Australia’s key regulator of banks and other financial institutions has put commercial property on the top of its hit list for 2009.
In an article published in its latest quarterly newsletter, APRA singled out commercial property as a key focus.
APRA says commercial property is a key part of its monitoring of the credit risk position of banks and other authorised deposit taking institutions (ADIs).
"Since the crisis began, liquidity risk for ADIs has obviously grown in importance but credit risk is still regarded by APRA as most significant for ADIs.
“These two risk areas will continue to be under the microscope in 2009 – particularly as credit issues emerge from the slowdown in economic activity.
"As part of its monitoring of liquidity risk management, APRA has been collecting data from a number of institutions on liquidity positions, cash flows and obligations on a weekly basis, and sometimes more frequently.
“APRA supervisors have undertaken in-depth assessments of liquidity risk management practices, including the use of liquidity buffers, and have been reviewing longer-term funding plans.
"In the area of credit risk, APRA will continue its close monitoring of loan impairment trends and internal ‘watchlists’ from the larger institutions, with particular attention to ADIs’ commercial property lending.
"APRA believes risk governance and strategic business decisions will be critical to the continued resilience of ADIs in the current challenging environment.
"Even more so will be capital management, given that capital provides fundamental strength to, and a major source of confidence in, financial institutions," APRA said.
The regulator revealed that the authorised deposit taking industry "has been subject to intensive supervision by APRA, as evidenced by the absolute number and increased volume of ratings reviews performed over the last 12 months".
"2008 was a testing time for APRA regulated institutions and indeed APRA. The heightened level of PAIRS ratings activity will be sustained over 2009 across all industries."
(PAIRS is basic prudential rating system APRA uses. It’s stands for Probability and Impact Rating System and is a way of looking at the health and strength of ADIs, such as banks, and financial institutions such as super funds and insurers).
"In 2009, the impact of the global financial crisis on fund earnings and the financial support available from employer sponsors of defined benefit/ hybrid schemes will continue to be a key focus for APRA in the superannuation industry.
“APRA has been examining the solvency levels of defined benefit funds and will seek updates on financial positions.
"APRA’s spotlight will also remain on liquidity risk, particularly that arising from exposures to unlisted illiquid assets and frozen investment schemes. APRA will be looking to see robust liquidity management practices more broadly.
"The global financial crisis has not to this point significantly affected the general insurance industry, with the supervision stance for many insurers reaffirmed over the last 12 months.
“The industry remains well capitalised and has taken a conservative approach to investments.
"APRA will be monitoring the impact of the economic downturn on this position through 2009; in particular, it will be looking at trends in underwriting and investment performance and any impact on earnings.
"In the key area of insurance risk, APRA will be paying close attention to the consequences of the recent spate of natural disasters, after a period of good claims experience.
"APRA will also continue to monitor the performance of lenders mortgage insurers (LMIs) in an environment of increasing levels of loan defaults and slowing housing lending activity."
Looking at the past two years, APRA revealed that 2,171 PAIRS rating assessments have been performed for 1,227 institutions.
Of these, 1,175 rating assessments were undertaken in the 12 months to 31 December 2008, an 18% increase on the previous year.
"The ratings for many institutions have been revisited on a number of occasions over the last two years, particularly in the ADI and superannuation industries.
"Overall, the number of upgrades and downgrades are comparable.Two entities were downgraded through two stances; one entity was upgraded through three stances and another through two stances."
APRA said that in recent months there have been more downgrades than upgrades, but the large majority of ratings assessments have resulted in no change in supervision stance.
APRA grades the health of groups it regulates in four levels, starting with normal to restructure, which means the group has to change itself dramatically.)
"This is consistent with APRA’s stated view that the Australian financial system has coped well to date with the global financial crisis.
