Jump to content
House Price Crash Forum

Bcbs Risk-Weights


Recommended Posts

Hehe; sorry Neverwhere. I had window open too long, and you got to it before me, in #153.

Coincidence.

Well I think that's confirmation that it's the right thread to stick it on. ;)

I agree that it mainly reads like bankers moaning and seeking that the proposed changes be relaxed. The level of moaning does seem to suggest that the sum total of the measures as currently proposed will have a very significant impact though!

Link to comment
Share on other sites

Hey all,

When is Basel III likely to be implemented? Read somewhere that it was 2013 - 2015 but then delayed until 2019?

Kind of makes you want to put off buying until at least 2019, was hoping markets may have corrected prior to this, as if really like to buy next year sometime! :-/

AFAik banks are reporting using the new rules.

The higher capital charges come in staged this year.

Link to comment
Share on other sites

Cheers Spyguy,

Let's hope we can get this baby on a downwards trajectory before end of the year, then maybe start picking around early next year to sniff out something with some actual value!

I'd think once conservatives figure it's going down, they're going to want it to go at a hell of a pace. That way they give it chance to start a recovery in time for the next election. If HP's are still falling when they go to election, they might find it tough to pick up votes. Equally, if they're still sky high and rising , they'll get trashed by the opposition for being incompetent and failing to provide housing (as well as losing a lot of votes, as the renting population is quickly becoming the majority!)

Only way I can see them getting re-elected is to have a crash within next 12 months, reset the system and put controls in place to prevent a repeat!

Link to comment
Share on other sites

AFAik banks are reporting using the new rules.

The higher capital charges come in staged this year.

I think they might possibly be finalised later this year but it's likely to take longer than that for them to implemented because they have to go through the rigmarole of being enacted at a local (i.e. EU/UK) level.

Link to comment
Share on other sites

I think they might possibly be finalised later this year but it's likely to take longer than that for them to implemented because they have to go through the rigmarole of being enacted at a local (i.e. EU/UK) level.

The capital requirements are largely in place, but various bits of implementation will take until 2019.
Link to comment
Share on other sites

The capital requirements are largely in place, but various bits of implementation will take until 2019.

They systems are in place.

It's the classification of loans that'll cause problems in the UK.

AFAIK no other country has allowed individual to borrow and buy nonOOO property.

Most countries insist on chunky deposits and OOO homes only.

UK is exceptional in allowing low deposits and loaning huge amounts.

A lot of UK loans will be reclassified as commercial, high risk and capital charge adjusted.

Link to comment
Share on other sites

The capital requirements are largely in place, but various bits of implementation will take until 2019.

They systems are in place.

It's the classification of loans that'll cause problems in the UK.

AFAIK no other country has allowed individual to borrow and buy nonOOO property.

Most countries insist on chunky deposits and OOO homes only.

UK is exceptional in allowing low deposits and loaning huge amounts.

A lot of UK loans will be reclassified as commercial, high risk and capital charge adjusted.

Ah, okay, thanks for the correction. :)

Link to comment
Share on other sites

Last I read, the expectation is that the BCBS will put out the final policy on risk-weights at the end of this year. It's pretty clear from the public statements covered on this thread that behind closed doors the Bank of England are telling the lenders to look at the new higher risk-weights and adjust their businesses accordingly, which for some will mean a combination of shedding BTL by raising BTL mortgage rates and separately raising capital. I'm guessing that we might expect to see implementation being tapered in from some point in early 2017. I'll be surprised if this wasn't already happening by next summer.

With London rents looking a bit softer, lenders' rental covers already on the move, PRA underwriting rules imminent (Q3 2016) and the tax changes tapering in from April 2017, the next 12 months are looking very interesting for the BTL gang.

Link to comment
Share on other sites

  • 2 weeks later...

The Tories will do everything they can to stop a HPC on their watch - last time it happened they 3 lost elections on the trot and were out of power for 13 years.

Cheers Spyguy,

Let's hope we can get this baby on a downwards trajectory before end of the year, then maybe start picking around early next year to sniff out something with some actual value!

I'd think once conservatives figure it's going down, they're going to want it to go at a hell of a pace. That way they give it chance to start a recovery in time for the next election. If HP's are still falling when they go to election, they might find it tough to pick up votes. Equally, if they're still sky high and rising , they'll get trashed by the opposition for being incompetent and failing to provide housing (as well as losing a lot of votes, as the renting population is quickly becoming the majority!)

Only way I can see them getting re-elected is to have a crash within next 12 months, reset the system and put controls in place to prevent a repeat!

The Tories will do everything they can to stop a HPC on their watch - last time it happened they 3 lost elections on the trot and were out of power for 13 years. They blame the 90s HPC for that. Edited by mikthe20
Link to comment
Share on other sites

The Tories will do everything they can to stop a HPC on their watch - last time it happened they 3 lost elections on the trot and were out of power for 13 years. They blame the 90s HPC for that.

Major won the 1992 election after the bubble burst.

They lost as theyd been in power too long and people wanted a change and trusted the evil salesman.

Edited by Rigged
Link to comment
Share on other sites

Source: Basel may prompt lenders to rethink buy-to-let strategies – Fitch, Mortgage Strategy, 29 February 2016

Sorry to bring this excellent thread to a more mundane level,but I'm just rereading it and came across this excellent nutshell definition/example of how risk weighting works for anyone wondering(like myself at times) what it's all about.

'Currently a risk weighting of 35% is applied to buy-to-let loans with lenders required to reserve 8% of this. For example, a £100,000 mortgage has a risk weight of 35%, £35,000, and banks must hold 8% of this loan in reserve, £2,800. However, Fitch estimates this risk weighting could rocket to 91% if the proposals are implemented. For buy-to-let lending at 80% LTV or higher, the risk weighting will be hiked to 120%.'

Link to comment
Share on other sites

Consider a bank that lends only to BTL borrowers

  • BTL bank has £100 of captial
  • Capital Adequacy Ratio (Capital/Risk-weight assets) cannot exceed 4%
  • Hence the bank can make £2,500 of risk-weighted loans
  • BTL loans risk-weighted at 20% under A-IRB
  • Hence the bank can make £12,500 of BTL loans

Basel III implementation

  • The bank can still only make £2,500 of risk-weighted loans
  • Now BTL loans are risk-weighted at 150%
  • Hence the bank can make £1,667 of BTL loans

Very simplistically you can argue that unless the £1,667 of post Basel III lending can make the same profits as the £12,500 in the past then if the bank is constrained on regulatory capital, it ought to shift its focus and lend more to areas that carry low risk-weights and less to areas with the high risk-weights.

I'm just about getting there and the thread is months old....

First up, I missed a trick when working Coventry's Capital Adequacy Ratio. The minimum will be moving from 8.0% to 10.5% under Basel III, hence they may already be in a position where they must raise capital so that their regulatory capital is adequate cover their present stock of lending. If this surmise is correct then any additional buy-to-let lending leading to growth in their BTL loan assets would require further capital raising.

The Coventry are a mutual, hence they can only raise further capital by going to their members, retaining profits or possibly issuing subordinated debt. Asking members for more capital so that they can lend more money to BTL is not going to happen. Retaining profits means making more profits and not handing them out to the members (as return on savings) so is problematic. Subordinated debt issued to make good a regulatory capital shortfall would need to carry a good rate of return to compensate creditors for the risk.

Thus it seems to me that as things stand there will be a shortage of regulatory capital need just to cover existing lending at the wilder BTL lenders and these changes will bite as soon as they are finalised and introduced. As 80% of BTL lending is interest-only it doesn't amortise in the same way lending to owner-occupier lending does, it just sits there, so to do more lending you need more capital. With owner occupiers you can do new lending without growing your balance sheet because historical lending is constantly being paid off (and thus the balances from historical lending are reducing).

Moving on to Nationwide, Nationwide's latest Pillar 3 disclosure (4 April 2015) showed total total regulatory capital (Tier 1 + Tier 2) of £9,950mn and RWAs of £36,804mn leaving them reporting a Capital Adequacy Ratio of 27%, (and really just for the benefit of Mr M. Bodkin from the forum over the way, we remind readers that this needs to be 8% or above, but 10.5% or above post Basel III implementation).

Of the £36,804mn RWAs, £14,372mn relates to mortgages.

Nationwide's balance sheet for the same date shows £124,549mn lend to owner-occupiers and £28,336 lend to buy-to-let investors.

If we recalculate the RWA using a 20% RW for the owner-occupier lending and 150% we get RWAs of £89,846mn and a Capital Adequacy Ratio of 11.1%, just a whisker above the 10.5% red line.

Once again, Nationwide have been going nuts for the BTL in the year that has passed since these disclosures.

I think this makes pretty plain what Bank officials mean when they tell the press that some lenders may need to adjust their strategies.

Thanks for that example.Well explained and great work if I may say.

Agree absolutely.

I suspect that there is a massive feedback here, where first the A-IRB rules allow the banks to lend a bonkers amount, stoking prices and setting the stage for a massive reversal of prices, i.e. 40%+, when the music stops and the BTL sector becomes a net seller. However on a price move like that the LTVs shift so profoundly that the LGD calculated on the assumption that smaller moves would be seen becomes irrelevant and the actual losses that turn up are way outside what the model said would turn up. I should have written something like "The model tells Lloyds that the LGD on BTL is less than on owner-occupier lending", which is obviously not the same thing as the LGD actually being shown to be lower in the fullness of time.

quite.

And even more shockingly, a risk weight of around 10% means that the banks only need to hold about 1% of equity against any particular BTL loan. A safety margin of £1 fit every £100 leant. No wonder the market has boomed with risk being so badly mispriced.

When BTL and owner occupier risk weights are basically the same, it obviously asked the question of why BTL loans are so much more expensive than OO loans. If the risks are the same, then surely the rates should be the same.

The price of the loans is probably a better indicator of the relative risks of the two types of mortgage, not the self-assessed risk weights.

That is quite a stunning figure.

Link to comment
Share on other sites

A Sunday Times journo has mentioned Basel risk-weights, (h/t to Patient London FTB who posted it here on the Scum thread). Without wishing to be unduly inflammatory, if a Personal Finance journo is talking about something there is a vested interest PR piece lurking in the background. A bit of dull work with google threw up the following two pieces.

Ticking time bomb for landlords

Estate Agency Maskells are predicting a mass sell-off of BTL property by investors during 2018/19.
Maskells Principal, Charles Curran’s believes new policy & regulatory changes alongside mortgage lending and tax changes, will push landlords into selling up.
Charles Curran predicts a rush of BTL property to hit the sales market between April 2018/2019 due to the first & second tranches of removal of interest rate relief coinciding with rising interest rates caused by the increase in capital charges for banks under Basel III.

Source: Property Hawk - Landlord and BTL blog, 15 June 2016

Buy to let investors face a ‘ticking timebomb’ that may force many of them to quit the sector in the long-term, a letting agent is warning.

Charles Curran, principal of central London agency Maskells, predicts that substantial volumes of rental property will be put up for sale between April 2018 and April 2019 when the first and second tranches of higher interest rate payments come in, following the phased reduction of mortgage interest tax relief for landlords.
This will be combined with an increase in capital charges for banks - triggered by a recent international agreement, known as Basel III - which will push mortgage rates up.

Source: Letting agent warns of long-term buy to let 'ticking timebomb', Letting Agent Today, 15 June 2016

Hence the source of the story a this PR 'research' paper, What next for the buy-to-let market in London?, by Charles Curran, Principal and Market Data Analyst at Maskells.

3. Bank Capital Buffers

The cost of buy to let Mortgages for Banks will increase in the future which will push the cost of BTL mortgages up even without a raise in base interest rates. Under the current Basell III consultation, the standardised risk weighting for Buy to Let Mortgages could increase from 35% to 91% and even up to 120% for loans at 80% loan to value or higher. A £100,000 mortgage currently requires a £2,800 capital buffer (or reserve) - being 8% of the risk weighting - but may require £7,280 or even £9,600 if above 80% LTV. If a bank is required to set aside 2.6 times ( or 3.4 times for 80+ LTV loans) as much cash per loan, it may either raise BTL rates to take into account the loss of earnings on the reserved cash or it may just choose to exit the market, notwithstanding no potential move in base rates. (Source info: Fitch, calculations Maskells).

Bit of a health warning on that BTW. Charles confuses bank reserves with bank capital. The emboldened section is just plain wrong.

Reserves are a balance sheet asset and might typically result if a bank accepted deposits from customers but kept them as cash in a vault (or more realistically deposited the cash with the central bank) instead of lending it out. Hence one method of making banks safer is insisting on a 100% reserve model, which basically means the bank does not lend its depositors money to other customers, (it would have to lend its own money, which it could get hold of by raising equity, for example). Under 100% reserve requirements you can never have a run on a bank. All the depositors' money is always still at hand.

Bank capital is a balance sheet liability ultimately expressing the money that the equity investors have made available to bank, usually via the retention of profits or the buying of shares when share are issued. In any other business this is called equity. Bank capital is simply equity. Calling it capital when discussing banks is merely conventional.

This is 'tie your own shoe laces' stuff really in the bank regulation game - i.e. reserve requirements are an alternative or complement to capital requirements - and Basel III risk-weights tackle capital requirements.

Capital requirements work by shifting the financing of banks. Banks lend out money. They can get hold of that money by being given it in exchange for shares (equity), retaining profits (which walks and talks like the equity investors giving more money to the bank in exchange for their percentage interest in the business that results from their share holding being the same percentage slice of a larger pie) or by borrowing it, usually from retail depositors, usually covered by government deposit insurance (e.g. the UK's FSCS).

If to the greatest possible extent the bank chooses to get hold of money it lends by borrowing then it is both highly leveraged and under-capitalised. It is just like a portfolio landlord with 98% LTV on the whole portfolio.

The bank capital is still lent out. A simple bank might 'fund' its lending 50% with money from equity investors and 50% with borrowed money, but the money from equity investors ('capital') is still lent out.

Charlie is confusing how reserve requirements work with how capital requirements work. If you don't believe some internet nut (i.e. me) this is treated very carefully in The Banker's New Clothes.

Edited by Ghost Bird
Link to comment
Share on other sites

When hunting the Snark that turned out to be Charlie "Reserve confusion" Curran I happened on this:

The Instinctif Great Housing Market Debate, 2016; Buy-To-Let

Who’s to blame for the housing crisis?
The annual Great Housing Debate took place on 17th May with a typically engaging discussion on the state of our nation’s homes. From Basel to Brexit, the experts weighed up uncertainty versus prosperity, and from buy-to-let to Bank of Mum and Dad, the government was criticised for lack of socioeconomic foresight.
The panellists were as follows:
- Richard Dyson, Personal Finance Editor, The Daily Telegraph
- Nick Leeming, Chairman, Jackson-Stopps & Staff
- David Smith, Economics Editor, The Sunday Times
- Nigel Terrington, Chief Executive, Paragon Group of Companies
- John Tutte, Chief Executive, RedRow
And the chair, as always, John Wriglesworth the Managing Partner of Instinctif Partners.

On Basel they had this to say

UK Mortgages

Free from Basel, the mortgage market would be free to grow solely under UK regulation. There was a point raised from the audience about the disadvantages of the strengthening of the pound against the euro and US dollar, though this was also regarded by the panel as being purely a short term issue. As in other sectors, the experts concluded that a long term view on Brexit is nigh on impossible, and as such the discussion moved swiftly on.

The interesting thing is that this is just total horseshit. The Basel III rules are nothing to do with Europe (and thus nothing to do with Brexit whatsoever).

If the UK left the EU that would have no bearing on whether or not our regulators remained involved in the work of the BCBS and how they implemented the finalised BCBS rules on risk-weights and capital floors.

I find it very difficult to believe that all of the "experts" weren't aware of this, though the separate existence of the EU Mortgage Credit Directive has made it very easy to get mug punters confused about what comes from Brussels and what comes from Basel.

giphy.gif

Edited by Ghost Bird
Link to comment
Share on other sites

Major won the 1992 election after the bubble burst.

They lost as theyd been in power too long and people wanted a change and trusted the evil salesman.

Indeed, the HPC was pretty much never brought up by anyone in the 1997 election, I dont remember it being mentioned in any campaigning or by anyone I know, even those in -ve equity at the time, as a factor in voting. Not to mention that there was a large cohort FTBS eyeing up historically cheap houses.

As I recall is was the sleeze factor, cash for questions and all that, and a perceived running down of the NHS which lost it for them. The mid 90's tory gov was incredibly corrupt and people were just sick of them.

Edited by goldbug9999
Link to comment
Share on other sites

...Charlie is confusing how reserve requirements work with how capital requirements work. If you don't believe some internet nut (i.e. me) this is treated very carefully in The Banker's New Clothes.

Charlie seems to be confused about rather a lot!

I've only skimmed his 'paper' but the following also stood out: 'the BTL mortgage is typified by short term fixed periods and interest only repayments'; 'a minimum 5.5% interest rate stress test on ALL Buy to Let Mortgages regardless if the Lender does not think rates which reach this level during the life of the mortgage (usually 2 year fixed)'; and 'Banks will not absorb unnecessary costs if they can be passed on to the mortgagee'.

:rolleyes:

Edited by Neverwhere
Link to comment
Share on other sites

When hunting the Snark that turned out to be Charlie "Reserve confusion" Curran I happened on this:

On Basel they had this to say

The interesting thing is that this is just total horseshit. The Basel III rules are nothing to do with Europe (and thus nothing to do with Brexit whatsoever).

If the UK left the EU that would have no bearing on whether or not our regulators remained involved in the work of the BCBS and how they implemented the finalised BCBS rules on risk-weights and capital floors.

I find it very difficult to believe that all of the "experts" weren't aware of this, though the separate existence of the EU Mortgage Credit Directive has made it very easy to get mug punters confused about what comes from Brussels and what comes from Basel.

giphy.gif

0nLo6bB.gif

Link to comment
Share on other sites

He spent 1999-2008 creating UK RMBS for Bear Stearns! :D

The jokes are writing themselves today... :blink:

Un-f**king-believable. :rolleyes:

Polar-Bear-Facepalm.jpg

No wonder he thinks a stress test that is less than 1% above SVRs is a 'high bar'.

Clearly he's learnt next to nothing about risk management or appropriate underwriting standards in the intervening years.

His basic errors over the nature of mortgage finance are all the more unbelievable in context.

Edited by Neverwhere
Link to comment
Share on other sites

I guess it's not about learning is it? It's about getting a seat next to the river of new credit money spilling out of the banking sector and scooping out great fistfuls of it any which way you can.

I see you're new to the ways of The City ....

Link to comment
Share on other sites

  • Guest featured this topic

Join the conversation

You can post now and register later. If you have an account, sign in now to post with your account.

Guest
Reply to this topic...

×   Pasted as rich text.   Paste as plain text instead

  Only 75 emoji are allowed.

×   Your link has been automatically embedded.   Display as a link instead

×   Your previous content has been restored.   Clear editor

×   You cannot paste images directly. Upload or insert images from URL.

Loading...
 Share

  • Recently Browsing   0 members

    • No registered users viewing this page.
×
×
  • Create New...

Important Information

We have placed cookies on your device to help make this website better. You can adjust your cookie settings, otherwise we'll assume you're okay to continue.