THE AUSTRALIAN NATIONAL UNIVERSITY

RESEARCH SCHOOL OF FINANCE, ACTUARIAL STUDIES AND APPLIED STATISTICS

Take Home Final ExamSemester1, 2022

FINM3006 Financial Intermediation and Debt Markets

RELEASE DATE: Friday 27^th May at 5pm DUE DATE: Friday 3rd June at 9am

SUBMIT THE ANSWER BOOKLET USING THE SUBMISSION LINK ON WATTLE.

LATESUBMISSIONSWILLNOTBEGRADED

INSTRUCTIONS:

1. Read ALL the instructions before starting the exam.
2. This exam comprises of one (1) six-part (6-part) question.
3. You must attempt to answer all parts.
4. Answer the questions in the answer booklet provided on wattle.
5. Ensure you include your name and student number on the answer booklet.
6. The exam answers must be TYPED & SUBMITTED IN WORD. Other formats will not be graded.
7. Formattingofthedocument:standard1-inchmargins,doublespacing,12-pointTimesNew Romanfont.Exams notfollowing theseguidelineswillnotbegraded.
8. Page limit: there is a maximum page limit for each question (see below). Exam questions exceeding the limit will not be graded.
9. Where applicable, include References to any facts and data sources you use as part of your answers. References do not count to the page limit.
10. Where applicable, include any calculations you do in an Appendix. The Appendix does not count to the word limit.
11. In answering the questions, you should draw on all your knowledge gained during the semester. This includes the lecture and tutorial material, news articles and current events we have discussed, the data analysis and trends in economic/financial activity we have looked at, plus any additional research you do.
12. Good luck.

Total Marks = 100

Question1(6pagesmax–includinggraphs)

In mid-March 2020 Australia was thrown into a nation-wide lockdown as the pandemic took hold. Businesses were forced to close and a huge number of newly unemployed people queued up in front of Centrelink offices. One of the immediate concerns how millions of Australian households as well as small-to-medium sized enterprises (SMEs) were going to be able to keep up with mortgage repayments.

The banks responded almost immediately to the news of the lockdown measures and introduced a six-month pause on mortgage repayments. This action also had the double benefit of providing security for individuals who rented homes from landlords with mortgaged investment properties. For example, you can see the Commonwealth Bank’s announcement here

This initial repayment holiday was extended for four months in July 2020 and a second round of loan repayment deferrals was provided by the banks in 2021 when most of the country was again thrown into lockdown. These measures were supported by the Australian Prudential Regulation Authority (APRA) by providing banks with more lenient (temporary) regulatory treatment for loans subject to repayment deferrals. Specifically, APRA did not require banks to treat a repayment deferral as a loan restructuring or the period of deferral as a period of arrears.

Part 1 (15 marks, approx. ½ – 1 page)

Discuss what the potential benefits and costs of such a loan repayment deferral program are for the Australian banking sector.

Part 2 (15 marks, approx. 1 page)

APRA collected and published data on bank level exposures to deferred repayments (provided in the examination materials). Using these data, calculate the exposure of the entire Australian banking sector to deferred loan repayments over the sample period. Be sure to explain the steps in making the calculations. Plot the time series of these exposures in a graph. Can you explain the shape?

Part 3 (15 marks, approx. 1 page)

Based on these data, do you think repayment deferrals pose a significant risk to entire Australian banking sector as a whole? Explain your answer.

Part 4 (15 marks, approx. 1 page)

Looking at individual ADIs, are there any ADIs (or group of ADIs) that display a much risker deferral profile compared to the Australian banking sector as a whole? Explain your answer.

Part 5 (20 marks, approx. 1 page)

Now that some time has passed since the end of the deferral periods are you able to determine whether the risks you identified in Part 1 have materialised? Do you see differences in how risk materialised across the broad categories of ADIs (i.e. major banks, other domestic banks, foreign subsidiaries, foreign branch banks, mutual ADIs)? Explain your answer.

Note: with the four month extension the first round of deferrals started to expire January 31, 2021 and the second round of deferrals started to expire in September 30, 2021

Part 6 (20 marks, approx. ½ – 1 page)

Suppose that the risks identified in Part 1 were very large and threatened the stability of certain banks or even the entire banking sector. Outline three different approaches that the banks/regulators/government can use to manage these risks. What are the costs and benefits of each approach in the current inflationary environment?

(End of Examination)

Student ID:_____________________________________

Student Name:__________________________________

THE AUSTRALIAN NATIONAL UNIVERSITY

RESEARCH SCHOOL OF FINANCE, ACTUARIAL STUDIES AND APPLIED STATISTICS

FINM3006 Financial Intermediation and Debt Markets

Semester 1, 2022

Final Exam

ANSWER BOOKLET

RELEASE DATE: Friday 27^th May at 5pm

DUE DATE: Friday 3rd June at 9am

SUBMIT THIS ANSWER BOOKLET USING THE SUBMISSION LINK ON WATTLE.

LATE SUBMISSIONS WILL NOT BE GRADED

Loans subject to temporary repayment deferrals (Dollar values are based on Credit outstanding)
Month ending February 2021	Total	Housing	Small and Medium Business
Institution name	ABN	Total	Share of total loans	Number of facilities	Share of total facilities	New or extended in the month	Expired or exited in the month	Total	Share of total housing loans	Number of facilities	Share of total housing facilities	New or extended in the month	Expired or exited in the month	High loan-to-value ratio (LVR > 90%) – Share of housing deferrals	Investment loans – Share of housing deferrals	Interest-only loans – Share of housing deferrals	Total	Share of total small and medium business loans	Number of facilities	Share of total small and medium business facilities	New or extended in the month	Expired or exited in the month
		($ millions)	(%)	(number)	(%)	($ millions)	($ millions)	($ millions)	(%)	(number)	(%)	($ millions)	($ millions)	(%)	(%)	(%)	($ millions)	(%)	(number)	(%)	($ millions)	($ millions)
Westpac Banking Corporation	33007457141	5,121	0.9%	20,889	0.5%	0	7,073	4,448	1.1%	10,961	0.9%	0	6,462	10.6%	45.8%	25.1%	463	0.7%	2,228	0.5%	0	431
Australia and New Zealand Banking Group Limited	11005357522	3,909	0.9%	12,753	0.4%	94	4,154	3,294	1.2%	7,826	0.9%	89	3,458	8.5%	35.1%	6.6%	475	0.9%	1,721	0.5%	*	*
Commonwealth Bank of Australia	48123123124	2,300	0.3%	5,741	0.1%	63	7,383	2,081	0.4%	5,208	0.3%	57	6,848	15.2%	35.6%	14.8%	147	0.3%	316	0.1%	*	*
National Australia Bank Limited	12004044937	900	0.2%	1,488	0.1%	48	1,055	538	0.2%	1,037	0.1%	*	*	4.7%	39.3%	7.3%	123	0.2%	270	0.1%	*	*
Bendigo and Adelaide Bank Limited	11068049178	303	0.4%	821	0.2%	24	377	149	0.3%	420	0.2%	22	276	*	31.6%	24.9%	139	1.1%	281	0.5%	*	*
AMP Bank Limited	15081596009	256	1.2%	636	0.9%	32	154	244	1.3%	602	0.9%	31	147	9.0%	25.0%	19.2%	11	0.7%	34	0.7%	*	*
Macquarie Bank Limited	46008583542	243	0.3%	886	0.2%	15	247	211	0.3%	369	0.3%	13	225	5.1%	36.2%	18.4%	12	0.1%	179	0.3%	*	*
ING Bank (Australia) Limited	24000893292	220	0.3%	637	0.2%	45	300	212	0.4%	555	0.3%	44	290	9.6%	22.2%	9.6%	*	*	*	*	*	*
Bank of Queensland Limited	32009656740	189	0.4%	608	0.4%	23	321	113	0.4%	286	0.3%	15	236	17.3%	30.4%	11.8%	73	0.8%	275	0.8%	*	*
Members Equity Bank Limited	56070887679	145	0.7%	410	0.3%	0	87	143	0.7%	335	0.5%	0	87	13.1%	20.2%	*	0	0.0%	0	0.0%	0	0
HSBC Bank Australia Limited	48006434162	108	0.4%	662	0.3%	*	*	86	0.4%	164	0.3%	0	102	0.0%	29.7%	*	*	*	*	*	*	*
Credit Union Australia Ltd	44087650959	86	0.6%	378	0.4%	*	*	83	0.6%	252	0.5%	*	*	*	*	*	*	*	*	*	*	*
Suncorp-Metway Limited	66010831722	54	0.1%	87	0.0%	*	*	10	0.0%	25	0.0%	0	90	*	*	0.0%	37	0.3%	41	0.2%	*	*
Citigroup Pty Limited	88004325080	52	0.4%	1,400	0.1%	*	*	24	0.4%	44	0.3%	*	*	*	*	*	*	*	*	*	*	*
MyState Bank Limited	89067729195	47	1.1%	109	0.6%	*	*	*	*	*	*	*	*	*	*	*	*	*	*	*	*	*
Qudos Mutual Ltd	53087650557	35	1.0%	80	0.2%	*	*	35	1.1%	67	0.6%	*	*	*	43.0%	53.5%	0	0.0%	0	0.0%	0	0
Beyond Bank Australia Limited	15087651143	23	0.4%	68	0.1%	0	12	*	*	*	*	*	*	*	*	*	*	*	*	*	0	0

Explanatory notes

Basis of preparation

All data has been submitted to APRA on a best endeavours basis under relatively tight timeframes. As a result, data may be revised in future reports. APRA will continue to publish this information on a monthly basis until loans subject to repayment deferral are no longer a notable component of the ADI industry’s total loan portfolio.

The source for this publication includes data on all ADIs excluding foreign branches. The scope of this publication is ADIs with total loans subject to temporary repayment deferral of greater than $20 million and more than 20 deferred facilities. If an ADI drops below this threshold in any reporting period, their data will not be published for that period. In addition, for privacy reasons, fields are masked where a non-zero value is below $10 million or there are less than 20 facilities. For an entity where either the New or extended in the month field or the Expired or exited in the month field falls below this threshold, both of these fields are masked. Items which are reported as a share of housing deferrals include only deferrals which are eligible for capital concession.

Differing rates of deferral among ADIs are not necessarily indicative of heightened risk or an indication of asset quality. Many ADIs have taken different approaches to the granting of repayment deferrals, such as ‘opt-in’ or ‘opt-out’ deferrals or auto-approving applications.

The total change in net repayment flows each period will not reconcile to the change in total loans subject to deferral outstanding for each ADI. The credit outstanding of loans subject to repayment deferral can change independent of monthly entries or exits due to a variety of reasons including change in the value of credit outstanding. Also note that, when a customer’s loan repayment deferral is extended it is reported in this data as both ‘expired or exited in the month’ (as the initial deferral has expired) and ‘new or extended in the month’ (as it has been extended).

Domestic books includes the business of an ADI on a standalone basis, excluding subsidiaries and associates. The domestic book is the licensed book excluding offshore banking operations such as offshore branches. This scope may result in a difference in the data contained in this publication to those contained in public disclosures or profit announcements made by ADIs. This publication will not reconcile to other publications provided by APRA.

Source of statistics

The data in this publication are sourced from the following returns submitted to APRA by ADIs:

• ARF 923.2 – COVID-19 Repayment Deferrals (Domestic books)