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BFCSA: LIXI standardised communications formats AND measuring the ability of the borrower to meet the repayments

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If I ran APRA



November 8 2009

Christopher Joye



.................If I ran APRA, or perhaps the RBA’s Financial Stability Department, I would establish a central electronic clearinghouse of all residential and business credit originated in Australia. For simplicity’s sake, let’s call it the National Electronic Credit Register (NECR). 

If you think about it, credit is effectively an over-the-counter (OTC) contract. There is no centralised exchange novating the relationship between the parties as we see, for instance, with securities listed on the ASX. And as we discovered during the GFC, one of the profound shortcomings associated with OTC markets is that they effectively eviscerate transparency. The only people who know what is going on are the counterparties.

Now in Australia, APRA and the RBA collect a great deal of ex post facto credit data. But this is normally aggregated information and does not necessarily tell them anything about the individual loan-by-loan risks. It also does not necessarily furnish them with any insights about the ex ante, or before the event, credit assessment parameters employed by lenders.

The establishment of NECR would presumably be very straightforward. All Australian lenders have electronic lodgment processes and there are standardised communications formats that allow lenders to communicate with one another (in the mortgage market this is known as 
LIXI (or the “language of lending”).

APRA, the RBA, and ASIC (to cover non-banks) could, therefore, simply insist that any licenced entity involved in the creation of residential and business credit sends NECR a simple little data packet upon the settlement and, notably, discharge (ie, repayment) of every single loan. The lender’s transmission to NECR would contain:

1) A unique loan identification code (so that NECR can track the loan);
2) The loan amount;
3) The loan type (eg, 3 year fixed)
4) The interest rate;
5) The settlement/discharge date;
6) The collateral value (eg, property value);
7) The collateral address; and 
8) A nationally-defined debt serviceability standard measuring the ability of the borrower to meet the repayments on the loan (all lenders use these in one form or another, so it should be easy to define a standard metric that they have to supply).


There is also technology now available that enables lenders to revalue every single home in Australia on a daily, weekly or monthly basis. These Automated Property Valuation Models (AVMs)* are highly accurate on a “portfolio” basis.


Armed with this new weaponry, regulators could literally quantify the LVRs and equity held in every home in the country as frequently as they desired in order to compute the fallout associated with two, three, four or five standard deviation property price falls (or, put more broadly, fat-tail events). Now that’s what I call 21st century policymaking. Sadly it will doubtless take a long-time before anyone picks it up...


Update: My old buddy, Joshua Gans, has had a similar idea for a different purpose. Joshua tells me he would like to see a NECR style facility to enable (a) more efficient switching of customer accounts between banks and (b) to minimise the information asymmetry problems that plagued the CDOs and SIVs in the US wherein policymakers had difficulties actually identifying which loans were in which portfolios, and efficiently negotiating with borrowers who are in distress. A centralised database of all customer accounts would potentially address both of these problems.

Christopher Joye writes a blog for Business Spectator. His “after-hours” blog can be found here.

*Several companies provide AVMs locally, including Fist American Core Logic and RP Data-Rismark.

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