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BNZ CEO Andrew Thorburn questions whether the big banks holding more capital against high LVR home loans will address the key problems in the housing market

Posted in Property

By Gareth Vaughan

The Reserve Bank needs to be careful that its move to force the big four banks to hold more capital against home loans with high loan-to-value ratios (LVRs) solves the problem it wants to solve, BNZ's CEO Andrew Thorburn says.

Speaking to interest.co.nz after BNZ issued its interim financial results, Thorburn said the Reserve Bank ought to be mindful of unintended consequences.

"We have said to the Reserve Bank 'be careful of the unintended consequences' because you have to be clear what the problem is," Thorburn said. "And it seems as though everybody believes that one of the core problems is rising house prices in Auckland, and this is making housing affordability more difficult and it's possibly creating a bubble."

"To me the long-term issue around that is supply and infrastructure and transport," Thorburn added. "To me that's the main driver of the increase in house prices. Demand, supply inward migration, international migration, and lack of a co-ordinated long-term plan." (Thorburn's comments were made on Thursday, before the Friday afternoon Auckland Housing Accord announcement by the Government and Auckland Council).

"So this housing LVR piece, they have to be careful that they're solving the problem that they want to solve."

Through its latest bi-annual Financial Stability Report on Wednesday the Reserve Bank said the big four banks - ANZ NZ, ASB, BNZ and Westpac NZ - will have to hold an average of 12% more capital against housing loans where the borrower has less than 20% equity from September 30 to cover potential losses. That adds up to an average of NZ$125 million per bank, although the BNZ figure will be lower than the average.

Thorburn said, however, that if the Reserve Bank was focused on the quality of the banks they were already strong.

"And in the last 20 years I don't think there have been significant losses at any time regardless of any shock, due to housing. It has been commercial property and residential development and business," said Thorburn.

BNZ's interim results showed the ratio of loans at least 90 days past due plus gross impaired assets to gross loans at 1.13%, which was down 8 basis points over the half-year.

Thorburn noted that 15% of BNZ's residential mortgage book is at LVRs above 80%, which is lower than the other major banks.

"We apply a low equity premium (on LVRs) above 85% and we have a higher debt servicing requirement for higher than 80% lending. So we are already taking prudent steps to make sure that (for) the risk we're taking we are protecting the bank and the (financial) system, and we're ensuring that people can repay their loans," said Thorburn.

BNZ would need to "recover somehow" the higher costs it faces through the increased capital it'll have to hold against high LVR mortgages. The Reserve Bank estimates the increased capital required by the banks will result in a fall in their regulatory Tier 1 capital ratio, which represents shareholders' funds in the banks expressed as a percentage of total risk weighted exposures, of about 40 basis points on average. Over the medium-term the Reserve Bank expects the banks to raise fresh capital to maintain their capital ratios.

In 2011 the Reserve Bank increased the amount of capital the big four banks have to hold against farm loans in the wake of falling dairy payouts and concern over loose rural lending. Thorburn said that increase had been "priced in" by the banks, which was presumably what the Reserve Bank wanted to see happen with high LVR home loans too.

"That's part of their point that they hope it'll result in a higher price that will slow down demand," said Thorburn.

He said gross lending growth to the agriculture sector, where total debt recently topped NZ$50 billion for the first time, had slowed since the Reserve Bank move.

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10 Comments

What about credit

What about credit supply....
"To me the long-term issue around that is supply (too few) and infrastructure and transport," Thorburn added. "To me that's the main driver of the increase in house prices.
please look at interest rates/bond yields, are they not the lowest levels in 2, maybe 3 generations.... What of the wall of $/sea of liquidity...
please look at the aggressive sale and marketing tactics.
 
"And in the last 20 years I don't think there have been significant losses at any time regardless of any shock, due to housing. It has been commercial property and residential development (too many) and business," said Thorburn.
Who needed Govt Gtee during GFC....
Look at Rams Home Loans Float in Oz...
Look at Northern Rock in UK..
 

Thorburn noted that 15% of

Thorburn noted that 15% of BNZ's residential mortgage book is at LVRs above 80%, which is lower than the other major banks.
 
Does Mr Thorburn believe lower relative exposure will save some or all NZ depositors funds from being extinguished in the event BNZ becomes insolvent due to it's extraordinarily high 162% loan to deposit ratio?
 
"We apply a low equity premium (on LVRs) above 85% and we have a higher debt servicing requirement for higher than 80% lending. So we are already taking prudent steps to make sure that (for) the risk we're taking we are protecting the bank and the (financial) system, and we're ensuring that people can repay their loans," said Thorburn.
 
These actions do not protect the bank's depositors from the risk of borrower failure to pay.
Despite massive Federal Reserve monetary support US Treasury Debt margin regulations demand 10% down and 5% maintenace margin - which agency can an highly geared unemployed NZ home owner turn to?
 
 

Could we suggest analysis of

Could we suggest analysis of the dog UK banks that NAB own (and wish they didn't)

ANALYSTS have urged National Australia Bank to push ahead with a sale of its troubled British business even as Spanish banking group Santander has knocked back reports it is contemplating a bid for the Australian bank's Clydesdale and Yorkshire business.

Read more: http://www.smh.com.au/business/nab-urged-to-forge-on-with-uk-sale-20130122-2d57p.html#ixzz2SryvgMDx

 

A sale would be welcomed by the market, which has been urging NAB to lift its performance by quitting its low-return Clydesdale banking operation in Britain and concentrating on its domestic business.
NAB chief executive Cameron Clyne has been reluctant to crystallise a massive loss, preferring to wait for an economic upturn to improve valuations.
http://www.theaustralian.com.au/business/financial-services/nab-seeks-ad...
 
Were it not for the UK baggage, NAB’s performance would be considerably better – its earnings would be almost 8 per cent more than for the same half last year rather than 3.1 per cent. Its return on equity of 14.7 per cent would also be materially higher – perhaps 300 basis points higher – rather than lagging its peers.

Read more: http://www.businessspectator.com.au/article/2013/5/9/financial-services/nab-admirably-shoulders-uk-burden#ixzz2SrzTOgVw

 
We have heard that on occasion bank regulators from country to country do compare notes...
 

Further example of a bank

Further example of a bank regulators “pre-emptive” action

'Wake up call' on interest-only mortgages

Many householders with interest-only mortgages face losing their homes amid warnings from the City regulator that up to half will not have enough money to pay their loans back.
http://www.telegraph.co.uk/finance/personalfinance/borrowing/mortgages/1...
and from the FT:

. http://www.ft.com/cms/s/0/20d8d45a-b318-11e2-b5a5-00144feabdc0.html#ixzz2Ss1smuXr
 

and

http://www.guardian.co.uk/money/2013/may/02/interest-only-mortgages-storing-up-trouble

 

and

http://www.reuters.com/article/2013/05/01/britain-fca-mortgages-idUSL6N0DH4C420130501

The FCA was launched last month with a specific remit to protect consumers and end a history of mis-selling financial products, including endowment mortgages and pensions, stretching back two decades or more.
The FCA aims to head off problems earlier, rather than waiting for problems to gather critical mass before intervening, as regulators did in the past.
 
 

 

A close job associate's wife

A close job associate's wife ran a very lucrative UK biz selling interest rate only endowment insurance related mortgages. Many discussions, some heated, ensued between Charles and myself - nevertheless, we both acknowledged the encumbered were doomed if not by the fees then by the inevitably unobtainable capital.

The Reserve Bank has raised

The Reserve Bank has raised concerns about Australia's low-interest-rate environment, fearing a quicker-than-expected rise in house prices - spurred by low interest rates - could encourage households to take on more debt again.

Read more: http://www.smh.com.au/business/rba-concern-on-household-debt-threat-20130510-2jdhs.html#ixzz2Sw2UaUQs

 

Competition is feral at the

Competition is feral at the institutional end of the banking industry, where quantitative easing is creating a flood of cheap money, and in the big banks a recent development has everyone talking: covenant-light lending appears to be making a comeback.
Covenant-light loans were a phenomenon of the boom that ushered in the global financial crisis. Bankers who say covenant-light lending is on the rise again say loans that are being proposed now are not as radical as the ones created ahead of the crisis, but say they are watching closely.

Read more: http://www.smh.com.au/business/covenantlight-lending-making-its-presence-felt-again-20130510-2jdje.html#ixzz2Sw3HYGtX

 

Jaret Seiberg, a Washington

Jaret Seiberg, a Washington policy analyst for Guggenheim Securities LLC, said Bernanke’s remarks reinforce his view that regulators will go beyond current capital agreements and impose additional requirements on the biggest banks.
 
“We continue to believe the regulators will use a combination of a more restrictive leverage limit, a capital surcharge based on reliance on short-term debt, and a long-term debt requirement,” Seiburg said in a note to clients.
 
If safeguards under the U.S. Dodd-Frank Act and the international accord known as Basel III won’t eliminate the perception that the largest banks will be bailed out, Bernanke said he would argue that the largest banks “have to have more and better quality capital.” Higher capital requirements could also give banks an incentive to reduce their size, complexity and interconnectedness, he said. Read more
 
Are our relatively new CFR regime and proposed LVR caps indicative of an opposite regulatory approach to the "covenant - light" developments in the Australian institutional markets - or is it just an overt spin exercise to pacify future OBR exposed domestic depositors? 

It is good that the Reserve

It is good that the Reserve Bank is finally doing what it is supposed to be doing and that is watching the banks. They should get tougher and warn CEOs and Board of directors that they will hold them directly responsible for any bank collapse. Therefore the onus of CEOs and board of directors to ensure that they are also ensuring that appropriate policies and practices are in place that does not cause a banking collapse. Squeeze the money supply and you will dampen house prices anyway.
The Reserve Bank should cease commenting on house prices as it is not factored into the inflation index since 1990s. Interest rates need to be stable and not be moving around too much. If there is an inflation concern then they should address directly the inflationary cause rather then just liberally threaten property owners with interest rate increases.
Interest rates is a significant cost variable and a business can easily blow their pricing margins when interest rates move around too much. Interest rates need to be stable. The uncertainty makes it difficult to make decisions. Of course the lower the better.

The onus of CEOs and board of

The onus of CEOs and board of directors...
They in turn can prove a determined (brass necked) bunch....
South Canterbury Finance former chief executive Lachie McLeod has applied for a discharge without conviction in the lead up to the failed finance company's $1.58 billion fraud trial.
http://www.stuff.co.nz/business/industries/8561036/Former-SCF-exec-chase...