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BFCSA: Basel Committee backs Murray Inquiries recommendation re Leveraged Loan Books

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Basel Committee backs Murray inquiry’s recommendations

Banking and Finance

Date December 23, 2014 - 1:38PM


Shaun Drummond


The global banking regulator is echoing the Murray inquiry's recommendation to set a limit on the amount banks can leverage their loan books.  The Switzerland-based Basel Committee on Banking Supervision released a consultation paper on Monday setting out options for a "capital floor" on the risk-weighted (RW) capital of banks that are allowed to set their own capital, based on internal risk modelling.  It also advocates a simple "leverage ratio" to work in conjunction with the RW floor.

The Murray financial system inquiry's final report released earlier this month called for a risk-weighted capital floor of 25 to 30 per cent on mortgages written by Australia's big banks, which have all been granted so-called advanced accreditation allowing them to set their capital, as well as a leverage ratio. For several years, the Basel committee has warned of big variations in risk-weighted capital holdings between advanced accredited banks globally, even though they face similar risks of default in their portfolios.

Australian Prudential Regulation Authority chairman Wayne Byres said in February that was a problem that needed to be fixed while he was still head of the Basel committee.

The leverage ratio would apply across all a bank's assets, rather than being specific to certain loan types like mortgages or business loans. The Basel committee said even with this, some banks had such low holdings a leverage ratio would not have a big impact.

"Extremely low levels of internally modelled [risk-weighted assets] have been observed for some exposure categories," the paper said. "Even with a leverage ratio in place, there is still the risk that banks could face incentives to grow rapidly in businesses where the calibration of internally modelled capital requirements is low."

Conversely, a RW capital floor without an across-the-board leverage ratio would still allow banks to shift their lending to areas where they could get the most leverage, and ultimately profit.

"Banks can boost their financial leverage by increasing their exposures to low risk-weighted assets, increasing the fragility of their financing structures and the potential for subsequent problems if risk weights are misspecified or risks are otherwise not captured."

The Commonwealth Bank's Pillar III disclosure shows that more than a quarter of its $341 billion mortgages book as risk-weighted capital of 2.9 per cent. This is because the loans are assessed as low risk by the bank. But regulators are worried this modelling is based on data that reflects 20 years without a recession in Australia and doesn't take into account the losses that could occur in a severe downturn.

The regional banks in Australia must use the "standardised" approach to risk weights, because their risk modelling and data sets are not deemed sophisticated enough yet to move to the advanced approach.

They successfully argued to the Murray inquiry that their risk-weighted capital levels, which at 39 per cent are more than double the average of 18 per cent of the big banks despite being assessed against the same form of risk, put them at a competitive disadvantage.


The Basel committee paper endorsed this view. "Capital floors make for a more level playing field between standardised banks and banks using internal models for regulatory capital purposes," it said.  Submissions to the paper are due on March 27.

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  • Louie2U
    Louie2U Monday, 23 February 2015

    This just proves how stupid these inquiries are, and we have had them one after the other by the bucket loads, into the financial sector. As we have all witnessed repeatedly, there are no consequences to those in the banking cartel who deliberately mislead the inquiry with false statements. They know full well that the Senators or their staffers are not going to follow up or investigate so they make any comments to dodge, duck and deceive their way through that particular inquiry. They also know that the AFP will never investigate them or charge them either. Despite the implied threat everyone receives when they go to make their submissions, we all know by now that their are no consequences. We've seen it occur, witnessed and read the published comments but who actually follows through on it? Nobody.
    Banks setting their own limit on leveraging the loan books? Another joke brought about by the lazy federal government agencies abrogating themselves of their duties. Total dereliction of responsibility.
    The only thing that will curtail these lies, misleading statements, etc and reveal the truth is a full Royal Commission into ALL of the banking cartel, not just picking off the small sectors these inquiries are designed to do. They are an annoyance to the banking cartel. A full Royal Commission forcing documents to be produced, statements to be backed up and supported is what is required.

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