Westpac has infuriated the peak banking regulator APRA and the opposition has called for an explanation after the bank revealed that it had incorrectly classified $28.8 billion in property loans for up to three years.

(The) bank had been recording the loans as belonging to owner-occupiers since November 2008, when in fact they had been used for investment purposes.

The error went unnoticed during the GFC, but was discovered during an internal review and brought to the attention of the Australian Prudential Regulation Authority. “When we told them about the way we found out I don’t think they were happy about it,” a Westpac spokesman said.

 I’m sure they weren’t happy, but the issue is – why was this only “discovered” during an internal review and not by APRA itself investigating one of the biggest bank mergers (Westpac/St George) in Australian corporate history?

 Westpac has publicly called these revisions as “legacy” issues with the merger, with changes relating to when a borrower reduced the LVR (loan value ratio) on their home, but then used that “Equity mate!” to buy an investment property (usually as the deposit for the subsequent investment property loan).

 Considering the trillion dollar plus nature of the mortgage market, that this significant revision is not required to be disclosed in the banks corporate reports is staggering.

 Therefore the corporate regulator ASIC would not be aware of such revisions (and neither would investors, shareholders or analysts investigating the robustness of the mortgage side of the business) and it appears APRA does not become aware until the banks tell them… Seems to be more Holes than Houses going on here.

 Here’s the full list of revisions:

Asset RevaluationRevisionChange
Loans to households: Owner Occ. From $198.6 billion to $165.2 billion Down 17%
Loans to households: Investment From $88.6 billion to $116.2 billion Up 32%
Loans to financial corporations From $10.1 billion to $11.3 billion Up 11%
Investment securities From $70.1 billion to $90.2 billion Up 28%
Trading securities From $51.1 billion to $32.3 billion Down 37%

Interestingly, in their press release, Westpac confirmed that their housing valuation methodology, and by extension their systemic risk management, has nothing to do with the investment fundamentals behind the asset, but rather depends on how the purchase is financed:

“But the risk really relates to the individual, not the property.
The real risk in the mortgage is whether people can continue to pay or not. We lend based on people’s capacity to repay.