APRA moves on Mega Bank

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  1. bhandleyMEMBER

    Interesting article.

    As a layperson it looks like APRA wants little apras in each bank.

    But it could also look like these could be a requirement for “best practices”. By what mechanisms/processes will these increae accountability in practise?

  2. Different China Fanboy

    Apologies for being cynical but while the intent of these changes you’ve described seems clear there needs to be sufficient penalties for breaches. If a bank director can effectively burn the house down and escape with a multi million $ golden parachute, that seems like a pretty big incentive to ignore risks unless jail time is a possibility.

    The possibility for shareholder class actions exist but these sort of things drag on for years. Meanwhile the director(s) of mega bank can read all about shareholder pain (in the event of things going pear shaped) from their harbor view mansions.

    • As I said the value of these changes will be in the enforcement by APRA. Aussie regulators do not have a good track record in this area.

      However, if a first step is setting up a better accountability regime then APRA has moved significantly in that direction. Identifying who’s accountable at least leads to who should be punished for failure.

      But I do share some of your cynisism on enforcement

      • I have no need to share anyone’s cynicism as I have a vast reservoir of my own to draw upon.

        Reading Deep T’s insightful post it occured to me that these changes in language may be bureaucrats attempting to offload the responsibility for a bank getting into trouble onto the board/management.

        Ultimately this looks like CYA to me right up the line to the ministerial level ie. pressuring the so-called regulators who in turn seek to lay off their exposure on the “regulated”. Perhaps the folks in Canberra see trouble on the horizon.

        I doubt that directors will view this change in language as something to ignore. CYA is a highly contagious disease.

  3. Diogenes the CynicMEMBER

    The language change is notable (excellent pick up and article) but do you really think Directors of Megabank will go into CYA mode? Megabank are the titanic they can sink but will cause such distress and casualty that they have to be rescued. Gaming capital ratios has become one of their chief methods to increase profits…that will not change until they hit the iceberg at which time it is too late. I would expect some fancy new prediction models devised by the Banks showing wonderful capital management providing a figleaf of legal cover for the Board to sign off and then promptly continue their old ways. If they sink they will claim that the models were wrong and throw a subordinate or two under the bus.

    It is nice to see APRA finally waking up and I hope I am wrong but I am hearing of new home loans at 95%+ LVR which is just asking for disaster.

    • It’s 95% plus LMI but I get your point. That’s pretty much a standard across the anglo/american banking system that was enforced on us by Keating.

      It’s a balance between efficient use of capital and risk. In reality it means that in every sizeable crisis governments will have to guarantee depositors funds or offer the banking system aid in some shape or form. The alternative is to live in a country that can’t compete globally. We are such a financial minnow that we can’t go it alone, we can only follow even if we don’t really want to.

      Thanks for the information DT – it will be interesting to see how it evolves.

      • And as the RBA points out, the effective government guarantee is a positive externality. The overall cost to society of a safe banking system is lower with the government backstopping it rather than having capital levels of, say, 40%. Even taking into cost of the obvious agency issues, it looks like a better deal than the alternative

        • Surely the favourable externality of an implicit government guarantee will result in realised moral hazard over time. The suppressed crash is likely to have a greater cost than smaller more frequent crises.

          Better in my view to retain your negotiating position until the middle of the crisis. No implicit guarantees for bondholders. Specific depositor guarantees and liquidity for clearly solvent institutions only. All term government assistance to be at the total expense of shareholders.

          If in a crisis the government weakens a bit, so be it, but why accept now to being Ireland in the next crisis.

          Let the banks raise their capital and lengthen their maturities at the cost of borrowers now, not taxpayers later.

          • All the history on systemic crisis is that they generate a 25% fall in GDP. If you decide to jump in half way through as you propose, there is a very strong chance you will not be able to stop it. So you are trading off the agency issues/moral risk against a 25% fall in GDP. Bit of a no brainer I reckon but you do need to have stuctures in place so that the implicit put is never used (or never costly)

  4. EpicurusMaximus

    When are the draft BasIII liquidity rules due to come out?

    The liquidity rules are a far more significant change in terms of the likelihood of banks ever earning a decent return on equity.

  5. Agree with the sentiments, but I dont think it changes their legal duty of care, and even if it does turn out to be something else to scare directors, there will no doubt be a similar type of process for issuing prospectus/PDS’s eg a due diligence process, and reams of paperwork that someone signs off on. Life Insurers have a similar duty (I seem to remember) and they seem to get around it
    It would be interesting to see if the RBA has advanced their thinking on the countercyclical buffer given that their excess credit growth model would have seen capital imposts for half the last decade. If I was a bank I’d be arguing for a negative buffer given the current status of credit growth.

  6. APRA may,..require ADIs to hold additional Common Equity Tier 1 Capital of between zero and 2.5% of total risk weighted assets, as a counter cyclical buffer

    Not nearly enough.