its more a gut feel than anything.. based on reading between the lines of what Glenn Stevens comments were and also comments by some bank CEOs and their recent actions this year..
I don't hold much value in what the RBA PR machine says. In my opinion their only function outside of transaction management for Australia is set to an arbitrary I.R that dictates the cost of the AU dollar against foreign currency/treasuries. I don't see a big correlation between RBA policy and the cost of private equity. As for CEO's when ever I see an interview they seem to talk a lot without saying much. If you have an example of them giving concrete evidence of their intentions I love to hear it, as I have missed it and would like to know what goes on in their heads.
btw i DIDNT mean if RBA rates are 4.5% then resi loans will be 8% and business loans will be 7% ...
what i meant was in the past half year or so resi mortgage rates have gone up LESS than business loans , the banks have been building up their resi loan books.. however i think going forward this will change... meaning if we get a 0.25 rise by the RBA then business sloans may go up .25 but resi will go up .35 (note: this is just an example to illustrate the point) ...
I have diverted all my limited brain power to find an answer to this question, so far I have hit a brick wall when investigating what would be the likely direction banks would take in re-assessing their risk management. What I have found is that the banks have a lot less control than I thought about what risks they can take. To my understanding a large part of their decisions is based on what direction APRA takes in interpreting and legislating "policy" changes according to the Basel II framework.
From my understanding Basel II framework dictates what is acceptable measurement of risk within the Banking and Finance industry. APRA then tries to fit the framework as best it can into a policy/legislation for the Australian B&F industry. The banks then set their risk measurement and lending policy against what is legally acceptable by APRA policy/legislation to milk the market for as much as possible and look after the shareholders "best" interests, I have no idea what internal process go on in the bank to dictate resi rates = X commercial = Y, but looking at CBA's loan offerings and guessing other banks are similar it isn't a simple a proposition as resi = x com = y, it all comes down to the quality of the collateral (as deemed by APRA/Basel II) which the banks can then play with to make $1=$+10.
As far as I have looked APRA is currently in the process of drafting/reviewing/tweaking their implementation of Basel II... which will most likely lead to amendments some time after mid year 2010. What the changes may be, I have no idea as yet sorry
. Banks will then (I suppose) adjust their lending to reflect what is in their best interests and still keep them in line with any changes in legislation.
At the moment as far as I can tell resi home loans with LVR 80% or less are golden and are ticket to print $$, resi home loans with LVR above 80% are a good enough second, everything else is second rate and carries a risk premium for banks to hold. Up until this changes through APRA/Basel II "reform" I don't see huge changes in spreads, if anything I think banks will only increase the spreads as they chase more resi loans for their books with ever more limited offshore equity edging out local commercial lending more and more.
As a disclaimer please take the above as my opinion, as I have NFI idea if the above is correct, it's just my limited understand of the Banking system.
Edited to fix some errors
Ok just to show how much leverage banks can get from 80% lvr standard loan or a 60% lvr non standard loan. Apparently according to what I have read from googled pdf's and from the APRA site banks only have to hold as capital 4% of the value of the loan as security to meet legislative capital requirements. If the loan is above 80% lvr and insured by LMI then the banks have to hold a whopping... 8% of the value of the loan on their books as capital. I think what some of the changes APRA are looking to introduce is to increase capital requirements to .... 8% of value across the board, but I am not sure as I lost track of what I was reading
. I fear some of the above I wrote was BS, but it just goes to show it pays to be the banker
.