Monday, 2 September 2013

Banking regulation a damp squib

Heard the one about the regulator which loosened regulatory standards after pressure from industry lobbyists?  Sure you have!

Now presenting another example of regulatory capture, this time from the Australian Prudential and Regulatory Authority (APRA), responsible for setting banking standards and one of the three financial market regulators, along with ASIC and the RBA.  Or more accurately banking unstandards.  At a time when the Australian property bubble is bursting its last frothy bubbles and the securitisation industry attempts muted growth (having been responsible for the 2007-8 crisis), what better idea than to suggest that Aussie banks fill up their coffers with the toxic rubbish?!

Australian banks have stepped up their investments in residential mortgage-backed securities after regulators appeared to endorse their use towards a liquidity buffer. 
Bank treasuries have shown an increased interest in mortgage-backed bonds since August 8, when the Australian Prudential Regulation Authority published a discussion paper on Basel III liquidity reforms. 
Crucially, the paper stopped short of recommending that banks increase their holdings of high-quality liquid assets - limited to Australian government and semi-government bonds, as well as cash held at the central bank. 
That effectively gave banks a green light to increase their investments in higher-yielding assets that they can then use as collateral to access a cash facility at the Reserve Bank of Australia.(here)
And what do industry participants have to say about this move?

One banker in Sydney said regulators were being "quite soft" by not pushing lenders towards greater holdings of Australian Commonwealth Government bonds and semi-government paper... 
"If there is one thing Australian banks know, it is the domestic mortgage market.... So, banks feel very comfortable holding its RMBS," said the banker.

Oh dear! Let's hope they do a better job than Freddie Mac, AIG, Fannie May, Bear Stearns, Lehman Brothers, JP Morgan and Citibank...! 

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