APRA benchmarks heighten risk of rate rise

by Miklos Bolza21 Jul 2017
Two leading economists have warned that the ‘unquestionably strong’ capital benchmarks released by the Australian Prudential Regulation Authority (APRA) on Wednesday will spark rate hikes by the banks.

In a statement, Treasurer Scott Morrison said the announcement “should not significantly impact loan pricing or consumers’ ability to access finance”.

However both Roger Montgomery, chairman and chief investment officer of Montgomery Investment Management, and Brett Le Mesurier, banks and finance analyst of Velocity Trade, told ABC’s The Business that banks could certainly raise rates in response without APRA being able to link the two.

“The customers will pay,” Le Mesurier said. “The government won’t see how it’s being done. The recent increases that they’ve had in home loan rates have been sponsored by APRA really as a result of trying to reduce the amount of interest-only loans and reduce the amount of investor loans.”

In fact, APRA had said that the net interest margins for the banks would need to increase by 10 basis points for the banks to retain their return on equity, he said.

“Who’s going to pay? It could be the depositors as well. Some of the deposit rates could go down. But of course, the Treasurer will never know.”

Montgomery expressed his certainty that the mortgage holders would bear the costs of these added capital requirements instead of the deposit holders.”

“That’s because deposit funding is the cheapest source of funding for the banks. As international funding costs go up for the banks, there will be more competition for deposits. As a result, we’ll find that the cost will be passed onto consumers through higher mortgage rates.”

He agreed with Le Mesurier that it would be impossible for APRA to attribute a change in rates to the new requirements for higher CET1 ratios.

“Short of monitoring every email of every CEO – which they have said they’re going to do – it would be difficult to attribute a change in rates to that particular thing. So in the normal course of business, rates will go up. They’re going up out of cycle anyway.”

With the spread between mortgage rates and the official cash rate at its widest levels, this trend will continue, he said.

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