.

  11. The purpose of the new world order is to bring misery,death and hell for mankind.Globalist means communism for everyone.There is nothing to be learned from a socialist.Voting for a bunch of communists is not going to help anything.Whether,they are ‘labor’ or ‘liberal’,they are all essentially practising communists.Democracy in it’s political form is like two wolves and a sheep deciding who is going to be for dinner.Keep your guard up and do not be taken in by anyone.By being separated from the influences of the new world order will render their teachings impotent.Walter Allen Thompson.

  12. 56andoverit – give up using the words ‘communism’ and ‘socialist’ as the context is wrong. Globalisation is the narrative that underpins the US empire. There will not be a single ‘block’. The financial system is fracturing as countries move off the empire currency (US Dollar) and alternative financial institutions are created which will compete with the IMF and World Bank. Where you are right is there is a lack of choice as most countries are run by wealthy vested interests (oligarchs) that want more and will bleed the rest of us dry as we plummet into serfdom and feudalism.

  13. At some point it may become more prudent to buy gold and bury it in your backyard than have savings in an Australian bank or even hold onto Australian dollars. When is that point?

  14. The 1% are invading.That’s 20 million elite COMMUNIST party officials and their children buying our children’s future in cash.Greed and corruption is all around.Just go to any auction,in suburbia,99% of biders are the people mentioned above.I am not racist,came here as an immigrant from Europe 50 years ago.I love this country and the people more.We all came here to escape the madness and the injustice.It is tragic that we are all being shafted.Do our leaders think that they will be free?I don’t think so.As Krudd said,”Teach your kids Mandarin”. Even though we are going down, let them know ,that we are not stupid.

  15. @3 Matty, 380 billion is probably not going to be enough. My guess is it’ll be super they’ll go after first – that’s where the numbers are. This has been in the post for years now, you can bet the planning has been done.

  16. Nukes along the fault lines? MJ “All I wanna say is they don’t give a …. about us.

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