While I do not believe the sub-prime style problems are likely to happen in Australia as the Australian mortgage market does not have many of the types of deals that have caused the problems (at least not in the institutions I see regularly) it does show why the proposed disclosures under APRA’s version of Basel II Pillar 3 (APS 330) need to change.
The problems flowing through the markets at the moment are not a direct result of the sub-prime issues for the simple reason that the losses are not huge overall – less than 1% of US GDP in total. Even worst case this should not affect corporate profits overall by much. The problem is that the markets do not know where they are concentrated. Until these issues are fully flushed out the uncertainty will remain.
The problem here then is not so much the actuality of the losses, but the uncertainty. The result is that liquidity dries up as counterparties stop trusting each other, dealing slows down and spreads increase. The solution is good, accurate and timely disclosure.
The disclosures for the advanced banks are already good enough. There is enough information in Table 4 (both of APS 330 and Pillar 3) for proper analysis of the likely exposures of the banks going down that path. This should be enough (as discussed in my previous piece on this) to stop or slow down the contagion we see at the moment from spreading to those advanced banks not genuinely afflicted.
As most would know, though, it is not the larger banks that are actually originating these loans – it is the ones that would be going standardised.
The market disclosures for standardised institutions under Basel II in Australia should be increased to include most of the elements of Table 4 and perhaps Table 8 so that the information is published, checked and used regularly by all market participants. The neutering of Pillar 3 by APRA for the smaller participants is of no use to anyone.