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...! 

Ozzie banks vulnerable

Business press seized on comments from Moody's as to overexposure of Australia's banks to a housing crash:

According to the Financial Review, Australia’s biggest banks have been fighting over the mortgage market for too long and if property prices fall too far, we could be in for a US-style banking collapse.
With the exception of ANZ (ASX: ANZ), our top four banks are not exciting from an investing perspective and are too heavily leveraged on growth through their mortgage books. If Australia were to experience an unemployment boom, loans would struggle to get paid, leading to more defaults and eventually lower housing prices.
This would paint an ugly picture for our biggest mortgage writers like Commonwealth Bank (ASX: CBA) and Westpac (ASX: CBA) (here)

And worringly this is structutal - a function of the market and simply how the banks are:

Banks in Australia have the highest concentration of residential mortgages than any other type of institution in the world, making them vulnerable to a possible house price correction according to the analysis of a leading credit market economist.
Moody's Analytics managing director Tony Hughes says that house prices in Australia were overvalued which could pose a major concentration risk for banks.  The high exposure to residential mortgage represents a valid risk for banks and the Australian economy. (here)

Nothing like being so exposed in one asset that you become the market (when it plummets):

Australia’s banks have the highest exposure to residential mortgages of any financial institutions in the world, leaving them vulnerable to a “looming” house price correction, a leading credit market economist has warned.(here)