Question 1 (6 pages max – including graphs)

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 announcementhere

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