Australia to Take Steps to Strengthen Banks' Capital Levels

  • Government releases response to Financial System Inquiry
  • Treasurer says sector faces `potential vulnerabilities'

Australia’s banking regulator will take additional steps by the end of 2016 to ensure the nation’s lenders have strong capital levels, the government said Tuesday in its response to the Financial System Inquiry.

The sector has “potential vulnerabilities” due to banks’ reliance on offshore funding and mortgages and thus needs stronger regulation than other comparable economies, Treasurer Scott Morrison said in a report released by Treasury. The content and timing of regulatory changes will take into account developments in the local economy and in international regulations.

“The resilience measures will ensure the banking system is more stable by holding more capital, and will address risk weights, leverage, loss absorbency and regulators’ crisis management powers,” according to the government’s response. “By requiring banks to take greater responsibility for their own resilience, the need for taxpayer-funded bailouts is reduced.”

Chaired by former Commonwealth Bank of Australia Chief Executive Officer David Murray, the Financial System Inquiry said in December that Australian lenders should hold “unquestionably strong” capital levels and made 44 recommendations aimed at bolstering the sector. The government on Tuesday accepted the majority of the recommendations.

Extra Capital

Australia’s biggest four banks have amassed close to A$20 billion in extra capital this year.

“The government’s response is yet another indication that capital levels for banks have just one way to go and that is up,” David Ellis, a Sydney-based analyst at Morningstar Inc. said by phone. “There are more changes to come in liquidity, funding, leverage ratio and overall capital levels. The cost of a safe and secure banking system will have to be borne by customers and investors.”

Shares in the nation’s four biggest banks -- -- Australia & New Zealand Banking Group Ltd., Commonwealth Bank, National Australia Bank Ltd. and Westpac Banking Corp. fell in Sydney trading Tuesday, with ANZ dropping the most with a 0.9 percent decline at 10:11 a.m. The benchmark S&P/ASX 200 Index dropped 0.7 percent.

“Above all, we are constantly focused on ensuring from a prudential point of view our banks and major financial institutions are safe, both for investors and depositors,” Prime Minister Malcolm Turnbull told reporters in Canberra. “They’re critical to the stability of our whole economy.”

Superannuation Review

The government also announced a Productivity Commission review of superannuation, saying the pension savings system was “fragmented, costly, complex and suffers from a lack of member engagement.”

The government will introduce legislation allowing pension funds to provide pre-selected retirement income products “to help guide members at retirement and improve outcomes for retirees.”

Corporate Bonds

Disclosure requirements for large companies issuing “simple” corporate bonds to private investors will also be simplified. The government will consult on legislation to support crowd-sourced equity funding and develop laws to ban excessive credit card surcharges. The government also recommended a review of the corporate regulator’s enforcement regime.

The government rejected the FSI’s recommendation that borrowing by pension funds be banned, saying there wasn’t yet sufficient concern to warrant policy intervention. The tax office will monitor leverage and risk in the superannuation system and report in three years.

Responding to the inquiry in July, the Australian Prudential Regulation Authority increased banks’ mortgage risk weightings, or the capital they must hold against potential home loan defaults, to 25 percent. That compares with an average of 18 percent for the four largest banks , according to the inquiry.

APRA also said lenders would need to raise their capital ratios by 2 percentage points to be considered among the world’s safest.

While recent share sales by Australian banks have closed the gap to the world’s safest lenders, their capital levels “will likely need to be higher” to retain their relative global position over time, APRA Chairman Wayne Byres said at a Sept. 16 conference in Sydney.

Before it's here, it's on the Bloomberg Terminal.