Banks to escape Basel rules?

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By David Llewellyn-Smith

From Banking Day:

The major banks will have to wait for some time to learn of the Australian Prudential Regulation Authority’s plans regarding what additional measures it will adopt as yet another regulatory caravan rolls by in the form of D-SIBS, or a set of standards that apply to “domestic, systemically important banks”.

D-SIBS are the domestic cousin of the G-SIBS, a list of 29 globally significant banks (which includes the most well-known, internationally active names). These banks need to hold between 1.0 per cent and 2.5 per cent in additional capital.

The issue for Australia’s four major banks is whether any or all of them can expect an additional capital charge as the D-SIBS framework – recently devised by the Basel Committee – is adopted locally.

Speaking at the Australian Conference of Economists, held in Melbourne yesterday, APRA’s chair, John Laker, hinted that local banks may avoid having to meet an additional capital charge, one that would be over and above the additional layers of capital that is one of the hallmarks of the Basel III standards that come into force in Australia from 2016.

Laker said: “The consultative document makes the key point that other policy tools, particularly more intensive supervision, can also play an important role in dealing with D-SIBs. APRA could not agree more.

“Our risk-rating process has been in place since 2002 and is geared towards earlier supervisory intervention for APRA-regulated institutions with higher impact, measured in terms of their balance sheet size.”

According to Laker, this reform, along with the many other reforms under the rubric of Basel III, brings “benefits to the Australian community of a safer banking system [that] clearly outweigh, in our judgment, the economic costs of the reforms.”

APRA will soon publish a paper that provides insights into its rationale.

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To my mind, if true, this is not good news nor is it good regulation. Australia’s big four banks are the very definition of domestic, systemically important banks (D-SIBS). For more on D-SIBS read Deept T. While APRA may have done a good job since 2008, there are very serious unanswered questions about the period prior in which the banks borrowed enormous sums offshore and used Pillar III internal risk modeling – monitored by APRA – to generate huge mortgage risk in their books (not to mention inflated profits).
That Australia is yet to face the reckoning of this owing to a clean public balance sheet and once in century commodity boom is hardly reason to ease up on effective regulation. The most effective kind of bank stability is raising capital standards. It simply takes away the discretionary powers of the regulator, which are vulnerable to industry capture, external pressures and mistakes.
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There is no substitute for higher capital standards.
About the author
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal. He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.