RDP 2015-06: Credit Losses at Australian Banks: 1980–2013 Appendix B: Data

B.1 Credit Losses Dataset

The sample of banks for this dataset was selected by obtaining lists of the ten largest banks at each of 1980, 1985, 1990, 1995, 2000, 2005 and 2010, and then attempting to gather data for these banks for the longest possible period. This was not always possible. For example, data were unavailable for many large savings banks during the 1980s, as these were part of banking groups that only published data on their trading bank and consolidated results. The 26 included banks are listed in Table B1. Data for Bankwest, HSBC, and ING from 2002 onwards come for regulatory reports. Major bank time series are split around the incorporation of savings banks in the early 1990s. Time series for other banks are separated around major mergers. For example, Adelaide Bank and Bendigo Bank are separate from the merged Adelaide and Bendigo Bank. The sample includes some observations on banks that are very small in relation to the whole system (less than 1 per cent of total lending). These are excluded from most of the regressions in the paper.

I test for attrition bias in my unbalanced panel in the manner suggested by Wooldridge (2010). I add a dummy variable indicating exit in the next period to Model C. This is insignificant, in the cases in which I define the indicator to capture (i) all attrition from my sample (1 instance through becoming a non-bank asset management company (SBSA), 14 instances through merger, and 5 instances via missing data or falling below the 1 per cent of lending threshold); (ii) just failures and mergers (15 instances); and (iii) the attrition of only SBSA, SBV and Bankwest. These latter three cases are (arguably) the only cases of exit under stress in my sample.

Current loss rates appear to be stationary. The test statistic is less than the 1 per cent critical value in an Im-Pesaran-Shin test of the null hypothesis that credit loss rates are non-stationary. This is also the case in the version of this test that accounts for serial correlation. This result is in line with that of Pain (2003) for UK banks.

Table B1: Banks in Sample
Name of bank Bank type(a) In sample Precursor entities Becomes Banks acquired during sample period Alternative names
ANZ (trading) Trading 1980–91   ANZ    
ANZ Combined 1992–2013 ANZ (trading) & ANZ (savings)      
CBA (trading) Trading 1980–92   CBA    
Commonwealth Savings Bank Savings 1980–91   CBA    
CBA Combined 1993–2013 CBA (trading) & Commonwealth Savings Bank   Bankwest (from 2013) State Bank of NSW (from 2000)
State Bank of Victoria (from 1990)
NAB (trading) Trading 1980–92   NAB    
NAB Combined 1993–2013 NAB (trading) & NAB (savings)      
Westpac (trading) Trading 1982–93   Westpac    
Westpac   1994–2013 Westpac (trading) & Westpac (savings)   St. George Bank (from 2010)
Bank of Melbourne (from 1998)
St. George Bank Combined 1989–2009 St. George Building Society (until 1992)   Advance Bank (from 1997)  
State Bank of South Australia Combined 1985–94        
State Bank of NSW Trading 1981–99       Colonial State (from 1990)
State Bank of Victoria Savings 1982–90        
Bankwest Combined 1983–2012       Rural and Industries Bank (prior to 1990)
Advance Bank Savings 1986–96        
Metway Bank Savings 1980–96   Suncorp Metway Bank    
Suncorp Metway Bank   1997–2013 Suncorp Metway Bank & QIDC      
Adelaide Bank   1994–2007   Adelaide and Bendigo Bank    
Bendigo Bank   1994–2007   Adelaide and Bendigo Bank    
Adelaide and Bendigo Bank   2008–13 Adelaide Bank & Bendigo Bank      
Bank of Melbourne Trading 1989–97        
Bank of Queensland Trading 1980–2013        
Deutsche Bank Australia Trading 1987–92   Changed to branch status in 1994    
Macquarie Bank Trading 1986–2013        
ING Bank (Australia)(b)   1995–98, 2002–13       ING Mercantile Mutual Bank (until 1998)
HSBC Bank Australia(b)   1987–99, 2002–13        
Notes: ANZ = Australia and New Zealand Bank; CBA = Commonwealth Bank of Australia; NAB = National Australia Bank; QIDC = Queensland Industry Development Commission; Westpac = Westpac Banking Corporation
(a) This column is blank for banks that entered the sample after 1993, given the distinction is not meaningful after this period
(b) Data are not available for the missing years

The credit losses of SBSA and SBV have been adjusted to remove the economic impact of support these banks received from their state government owners during the early 1990s. SBV received an indemnity from the Victorian government for losses on a proportion of its loan book. The value of this indemnity has been added to SBV's credit losses, as it removed the requirement for SBV to raise an equivalent amount of provisions. Direct payments and indemnities given to SBSA have been dealt with in the same way. A large portion of SBSA's troubled loans were transferred to the state government in 1994 and run-off over the subsequent decade. I have treated this transfer as a write-off by SBSA of these loans and the associated specific provisions.

Changes in accounting standards affect the comparability of credit loss data over time in two main ways. The change from the previous standards to the Australian equivalents to IFRS in the 2006 financial year had an effect on banks' collective provisions (which were referred to as general provisions before the shift). Compared to the previous standards, IFRS allows less scope for banks to hold provisions against expected future losses. It requires that provisions only be held against losses that have been ‘incurred’, in the sense that they are supported by objective evidence. The five largest banks in Australia reduced their general/collective provisions by around 20 per cent as a result of the change. This outflow from provisions, which was generally absorbed through an increase in shareholders' equity, has been removed from the charge for bad and doubtful debts in the long-run sample (it does not affect the other two measures of credit losses). Accounting advice and banks' public statements about their accounting policies indicate that, using various mechanisms, banks continue to raise collective provisions to cover likely future losses under IFRS.

Unlike the previous standards, IFRS requires banks to discount expected future recoveries under impaired loans, at the original interest rate applying to the loan. Thus, upon initial loss recognition, banks must raise higher dollar amounts of provisions. The extra provisions are run down over the period until recovery is made, and this flow is recognised in interest income. The overall effect of the change is that both credit losses and interest income are higher under IFRS than under the previous standards. Some banks provide the amount of the flow to interest income from provisions in their annual reports. Figure B1 presents the aggregate current losses for three banks that publish this data. The average difference between the adjusted and unadjusted ratios is less than 2 basis points.

Figure B1: IFRS Discounting

B.2 Other Data

Table B2: Data Construction and Sources
All variables observed at September of each year
Variable Detail Sources
Real GDP growth Year-on-year growth ABS
Cash rate Average over year RBA
Economy-wide interest burden (Average intermediated credit outstanding × average cash rate)/GDP, average over year ABS; APRA; RBA
Inflation Trimmed mean from 1993, average over year ABS; RBA
Total credit growth Annual growth APRA; RBA
Business sector interest burden (Average intermediated business credit outstanding × average large business interest rate)/business profits, average over year ABS; APRA; RBA
Business profits growth Private non-financial corporations' gross operating surplus + unincorporated enterprises' gross mixed income, year-on-year growth ABS
Average interest rate for large businesses Average over year APRA; RBA
Commercial property price growth Capital city CBD office property, weighted using ABS shares, annual growth ABS; JLL Research; RBA
Change in the unemployment rate Annual ABS
Household sector interest burden (Average intermediated household credit outstanding × standard variable mortgage rate)/household disposable income, average over year, year-on-year growth ABS; APRA; RBA
Household disposable income growth Before interest payments, year-on-year growth ABS
Standard variable mortgage rate Average over year APRA; RBA
Residential property price growth Annual growth REIA
Business credit growth Annual growth APRA; RBA
Personal credit growth Annual growth APRA; RBA
Housing credit growth Annual growth APRA; RBA
Share of system lending    
Business share of lending Share of portfolio that is business lending APRA; RBA
Personal share of lending Share of portfolio that is personal lending APRA; RBA
Housing share of lending Share of portfolio that is housing lending APRA; RBA
Loan growth Winsorized at the 5th and 95th percentiles APRA; RBA
Dummy variable for state government ownership   Author
Table B3: Descriptive Statistics
Variable Mean Standard deviation Minimum Maximum
GDP growth 3.22 1.61 −1.91 5.97
Cash rate 8.24 4.41 2.91 17.19
Economy-wide interest burden 9.22 1.87 6.57 13.38
Inflation 4.27 2.99 −0.40 12.40
Total credit growth 11.25 6.23 −0.40 23.99
Business sector interest burden 16.22 5.45 10.01 29.24
Business profits growth 7.43 6.07 −4.62 27.69
Average interest rate for large businesses 10.34 4.55 4.75 20.50
Commercial property price growth 5.95 12.67 −22.81 30.00
Change in the unemployment rate −0.02 1.02 1.61 2.90
Household sector interest burden 7.92 1.94 5.67 12.71
Household disposable income growth 7.77 4.08 1.95 17.50
Standard variable mortgage rate 9.77 3.29 5.80 17.00
Residential property price growth 7.93 8.31 −2.30 41.66
Business credit growth 10.18 9.76 −5.90 30.55
Personal credit growth 8.66 7.38 −5.51 22.32
Housing credit growth 12.91 4.47 4.67 21.58
Share of system lending        
Business share of lending 0.42 0.23 0.00 0.99
Personal share of lending 0.10 0.09 0.00 0.56
Housing share of lending 0.48 0.28 0.00 1.00
Loan growth 14.47 13.89 −40.53 93.28
Loan growth (winsorized) 14.69 11.34 −0.98 46.27
Dummy variable for state government ownership 0.13 0.34 0.00 1.00
Table B4: Correlations between Macro-level Variables
GDP growth Business profits growth Household disposable income growth Commercial property price growth Residential property price growth Cash rate Average interest rate for large businesses Standard variable mortgage rate Economy-wide interest burden Business sector interest burden Household sector interest burden Total credit growth Business credit growth Housing credit growth Change in the unemployment rate
Business profits growth 0.61                            
Household disposable income growth −0.09 0.17                          
Commercial property price growth 0.30 0.37 0.57                        
Residential property price growth 0.24 0.23 −0.07 0.29                      
Cash rate −0.09 0.14 0.65 0.29 0.02                    
Average interest rate for large businesses 0.01 0.17 0.58 0.25 0.05 0.97                  
Standard variable mortgage rate −0.03 0.16 0.57 0.24 0.03 0.95 0.96                
Economy-wide interest burden −0.27 −0.04 0.05 −0.27 −0.05 0.35 0.29 0.44              
Business sector interest burden −0.13 0.06 0.08 0.24 0.11 0.68 0.69 0.77 0.68            
Household sector interest burden −0.25 −0.15 −0.08 −0.18 −0.20 −0.37 −0.46 −0.33 0.58 −0.18          
Total credit growth 0.53 0.58 0.55 0.71 0.43 0.54 0.55 0.48 −0.19 0.08 −0.43        
Business credit growth 0.42 0.47 0.60 0.74 0.33 0.63 0.60 0.56 0.00 0.16 −0.26 0.94      
Housing credit growth 0.49 0.41 0.01 0.08 0.32 0.09 0.20 0.17 −0.32 0.14 −0.55 0.49 0.21    
Change in the unemployment rate −0.86 −0.57 0.15 −0.36 −0.25 0.25 0.15 0.16 0.39 0.29 0.23 −0.43 −0.28 −0.49  
Inflation −0.16 0.17 0.75 0.52 0.05 0.82 0.79 0.76 0.09 0.30 −0.32 0.55 0.61 0.01 0.20