Home' MFAA Prosper : Prosper April 2016 Contents 33
VOLUME 3 | ISSUE 1 | 2016
THE ESSENTIAL RESOURCE
It’s not just an Australian problem – the discrepancy
exists around the world and the Basel Committee
is recommending that its proposals to reduce it a re
implemented by Ja nua r y 2019.
Yanotti says Basel IV also recommends that the banks
using the IRB model compa re their calculations against
the standardised model. “ Basically they ’re asking the
big banks to calculate their capital ratios using both
models to ma ke sure they ’re not too different. If there’s
a big difference they need to justify it or consider using
the standardised result,” says Yanotti, who is a lecturer
in economics and finance at the Tasmanian School of
Business and Economics.
On one hand, that may undermine the IRB model
despite the massive investment the banks have made in
systems to improve risk assessment. On the other hand, it
may improve competition a nd allow better compa risons to
be made between banks and banking systems in different
countries, adds Yanotti.
But Kevin Nixon doesn’t believe that the t wo models
should produce the same results. “A standardised bank is
one that uses the standard capital calculation provided by
a regulator. An internal model bank – and they often use
the term ‘sophisticated bank’ – collects all the data from its
mortgages a nd calculates how much it will lose if there is a
default,” says Nixon, lead pa rtner at Deloitte A sia-Pacific
Centre for Regulator y Strategy.
The sheer qua ntity of the mor tgage data available allows
the big banks to see how risky their mortgages are, he says.
And a bank is only accredited to use the IRB if APRA
agrees the interna l model prov ides sufficiently robust
calculations to under pin business decisions.
Nixon says that considering the big banks are on top
of the nuances and risks in the market and able to track
them as the data changes, it means that the risk weights
from their interna l models will be different from the
In any case, he believes too much is being made of
the benefits of Basel IV to standardised banks. Nixon
acknowledges the concerns of the Basel committee and
Australia’s own Murray inquiry that the results from
the two models are too far apart, but suggests that the
big ban ks’ internal models a re probably more accurate
considering the wealth of mor tgage data they use.
Economist Christopher Joye referred to the risk weights
used by the major banks as “absurdly low” in an Australian
Financial Review column last year, writing that a risk
weight is “the secret sauce that fuels all of the big ban ks’
On bala nce, the Basel proposals a re “ver y positive” for
the second-tier ban ks, says Michael Cunningha m, KPMG
Partner, risk advisory. “It means they can have a more
competitive capital playing ground.”
“Currently, the regional banks have to charge more to
get the same return on equity as the big banks,” he says. But
it’s a highly-contested ma rket. They ’re cha rging the sa me
rate as the major banks and, as a result, they’re holding
more capital so their return on capital is lower.
“The new rules are to change that around for them. The
profitability of their loan portfolio is going to be better,”
he says. The bottom line is they’ll be able to write more
business, says Cunningham. “By having a lower capital
requirement it means you can write more loans with
the existing amount of capital. So it’s obviously going to
increase their ability to offer more loa ns; it will help their
ret urn on equity a nd their revenue.”
The Murray inquiry report called for “competitive
neutra lity” bet ween the ban ks using different models.
The report accepted that there might be good reasons for
differences in risk weights bet ween the models – such as
improving risk management capacity for those using the
IRB model and the fact that the standardised model takes
account of more tha n just credit risk. But the repor t found
that these reasons didn’t justify the big difference bet ween
the different models.
WINNERS AND LOSERS
Under the Basel IV proposals for standardised ban ks, the
risk calculation for residential mortgages would no longer be
the same 35 per cent for all. Instead it would
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