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The Basel Committee issued its second consultation paper on the standardised approach for credit risk in December.
Commenting on the paper, CoreLogic RP Data’s executive general manager of commercial, Craig Mackenzie, said one of its themes is a “shift back” towards some measured reliance on external credit ratings issued by the ratings agencies in determining regulatory capital treatment for a range of loan exposures.
“One of the accepted learnings from the global financial crisis was the fact that investors and capital market participants placed too much blind faith reliance on ratings of mortgage-backed securities issued by credit rating agencies,” Mr Mackenzie said.
“For that reason, it is understood US representatives had been lobbying for complete severance from external ratings.
“It is therefore somewhat surprising that the Basel Committee appears to be comfortable with increasing reliance on external credit ratings, admittedly with certain caveats and conditions, in its proposed capital treatment of a range of credit risk exposures accepted by standardised banks,” he said.
A greater reliance on credit ratings agencies was also proposed by APRA in the regulator's latest discussion paper on securitisation, APS 120.
Speaking on a panel at the Australian Securitisation Forum conference in Sydney late last year, 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 sub-prime 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 7 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.