APRA taking heat from IMF

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From Banking Day comes an excellent analysis of last week’s IMF report vis-a-vis the banks. I may have downplayed this overly last week, given I’ve been waving my arms about it solo for three years, the subject seems tired to me. Anyway, on with the show:

The IMF’s latest Financial System Stability Assessment of Australia was released on Friday. It shows the Australian Prudential Regulatory Authority is under strong international regulatory pressure to adopt a tougher capital requirements stance for domestic systemically important banks, or D-SIBs.

The Big Four oppose any extra capital requirements. The Australian Bankers Association’s CEO, Steven Münchenberg, said last night that APRA already had mechanisms for dealing with the D-SIB issue through the additional prudential requirements it currently applies to individual banks on a case-by-case basis.

But Münchenberg also told Banking Day last night that he believed APRA was “not comfortable” that international rules would let them continue without imposing additional capital charges on the Big Four.

The IMF report confirms that the Big Four Australian banks are domestic systemically important banks – indeed, more so than banks in any other major economy. As reported in Banking Day, the Basel Committee last month finalised rules requiring stronger loss-absorbency rules for D-SIBs, including holding extra capital.

APRA has not set out what new rules, if any, will apply to Australia’s Big Four under the D-SIB framework.

But the local supervisor appears to doubt the need for explicit additional capital requirements. Australian regulators have recently depicted capital requirements as being just part of the prudential toolkit. And APRA chair John Laker hinted in July that he might not impose additional D-SIB capital charges on the Big Four.

The IMF, however, devotes an entire section of its report to “a case for higher loss absorbency” for the Big Four.

It notes that Australia’s four major banks hold 80 percent of banking assets and 88 percent of residential mortgages, more than in any other comparable major economy. They are among each other’s largest counterparties and their default frequencies are likely to change together. If one of them failed, it says, then “the impact on the financial system and the economy would be potentially substantial.”

It’s absurd to think of the big four as anything other than D-SIBs. They are the system and so indistinguishable in structure that it is inconceivable that if one were in trouble that the other three wouldn’t be also. Transparently higher capital standards are required. Transparency is also required in the Pillar III disclosures of how the banks internal models calculate that capital. Anything short of this is just more invisopower from the regulator.

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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.