The RBA has a secret weapon to rein in Australian banks and their 'risky' lending

Getty/Joe Readle

Australia’s housing market, or at least some parts of it such as Sydney, are on a tear.

Developers are paying what appear to be prices well over the odds and prominent real-estate agents, such as Kingsley Yates of Ray White Lower North Shore, are saying things like:

“I have never seen anything like it – it was like the Easter Show, and more unusual.”

If you are a regulator, like APRA, or the institution charged with standing in the market as the lender of last resort, like the RBA, this is a worrying liftoff in prices. It’s a liftoff which the RBA continues to warn threatens Australia’s economic stability.

It’s led to the imposition of local macro-prudential rules to slow certain types of more speculative lending.

But while macro-prudential limits are usually associated with restrictions on loan type, size and borrower, the strongest weapon in the RBA’s macro-prudential armory might actually be its new liquidity rules.

Specifically the banking system needs to hold more cash at hand to guard against the repeat of the sorts of events which saw Lehman Brothers collapse and banks all over the world be put on life support. As a result, the RBA and APRA, along with their global central banking peers, are requiring Australian banks to hold more liquidity so they can more easily sail through troubled waters next time they arrive.

Think of it as insurance against another GFC.

In the old days, banks would load up on government bonds which can be easily converted to cash in times and trouble. The problem in Australia, and a world of quantitative easing, is that there are not enough bonds to satisfy the needs of the bank.

RBA assistant governor Guy Debelle in a speech yesterday at the “KangaNews Debt Capital Markets Summit 2015” highlighted that the government bond market could not satisfy all of the banks’ needs. Rather he said that in order to ensure that bank demand didn’t “impair liquidity of these securities”, only $175 billion of APRA’s estimated $410 billion in liquid assets could come from government securities.

That means there is a massive shortfall in satisfying the liquidity needs of the banking system.

Which is why Australia’s banks have a huge emergency facility with the RBA called the Committed Liquidity Facility (CLF). This facility, which could be as large as $300 billion according to recent market estimates, will give them access to liquidity – and the RBA’s balance sheet – in times of trouble.

As we have discussed in the past, it’s a massive bet on the taxpayers’ cheque book for the RBA to effectively underwrite the entire banking system and while the fee for the CLF is not expensive, with a 0.15% cost for the standby facility and then 0.25% over the appropriate rate if accessed, it is not a free lunch.

But the RBA isn’t writing a cheque for billions of dollars and hoping the underwriting standards of the bank it’s funding are up to scratch. No, in what looks like the mortgage banking version of Democrat founder Don Chipp’s old slogan about keeping them honest in the senate, the RBA requires the banks to publish the data which underlies the credit risk on the mortgages they will be giving the RBA as security to get access to emergency liquidity.

That is, the banks are using your home loan as security so they can get cash from the RBA to make sure they don’t fall over.

Debelle said the provision of this data is important:

The required information, which must also be made available to permitted users, will promote greater transparency in the market, supporting investor confidence in these assets. These requirements will also provide the Bank with standardised and detailed data on ABS, which are a major part of the collateral eligible to be used under the CLF.

Think Don Chipp here.

The RBA and the market, local and domestic investors, APRA and no doubt the academic community will be looking at the data to judge the risks on the banks’ balance sheet. The RBA is ensuring there are no personal details available and guarding against any breaches of personal privacy.

But what the requirement for data transparency does is hold Australia’s banking system and, crucially, the quality of its assets up to scrutiny in real time.

It will be an early warning system for risks in the economy in general and housing in particular as the RBA recently highlighted in a paper on mortgage stress.

Naturally the banks are not keen to disclose this data to a more open, but still restricted, cabal of “permitted users”. Transparency is sometimes the natural enemy of banking.

Bank management will know that for the first time in their history, regulators and the market will be able to see, and better understand, the true risks on their balance sheets.

As Debelle says, data transparency will also provide the RBA with detailed information on the collateral underlying the securities in the CLF. It will then be able to use the data to analyse the risks itself.

That has to be a good thing given one day the RBA, and taxpayers, might have to write a cheque for $50, $60, $70 billion or more if a large institution gets into trouble.

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