Australia’s banking regulator, APRA, has signalled ongoing disquiet with the big four banks world leading concentration on home loan mortgage lending.
Charles Littrell, APRA’s executive general manager of supervision and support, told the AFR that the big banks lending concentration is a “perpetual concern”.
“It is a significant issue of concern to us that close to two-thirds of [the big four banks’] balance sheets are exposed to property… mainly housing loans,”Littrell said.
He added that APRA has become more worried over the past year “because of the point we are at in the cycle.”
Littrell’s concerns seem to mirror those held by investors who have marked the major banks down sharply in the past few weeks under the weight of fears over mining and other writedowns.
But while Littrell, and others might now hold reasonable fears about concentration risk at Australian banks some – a lot – of the blame lies at the feet of APRA, and global regulators.
That’s because it’s easy to think that banks should be conservative institutions safeguarding deposits and eschewing risk. Essentially that’s the way APRA sees them.
But the reality is that banks are no different to other corporations. They aim to maximise profit in their business for their owners – shareholders.
So it should be no surprise when regulators effectively say housing loans are safer than other loans by making it cheaper – in terms of capital allocation – that banks concentrate their firepower in this market.
It should also be no surprise that the explicit result of the implicit message from regulators is also that with lower capital needed to be held against home loans, compared to corporate or other lending, that home loans are more profitable than other types of lending for the banks.
So banks are being rational in responding to APRA and global regulatory signals that home loans are less risky and have concentrated their firepower in this market.
That’s not to say Littrell and APRA’s concerns aren’t valid. But they must take some responsibility for the way the Australian banking landscape has evolved.
For the moment though, Littrell signalled APRA’s concetnration is on even higher capital buffers.
“We have already said we are not going to announce our final capital strategy until the end of this calendar year, but it will ultimately be a higher capital requirement than we have now,” Littrell said.
That means home loan lending is going to become more expensive and harder to come by for borrowers. Which means investors might be right in marking down the banks share prices lately as they worry about earnings, dividends, profits and competition in the years ahead.