The International Monetary Fund has warned Australia’s big banks don’t appear to be well capitalised and increasing capital should be a priority.
The warning comes in the concluding statement following the article IV mission to Australia this month. (‘International Monetary Fund team to examine housing bubble – May 2, 2015‘)
It reports Australia’s banking watchdog, APRA, has been taking the appropriate targeted and gradual action towards risks in Australia’s hot housing market for some time (‘Property bubble a Macroprudential challenge for regulators – Oct 27th, 2014‘, ‘Woof – The watchdogs have a bark! – Dec 9th, 2014, APRA to keep banking crackdown secret – March 26, 2015‘).
While the IMF is confident APRA will reap the desired results, it notes the banks have been stubborn and have only recently started to act, hence tangible results to date has been hard to see in even the most recent lending data. (‘Sydney value agnostic investor bubble shows no sign of abatement – June 14, 2015‘)
“We expect APRA’s approach to succeed, but it may need to be intensified, for example, if investor lending and house price growth do not slow appreciably in the second half of the year. Such intensification could include requiring banks with fast-growing investor lending to hold more capital, raising risk weights on investor lending, and restricting the duration of interest-only loans.”
The report notes, Australia’s banking system “is dominated by four large banks with similar business models which rely significantly on wholesale external borrowing, most lending is housing related, and household debt and house prices are elevated. And although capital ratios have risen since the global financial crisis, this largely reflects a shift towards mortgages and a lowering of risk weights.” (‘Australian banks not the safest in the world – far from it – December 8th, 2014‘)
“More tangibly, the recent APRA stress test (‘Have the Big 4 just flunked APRA’s stress test? – November 16th 2014‘) indicates that in a severe adverse scenario, bank capital would have to be substantially higher to ensure a fully-functioning system. Putting a floor of 25-30 percent on mortgage risk weights would help, but capital ratios would also need to rise substantially. Given major banks’ high profitability, such ratios can be achieved at little, if any, macroeconomic cost, especially if done gradually, and will make the financial system, the budget, and the economy stronger.”
In recent weeks there has been heightened awareness of Australia’s currently unprecedented housing bubble.
» Australia: Concluding Statement of the 2015 Article IV Mission – International Monetary Fund, 24th June 2015.