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Westpac Says Some Basel Rules Flawed, May Constrain Australian Lenders
Westpac Banking Corp., which stayed profitable during the financial crisis without a bailout, said some of the proposed capital and liquidity rules on banks worldwide are flawed and risk constraining Australian lenders.
The Basel Committee on Banking Supervision on July 26 agreed on a reform package that included a leverage ratio for banks globally that may become binding by 2018. The committee said it aimed to develop a non risk-based measure designed to help track the resilience of lenders.
“Any measure of capital that does not take risk into consideration is fundamentally flawed,” Westpac Chief Financial Officer Phil Coffey said at a conference today in Sydney, where the bank is based. “We have to hope that at all times the binding capital constraint for Australian banks will be risk- weighted rather than a basic leverage capital ratio.”
Banking leaders in Australia, which avoided recession in the slowdown, have said they’re concerned that global industry standards will unnecessarily hold back domestic banks. Coffey said the Basel committee also needs to give more thought to its measures aimed at bolstering liquidity.
Australia’s banking regulator, the Australian Prudential Regulation Authority, will update its view on the Basel proposals at a Sept. 6 seminar in Sydney, said spokesman Andrew McCutcheon. APRA, which last carried out a major stress test on domestic banks in 2008, continuously monitors the lenders, he said.
“There’s a lot of final detail that needs to be clarified, but what’s important is this broad criteria that’s been put forward by the Basel committee,” said John Manning, Sydney- based director of credit strategy at Royal Bank of Scotland Group Plc. “That’s been consistent with what APRA has been trying to achieve.”
Changes Required
Westpac shares rose as much as 1.1 percent to A$23.95 and traded at A$23.83 as of 2:14 p.m. local time in Sydney trading. The stock has slipped 5.8 percent this year, while the benchmark S&P/ASX 200 Index has dropped 7.4 percent.
Coffey said today that regulatory changes are needed and Westpac, Australia’s second-biggest bank, supports proposals for stronger liquidity. Still, there’s no guarantee rules will stop a bank from collapsing once investor confidence has gone, he said.
“No amount of liquid assets will necessarily prevent a run on a bank,” he said. “There needs to be more thought given to how liquid assets can actually be used to support a bank without triggering the very event that they are seeking to prevent.”
The Basel committee’s plan for a net stable funding ratio, whereby banks seek to match the duration of their funding with their borrowing, is also incomplete, Coffey said.
“This risk-limiting approach is simplistic,” he said. “It doesn’t need an additional regulatory overlay. There’s still a lot more thinking to be done.”
A mismatch between funding and borrowing terms allows banks to manage risk and support economic growth, Coffey said.
To contact the reporter on this story: Angus Whitley in Sydney at awhitley1@bloomberg.net; Sarah McDonald in Sydney at smcdonald23@bloomberg.net
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