The banker’s age of entitlement is powering


In my last post, I pointed out the gross inadequacy of APRA’s treatment of Mega Bank as Australia’s D-SIB (Domestic Systemically Important Banks). In essence APRA have stated that although Mega Bank needs to carry a meagre 1% extra capital because it’s a D-SIB, because of other spurious reasons Mega Bank does not actually need to increase its current capital holdings.  However, I did not fully answer the question of why this is so important? There is a popular argument that the structure of Australia’s taxpayer supported Mega Bank ensures that borrowers get better access to credit at cheaper prices. Such a view taken in isolation may very well be true but is over simplistic and should be analysed with the other consequences in order to determine the value or detriment of the Aussie way.

Here’s the counter arguments.

  • A D-SIB with explicit and implicit taxpayer guarantees certainly socialises the losses but the real hazard is privatising the excess returns generated. All the senior bankers within Mega Bank are rewarded bonuses based on return on capital. Capital is calculated based on risk weighted assets. So the 7 to 8 figure $ bonuses paid the Mega Bank bankers are based not just on increasing net income but also on minimising capital requirements and understating RWAs or simply the risk. Being a D-SIB and too big too fail with implicit and explicit government guarantees underpins the ability to minimise capital at taxpayers expense and maximise bankers bonuses. It matters not one iota whether this structure ultimately leads to the guarantees being called upon. It should be abhorrent to all taxpayers and any democratically elected government. How can APRA be a party to this arrangement by penalising Mega Bank as a D-SIB with the equivalent of a slap on the hand with a $5 bill?
  • In home lending, its not necessarily the percentage of interest paid but the size of the principal that costs the borrower. Extremely low risk weightings and therefore capital requirements for residential mortgages encourage bankers to channel their available deposits and offshore wholesale funding into larger and larger mortgages as the process pushes up house prices. If funds start to leave the system and deleveraging occurs, its not the interest rate that will burn the borrower but the pain of repaying too much principal without the asset value to soften the pain. Having dampening mechanisms in place which penalise (without stopping) loan growth and the size of D-SIBs through extra capital penalties would significantly reduce risks to borrowers and ultimately reduce losses even if perhaps at a small cost.
  • Contrary to popular opinion, the cost of Australian mortgages is not cheap and is actually expensive by developed world standards. Whilst its difficult to provide exact apples to apples comparisons on interest rates across jurisdictions, my research suggests that margins charged by Australian banks over cost of funds and adding the cost of mortgage insurance ensure that Aussie mortgages are in the expensive category. Although negative gearing and capital gains discounts for investors certainly mitigate the normal expense.

So, we have a system where Mega Bank gets large government support and taxpayer subsidies with little to no cost but with great reward to the banker managers and is highly risky and greatly expensive to borrower and taxpayer. Is there any surprise then that Mega Bank and APRA want to cover this cosy arrangement up? As I’ve pointed out on many occasions, Mega Bank Pillar 3 disclosures which should allow analysts to be able to understand how risk weighted assets are calculated are grossly inadequate and do not comply with Basel standards on disclosure.

For the benefit of APRA I’d like to point out The Financial Stability Board’s Enhanced Disclosure Task Force (“EDTF”) . This committee first reported in October 2012 and the again in July 2013. The EDTF guiding principles offer seven fundamental principles for enhanced risk disclosures:

  1. Disclosures should be clear, balanced and understandable.
  2. Disclosures should be comprehensive and include all of the bank’s key activities and risks.
  3. Disclosures should present relevant information.
  4. Disclosures should reflect how the bank manages its risks.
  5. Disclosures should be consistent over time.
  6. Disclosures should be comparable among banks.
  7. Disclosures should be provided on a timely basis

Not one single Australian bank has responded to the EDTF surveys on compliance with the disclosure standards they’ve outlined or indeed attempted to comply.

It’s very strange to me that in APRA’s Information Paper on “Domestic systemically important banks”  the following statement is made:

“APRA will work with industry during 2014 on a reporting template to facilitate comparisons between the capital ratios of Australian and overseas banks.”

Whereas clear as can be one of the EDTF’s principles says:

Principle 6: Disclosures should be comparable among banks.

Disclosures should be sufficiently detailed to enable users to perform meaningful comparisons of businesses and risks between different banks, including across various national regulatory regimes. Disclosures that facilitate users’ understanding of the bank’s exposures compared with its competitors are of particular importance in building users’ understanding and confidence as well as reducing the risk of inappropriate comparisons. “

In the EDTF’s paper of July 2013 recommendations on disclosure formats, templates and tables have been made in the templates and many offshore banks are already complying with these disclosure requirements. It’s all there laid out on a plate for APRA and Mega Bank. Why are they still working “with industry” to sort it out? Blowing smoke with industry is closer to the truth.

Whilst I fully accept that disclosure is a complex issue and at times commercial interests do need to be protected, if the Australian taxpayer is heavily subsidizing Mega Bank then at the very least we should demand that it complies with international disclosure standards and APRA should be enforcing those standards in a timely fashion. We are entitled to know the detail of the risk we carry.

For Mega Bank and its bankers, the age of entitlement is certainly not over.


  1. Fantastic post. The entire usurious-lending sector is a gigantic, systemic rort of the Australian (and world) population.

    It’s also worth noting the Australian Financial Markets Associations’ response to Treasury regarding the BIS/FSB-prompted Consultation Paper “Strengthening APRA’s Crisis Management Powers”, in which AFMA welcomed the prospect of bail-in of Australian banks (page 5):

    “The FSB’s Key Attributes lays out its principles for executing a bail-in within resolution. We welcome the role of the bail-in tool for a resolution.”

    In the same AFMA document, it is worth noting a key repeated theme – the banksters’ clear insistence on getting protection from OTC derivatives losses under any bank “resolution” process, ie, “to avoid destruction of value” (pp2, 14).

    Then too, there’s the IMF’s related instructions (Technical Note, Nov 2012) to Australian lawmakers, to introduce legislation “to prevent premature disclosure of sensitive information” relating to impending bank bail-ins:

    “Past simulation exercises revealed the need for legislative changes to prevent premature disclosure of sensitive information. Australia’s securities disclosure regime requires, for the protection of investors, immediate and continuous disclosure of information that could reasonably be expected to have a material effect on the price or value of an ADI’s securities. There is a high probability that any resolution or crisis response measures will impact the price or value of an authorized deposit-taking institution’s (ADI’s) securities.

    Poor coordination of compliance with the disclosure requirements, timing of resolution or crisis response actions, and the overall public communication strategy regarding these actions could pose risks to financial stability (e.g., through depositor runs) or thwart resolution actions (e.g., through the stripping of the ADI’s assets by insiders) or cause market disruptions. Legislative changes that reduce tension between investor protection and financial stability should be pursued.”

    Love that. “Reduce tension”. Moral relativism at its finest.

  2. Thank you, DeepT.

    D-SIB is a huge issue, though you won’t hear a word about it from Joe Hockey.

    We need to prepare for the moment when the banks put their hand out for their guaranteed bail-out because their ‘customers’ can’t afford to repay the giant debts the banks extended. That is what bank equity is for. Shareholders should be demanding a higher level of comfort than they currently enjoy.

  3. How much political power can four big banks buy in this country, do you imagine ? How’s about an all you can eat freakin’ regulatory free-pass buffet !