NBDTs will need 50% more capital than banks: KPMG

The actual amount of capital non-bank deposit-taking institutions (NBDT) with credit ratings now have to hold is likely to be half as much again as banks, even though the nominal minimum for both banks and non-banks is the same at 8% of total assets, says accounting firm KPMG.

Friday, January 7th 2011, 5:00AM

by Jenny Ruth

Its latest survey of non-bank financial institutions says the underlying methodology for assessing NBDT capital "includes a number of significantly more conservative settings than those set for banks."

For example, loans "secured over qualifying moveable machinery," which KPMG assumes means motor vehicles, NBDTs can have 100% risk weightings only if the loan has a less than 70% loan-to-valuation ratio (LVR).

While the rules have become more complicated for banks since the introduction of Basel ll, their starting point for assessing risk weightings on all business loans is 100%.

In other words, finance companies lending money to buy cars need to have at least 8% of each loan's value as capital so long as the LVR is less than 70%.

But vehicle loans with LVRs above 70% have a 350% risk weighting, meaning finance companies need to have 3.5 times as much capital backing such loans, or 28% of each loan's value, as those with LVRs below 70%.

"One might speculate that in such a situation it would be better to classify the loan as a person loan," KPMG. That would reduce the risk weighting to 150%, requiring capital backing of 12% of each loan's value.

The 175% risk weighting assigned to operating leases (requiring 14% of each loan's value in capital) has resulted in a number of finance companies looking to exit their operating lease businesses, KPMG says.

"Property development lending has seen some improvement from the first consultative document but a 200% risk weighting on loans with a greater than 60% LVR will see finance companies in future needing to hold a far higher level of capital," it says.

While KPMG didn't say so, the new rules are likely to mean those borrowing to buy vehicles or property will probably have to have much more equity before NBDTs are prepared to lend to them.

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