CBA modelled a nightmare housing crash and recession -- here's the estimated impact

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The Commonwealth Bank has posted a $9.9 billion cash profit — a record result for the bank currently facing allegations that its systems enabled vast amounts of money laundering by terrorists and criminals.

The bank said it was comfortably on track to meet higher requirements for capital provisions set by regulators designed to stop banks blowing up in the event of a severe downturn.

Despite continuing concerns about a potentially ruinous housing bubble having formed in parts of Sydney and Melbourne, CBA reduced its provisions for bad loans and says the number of people in arrears has actually declined slightly over the past financial year.

In its investor discussion pack the bank shared the results of a “stress test” — a common exercise for financial institutions that tries to gauge the likely impact of system shocks.

The bank sets out a nightmarish scenario for the Australian economy where:

  • house prices crash 30%;
  • unemployment spikes to 11%, seeing more than a million Australians being out of a job, and
  • the official RBA cash rate falls to 0.5%.

The bank says the net impact would be loan losses of around $2.9 billion. Here’s the slide, with highlight added in green.

Of course this doesn’t take into account the impact from the horror show that would be inflicted on its biggest division, retail banking — responsible for almost half the group’s profit — from the downturn in borrowing and general banking activity.

It also is adjusted for the bank’s recouping some losses through insurance. So it puts the total amount of bad loans at around $4 billion.

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