Major bank shocked by APRA’s capital approach

The executive director of one of Australia’s biggest banks has expressed his concern over APRA’s decision to elevate the importance of ratings agencies in the risk assessment of mortgage bonds.

During a panel session at the Australian Securitisation Forum event in Sydney last week, three bankers and one analyst from an international ratings agency discussed the release of APRA’s APS 120 discussion paper.

ANZ executive director of structured capital markets Dominic Di Gori said that while there were plenty of positive changes in the paper – such as the removal of risk retention and specific provisions for funding-only transactions – he was shocked by the regulator’s approach to capital.

“The most surprising part of the package, to be frank, is the approach to capital for ADIs in Australia,” Mr Di Gori said.

“I think omitting the internal ratings-based approach definitely came as a surprise to myself.

“The reason I say that is, as an industry we have all heard global regulators talk for a number of years about the reliance on ratings agencies. We have seen some regulators in jurisdictions completely remove all references to ratings agencies.”

Credit ratings agencies were instrumental in the US subprime mortgage crises and consequently the GFC. According to Mr Di Gori, APRA’s proposal to elevate the external ratings-based regime to “the top of the hierarchy” will force a number of banks to effectively outsource their risk assessment to ratings agencies, something the ANZ executive said “surprises me no end”.

“I thought we had moved away from that and I thought no regulator wanted us to effectively do that,” he said.

While Mr Di Gori said it was “very realistic” to expect that capital charges would increase following the GFC, he highlighted just how material these increases will be for Australian bank mortgage bonds.

“Just to give an example, an RMBS/ABS triple A rated bond today is risk weighted at seven per cent,” he said.

“Under the proposals that we have seen in the discussion paper that is likely to increase to 20 per cent. That is a three-fold increase in capital charges. That has a material impact on demand, it has an impact on price – that’s a given.”

Mr Di Gori said Australian banks must spend time with APRA to work on the discussion paper and see if changes can be implemented.

[Related: RMBS and ABS defaults to rise, covered bonds strong]

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