Much ado about nothing: APRA and SMSF loans

Last week APRA sent a letter to the banks regarding loans to SMSFs. The ensuing days saw the following headlines appear in various business news publications:

'APRA warns banks on loans to SMSFs' (The Australian)

'APRA cautions banks on home loans to SMSFs (AFR)

'APRA warns banks on risks of SMSF loans' (Business Spectator)

'APRA guidelines on SMSF loans a warning' (Morningstar)

'The APRA move on SMSF lending' (MacroBusiness)

Perhaps it was a slow news day, or perhaps the heatwave was getting to everyone, but APRA's letter was anything but a warning to, or move on, the banks. It simply clarified whether SMSF loans should be treated as 'standard' or 'non-standard' for risk-weighting purposes (the consequence being the amount of capital banks need to hold against these loans).

So what was the media barking on about? Well, in the process of explaining why they thought SMSF loans should be treated as 'non-standard', APRA pointed out 'SMSF loans may have a different and potentially higher loss profile in comparison to standard loans'.

Personally I think this view is questionable. 'Different' sure, but I doubt the average SMSF loan exposes the bank to more risk than the average home loan. For a start, SMSF loans typically don't get done at a 90% LVR and you would expect SMSF investors to have a reasonable amount of net wealth.

But right or wrong, APRA gave no indication they were troubled by SMSF lending. The media response was a classic beat-up: making news, rather than reporting it. Pick a word, or group of words, and make a story completely out of whack with the context in which the word(s) were originally used.

I've said previously 'Don't take financial advice from a newspaper' and this episode reminds us why. Unfortunately the only way to know what has actually happened is to read the source documents for yourself.

SMSF property lending has its issues but, whilst the APRA letter should serve as a reminder that investors are captive to the banks, it is unlikely to have much impact. I'm a bit out of touch with the nuts and bolts of internal bank capital pricing but I suspect, for the time being at least, the banks will just absorb the additional capital they need to allocate. Ultimately we might see it feed into interest rates but it should be immaterial compared to RBA actions and the costs of wholesale funding.

The real danger for SMSF property investors continues to be the ATO (for not following the rules to the letter), the Cooper Review (potential legislative change) and our financial media.