Sunday, January 23, 2011

Fitch's Final Stress Tests Released for Australian Banks

The original report is available for free from if you register.

The three scenarios were (all declines were assumed to spread over a 3 year time frame)
20% decline in house prices and 2.5% default rate
30% decline in house prices and 6% default rate
40% decline in house prices and 8% default rate

Australian Insurers, Banks Can Weather Housing Drop, Fitch Says
Net bank losses, after insurance protections are applied, will be about A$100 million ($99 million) under the mild scenario, about A$800 million under the moderate, and about A$2 billion in the severe scenario, the results of the test show.

Mortgage insurers’ losses will reach a maximum 4.4 percent of capital resources in the mild case, 26 percent under the moderate and 56 percent under the severe scenario. They reach these levels in the third year of a downturn, Fitch said.

The analysis of the various declines is mostly a glancing look at declines in the UK, Ireland and US. The conclusion that the banks will remain healthy is heavily dependent on mortgage insurance.
Here is Fitch's loss chart for the insurers:

Under the Severe scenario (40% drop in prices) the insurers will loose 56% of their capital as a result of covering mortgage losses. That's a pretty hard hit. That leads me to wonder what the insurers are holding as capital. Please tell me it's not real estate trusts . . . (after what the U.S. has dealt with, I don't assume anything anymore).

Heh, Fitch had thoughts in a similar vein:
Mortgage insurance provides good protection to the Australian major banks, assuming reinsurance covers operate as expected.
. . .
Although, capital resources in total appear sufficient to meet losses under each scenario, high regulatory capital minimums may require additional capital to be raised. Where a group has internal reinsurance cover, it is also likely in a severe scenario that these covers would be called upon at the same time as a capital call. In such a scenario the strength of the group would become an important factor in determining whether the LMI could continue to operate.


jesse said...

"Mortgage insurance provides good protection to the Australian major banks"

That's the key. Someone's holding the bag. In Australia's case it's not the banks but that deflects the issue away from what happens if prices start dropping.

Someone's going to get hurt real bad...

GG said...

I'm unfortunately a bit busy with other things at the moment and do not have time to research it, but I'm worried there is a perfect storm here, that the same insurers and re-insurers are going to get hit with flood payouts, followed within a year by mortgage insurance coverage.

I never assume the taxpayers are off the hook.