Have Australian bank regulators jumped the gun with new capital and funding rules for Australian banks?
Just as APRA, the local lead regulator, was revealing its ideas on the new rules in a discussion paper yesterday and advancing their start to 2013, the Financial Times was reporting moves by bank regulators offshore to soften the rules.
"Global bank regulators are preparing to ease new rules that would require banks to hold more liquid assets to withstand a funding crunch in a crisis.
"The move follows complaints from banks that the new Basel III standards on liquidity – the first international rules of their kind – would force them to sharply curtail lending to consumers and businesses.
"A growing number of members on the Basel Committee on Banking Supervision, which sets the global standards, now want to soften key technical definitions in the ratio, people familiar with the discussions told the Financial Times. Those changes would have the effect of reducing how much liquidity banks have to hold, and would allow them to count more corporate and covered bonds toward the total, those people said.
"The committee staff, based in Basel, Switzerland, is gathering data on the potential impact of the ratio, and a subgroup is working on the definitions ahead of a full committee meeting this month. US and continental European regulators are expected to push for changes that would ease the impact on their banks, while the UK, which pioneered the first national liquidity rules in 2009, is said to support the status quo. No changes to the ratio have been finalised, and discussions are continuing."
So if the FT report is any guide, APRA and other regulators in this country could be accused on moving too early and too quickly at a particularly delicate time for banks here and offshore.
APRA said in its release yesterday:
"In APRA’s view, ADIs in Australia are well placed to meet the new minimum capital requirements and APRA is therefore proposing to accelerate aspects of the Basel Committee’s timetable.
"It is proposing to require ADIs to meet the revised Basel III minimum capital ratios and regulatory adjustments in full from 1 January 2013, and to meet the capital conservation buffer in full from 1 January 2016. APRA will adopt transitional arrangements for capital instruments that no longer qualify as Additional Tier 1 capital or Tier 2 capital."
Some of the changes on liquidity buffers won’t be at full strength until 2019.
As part of the changes in Australia, APRA will force banks to introduce a leverage ratio to slow lending and banks will have to have a buffer to maintain liquidity in times of great stress and market freezes (as we saw in late 2008) and there will be another buffer that banks will have to add to when credit growth exceeds growth rates considered to be too strong. That, it is claimed, will prevent the development of asset bubbles.
The Basel III rules on capital and liquidity buffers and other changes was released by the global Basel Committee on Banking Supervision last December and are aimed at improving the ability of banks to absorb financial shocks and strengthen transparency and disclosures.
APRA Chairman Dr John Laker said yesterday the proposed capital reforms would clearly strengthen the Australian banking system. That includes meeting capital ratios by 2013.
But as admirable as all these moves are, they are so very 2007-09, i.e. they are based on what happened in the lead up to and during the GFC.
Banking has changed dramatically and these new rules, had they applied prior to 2010, would not have helped banks in Ireland, Portugal or Greece, or be helping banks in Spain, Italy and perhaps France at the moment.
Ireland, Greece and Portugal all went bust and no amount of government bonds could have saved the banks.
They certainly were no help in saving the sovereign credit ratings of the countries involved.
Nor has holding huge amounts of bonds, having leverage ratios and the like help Spain and Italy, whose banks and bond markets are on life support, especially Italy.
The European Central Bank has bought between 30 and 40 billion euros of Italian government debt in the past month to try and keep interest rates low and worried investors at bay.
As well, the ECB is continuing to maintain financial lifelines to banks in Spain, Italy, Greece, Ireland and Portugal, and there are reports of one-off help being given to banks from other countries.
Italy could very well see its credit rating downgraded in the very near future by Moody’s according to market rumours.
Global banking is no longer about booms and bubbles, its now all about liquidity and solvency, not in 2016 or beyond.
Standard and Poor’s says five companies including Microsoft still have AAA credit ratings. Should Microsoft bonds be allowed for capital and liquidity buffers?
If Italy triggers a credit crisis in the eurozone, the trapdoor under the euro will open and everything will drop through (that assumes tomorrow night’s decision from the German Constitutional Court doesn’t sink the eurozone’s bailout mechanism or narrow it in such a way to make German backing prohibitively expensive).
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