Banks must have treated APRA with disdain..couldn’t have more clear instructions......
Sept 2004
From the same document
http://www.apra.gov.au/Policy/Documents/RIS-APS-112-Sep-04.pdf
Page 2
Both Low Doc loans and broker-originated loans can lead to problems associated with asymmetric information, where one side of the market (potential borrowers) knows something that the other side (ADIs) does not. Asymmetric information often leads to opportunistic or exploitative behaviour by the informed party and market failure. In order to avoid these problems, APRA expects ADIs themselves to be responsible for deciding the criteria to be used in making the decision to lend in all circumstances, and should not rely on broker valuations or income checking when providing a home loan. Furthermore, any use of a third party in the lending process should not adversely impact upon compliance with the ADI’s lending criteria. APRA is of the view that any use of a third party in the credit decision should only be allowed where the ADI’s credit assessment requirements are clearly specified and the relationship is managed in accordance with ADI Prudential Standard APS 231 – Outsourcing.
Experience overseas indicates that Low Doc loans have a higher default rate than “conventional” home loans, and ratings agencies have factored this into their assessments of Australian mortgage-backed securities where Low Doc loans are included in the securitised portfolio. In its report dated 23 July 2003, Fitch Ratings Australia stated that its Australian Residential Mortgage Backed Securitisation default model increases the probability of borrower default for each loan to self-employed borrowers (who form the predominant target market for Low Doc loans) by 25 per cent and for Low Doc loans by 30 per cent.
A Standard & Poor’s report, Low Documentation loans gather pace in the Australian market, dated 29 April 2003 refers to research in the UK home loan market that concluded that delinquencies and defaults on Low Doc loans can be twice that of fully verified loans. In addition, research by Nomura (a leading financial services group in Japan) dated 3 June 2003 states that loans with less than full documentation are arguably riskier from a credit viewpoint than fully documented loans, based partly on evidence from the 1991 recession in the United States where there was a notable correlation between losses and reduced documentation in mortgage loans. The report goes on to state that it may be reasonable to expect a similar correlation in the future.2
Page 4
It should be noted that the use of brokers as a home loan distribution channel is not of itself a prudential concern.The prudential issue is the use of broker-originated information without the ADI independently verifying the data in the home loan application. Based on the expanding market for Low Doc loans, APRA is concerned that ADIs may not be adequately protecting themselves against the risks raised by funding loans in which they do not independently assess critical borrower information.
Footnote – Page 6
Where an ADI uses a third party for loan administration functions only, and does not outsource any part of the credit assessment process to the third party, the responsibility for ensuring that the lending criteria are met remains with the ADI.
From: Denise Brailey
Sent: Thursday, December 07, 2017 11:02 PM
Subject: RE: The Big Lie exposed! Australian financial system under APRA almost wiped out in 2008 GFC 7 December 2017
Robbie rang me today and wants me to send out an all points for people to send on a one para sub
More work for me and I am trying desperately to wind down
I will read the same thing as he sent to me a few hours ago as well
db
From: Rhonda Fletcher [mailto:goforit@bigpond.net.au]
Sent: Thursday, 7 December 2017 8:17 AM
To: Denise Brailey <denise@bfcsa.com.au>
Subject: The Big Lie exposed! Australian financial system under APRA almost wiped out in 2008 GFC 7 December 2017
This confirms what I dug up and emailed yesterday with 2 attached pdf files with the
proof of the pudding....subject bar APRA must reach for the lash!
Even more scandalous, APRA knew its prudential standards were garbage!
The Big Lie exposed! Australian financial system under APRA almost wiped out in 2008 GFC
Citizens Electoral Council of Australia
Media Release Thursday, 7 December 2017
Website: http://www.cecaust.com.au
The Big Lie of the Australian financial system is that it remained sound during the global financial crisis in 2008, due to the effective oversight of the Australian Prudential Regulation Authority (APRA). Treasurer Scott Morrison repeated this claim in his press release of 18 August 2017 announcing the government’s new crisis resolution powers for APRA: “One of the key reasons Australia successfully navigated the Global Financial Crisis was the robust prudential regulation put in place by the Howard Government”, Morrison said.
Politicians cite the resilience of Australia’s APRA-supervised financial system in 2008 to justify the sweeping new powers that the government is legislating for APRA to manage the next financial crisis. Former Prime Minister Kevin Rudd, however, has just exploded this lie.
In a 25 November interview with Peter Hartcher of the Sydney Morning Herald, Rudd revealed for the first time the truth that the US government bailed out the Australian financial system in 2008. Rudd effectively begged George W. Bush to bail out US insurance giant AIG, because it was the reinsurer for about a third of Australian insurance policies.
“If AIG had fallen over, the systemic shock to corporate Australia would have been devastating”, Rudd said. “I said to George W. Bush, ‘This is an alliance matter. It goes to the fundamentals of what our economy needs to survive. [Emphasis added.] I really need you to prevent AIG from going under.’ I’m sure I wasn’t the only voice on the matter, and God knows how significant the impact would have been for Asia and Europe too. But to George W. Bush’s great credit he said, ‘I hear you’, and he did absolutely the right thing by us.”
Hartcher noted: “This intervention has not been disclosed previously. The US government took control of the failing AIG at a cost of US$180 billion.” The AIG bailout was part of the US government’s US$700 billion Troubled Asset Relief Program (TARP) bailout; the US Federal Reserve has since provided more than US$4 trillion in extra bailout funds, through quantitative easing (QE).
What prudential standards?
Rudd’s story also reveals that far from APRA enforcing strong prudential standards, its standards were reckless, to say the least. Why had APRA allowed the insurers it supervised to have such a high concentration of reinsurance with just one company, and such a risky one at that? AIG had a massive exposure to toxic financial derivatives, especially to credit default swaps on worthless mortgages, which it had insured for Goldman Sachs. Yet under APRA’s supervision a third of Australia’s insurance contracts came to depend on this one basket-case company.
This wasn’t the only area of the financial system where APRA’s standards were shown up. APRA had allowed the banks to borrow heavily from overseas on very short terms—around $440 billion in 90-day debt—to invest in long-term mortgage loans. This created a huge vulnerability, such that when inter-bank lending ground to a halt in September-October 2008, Australia’s banks were unable to borrow to roll over this debt. The Big Four and Macquarie Bank were forced to literally beg Rudd for a guarantee that allowed them to borrow on the government’s Triple-A credit rating in order to honour their short-term debt.
A former Macquarie Bank executive told the CEC of total panic at the board level, as directors frantically tried to raise their government contacts on the phone. “I never thought I’d see Macquarie in favour of government intervention”, he said, reflecting on the irony that Macquarie, which is a heavy funder of neoliberal think tanks that rail against government intervention in the markets, would suddenly want government welfare. Ross Garnaut and David Llewellyn-Smith recounted in The Great Crash of 2008 that the banks warned Rudd that without the government’s guarantee they would be “insolvent sooner rather than later”.
Even more scandalous, APRA knew its prudential standards were garbage! A year before the GFC, an internal APRA report had revealed that due to Australia’s banks lowering their lending standards, which APRA had allowed, the banks had expanded credit for mortgages 3.4 times more than they would have under their previous, higher standards. The report forecast that this bubble in the mortgage market would lead to delinquency rates of 7.5 per cent in the next three years—the same delinquency rate at which the US housing bubble started to burst in 2007—which would cause a recession. Instead of acting on it, APRA’s then chairman John Laker suppressed the report.
The poor prudential policies exposed in this internal report weren’t merely an error of managerial judgement. Under John Laker, APRA had deliberately adjusted its prudential levers to create the boom in home loans that caused the housing bubble. In the early 2000s APRA had lowered the capital risk-weighting for mortgages relative to other types of loans, to make mortgages far more profitable. This incentivised the banks to concentrate their lending on home loans, while starving the more productive small business and farm sectors of credit, and even withdrawing credit from those sectors through forced foreclosures—the kind of abuses that led to calls for a royal commission.
The politicians’ support for APRA hinges upon this Big Lie that APRA’s sound prudential standards kept Australia’s banks safe during the GFC. The truth is Australia’s financial system was propped up by two external actions: the USA’s TARP bailout for AIG and the rest of Wall Street, some of which also flowed through to Australia’s banks; and China’s decision in early 2009 to launch a US$1 trillion infrastructure spending program, which enabled Australia to resume the iron ore and coal exports on which the economy was completely dependent, and which had virtually ground to a halt.
Australia’s elected MPs have been duped to believe that APRA is a sound regulator. They are being duped again to give APRA sweeping new powers to manage the next financial crisis (caused by the speculative practices that APRA hasn’t just allowed, but encouraged), including powers to definitely “bail in” (convert to worthless shares, or write off) the savings of hundreds of thousands of self-funded retirees who own hybrid securities, and potentially bail in deposits. It is crucial that the APRA crisis resolution bill be defeated, and that Australia instead adopt a Glass-Steagall separation of deposit-taking banks from all other financial services—the only way to protect deposits and ensure financial stability.
11 days to have your say on APRA bail-in bill
Remember that the deadline for public submissions on the APRA bill, the Financial Sector Legislation Amendment (Crisis Resolution Powers and Other Measures) Bill 2017, is Monday 18 December—11 days from today!
Make sure you have your say. If you haven’t yet written a letter, do it today. It doesn’t matter how long or short your letter is, even if it is one sentence. All you have to do is express your opposition to expanding APRA’s powers and the very idea of “bail-in” and demand a proper system of regulation that protects people and their savings from the dangers of speculation—namely a Glass-Steagall separation of deposit-taking banks from all other financial services.
Here are the three ways to submit your letter to the Senate Economics Legislation Committee (please ensure that you have properly identified yourself with a name and address, so they know it is genuine):
- The committee staff have asked the CEC to direct people to use the Senate’s on-line submission process, which is at this link.
If you are computer literate and feel confident to make a submission this way, go ahead. - BUT, as some people may find that process complicated, the CEC recommends writing an actual physical letter, and mailing it to the committee. It will have a big impact on Senators that someone has gone to the effort to write and mail a letter.
The address of the committee is:
Senate Standing Committees on Economics
PO Box 6100
Parliament House
Canberra ACT 2600
Note: If you send a letter this way, make sure you mail it by no later than early next week, so it arrives in Canberra by 18 December. With the deadline looming, for some people it may be better to email. - The third way is to email a letter to the committee. If you wish your letter to be private, and only read by the Senators, write “Confidential” at the top of the email (this also applies to physical letters). Email your letter to: economics.sen@aph.gov.au