It’s never been formerly announced but it’s been commented on repeatedly by bankers that for the past few years APRA has insisted that major banks match new deposits to loans on a one-to-one basis. This move has helped shift bank liquidity profiles away from the wholesale funding dependence that has repeatedly caused funding cost spikes since the GFC.
Yet yesterday Deputy Governor of the RBA Phil Lowe dumped on deposits:
…it has become common to think of deposits as ‘good and stable’ and wholesale funding as ‘bad and unstable’. Signs of this thinking are evident in Australia, as they are in many other countries. Many financial institutions have had an explicit objective of increasing the share of their liabilities that are accounted for by deposits. Consequently, they have been prepared to pay large premiums for liabilities that are called deposits relative to wholesale funding liabilities of similar maturity. This has pushed up banks’ overall funding costs and led to increased spreads between lending rates and wholesale rates.
It is difficult to argue with the idea that this shift towards deposits is helpful for overall financial stability. While there can be a deposit run on an individual bank, a deposit run on the system as a whole is very unlikely, as deposits tend to get recycled from one bank to another. In comparison, it is easier to think of scenarios in which disruptions to foreign wholesale funding cause system-wide stress.
But, once again there is a balance to be struck. The recent problems in Cyprus give us a hint of this. The Cypriot banks were very heavily deposit funded. This turned out to have two distinct disadvantages.
I’m not exactly sure who these comments were aimed at. If it’s the regulatory community it’s a clear declaration to back off on deposits. If it’s the banks then it’s clearly egging them on to borrow more wholesale dough. That Deputy Lowe did this in the same speech that defended deploying the government balance sheet in support of banks in crisis rather suggests an unedifying both. As we know, the RBA is already slashing interest rates and talking up housing markets as much as it dares, as well as talking down any sensible macroprudential reform, so one is tempted to conclude that the RBA is bulldozing anything in the way higher borrowing in the hope of kicking private sector debt down the road. Then again, just two days ago Captain Glenn praised households for their financial prudence so I’m a bit confused.
And that confusion is not improved by a recent speech by David Lewis, General Manager at APRA:
Of course, the effectiveness of any risk-based approach owes a lot to the supervisor’s ability to get an early line of sight of new and emerging risks. This is an area where we are constantly seeking to make improvements. To this end, APRA is continuing to expand its industry analysis resources and stress testing capabilities.
There is also a growing interest in macroprudential supervision as a risk identification tool. As you know, enhancing regulators’ capacity for macroprudential oversight has become a major focus of reform initiatives coming out of the global financial crisis. This is to be welcomed. It is apparent that too little attention has been paid to system-wide imbalances in the past and this needs to be addressed. It is an area in which APRA is looking to make improvements as well.
Of course, it is also apparent that macroprudential supervision means different things to different people. To some, macroprudential supervision means adding another layer to prudential framework to install system-wide ‘shock-absorbers’ to dampen excessive swings in the economic cycle. If this is what is intended, then we still have some way to go.
But, to others, macroprudential supervision is nothing new. It is what prudential supervisors have always done – or should have done. (Wasn’t it always the job of prudential supervisors to take a system-wide view?) It should not be overlooked that, when done well, the timely interventions of supervisors to counteract excessive risk-taking by firms is inherently counter-cyclical.
APRA is currently developing a range systemic risk indicators across each of the industry sectors that we supervise to help us to map and track potential industry risks. In each case, we examine a number of potential risk indicators and then look at their impact on individual firms. This highlights those firms which might be vulnerable to the particular risk and focuses attention on the outliers. Having done that, we also take into account indicators of how that risk is tending.
Obviously APRA too is looking rather slow on actual applied macroeconomic tools compared with a very long list of global banking regulators but at least it is thinking about the issue in terms of monitoring which puts it well ahead of an RBA that can’t trash macroprudential ideas fast enough.
I guess this is just usual argy bargy between regulators as they seek a best case outcome balancing stability and growth but banks and consumers could be forgiven for felling a little confused.
