Reserve Bank Governor Glenn Stevens has made it clear he strongly supports moves to force banks to build up capital buffers faster than they want to help protect them (and the financial system) against damaging future shocks and crises, such as the GFC back in 2008.
Moves by regulators to force banks, especially the major banks of each financial system, to hold more capital, are being strongly opposed by those financial groups who claim it will damage economic growth by restricting lending opportunities.
In Australia, our big banks, led by the Commonwealth, complain that the Australian Prudential Regulation Authority is being too hasty in implementing key parts of global banking rules, Mr Stevens made it clear the arguments from the banks would fall on deaf ears.
The banks have also tried to involve shareholders by claiming that the moves will restrict dividend growth (and share price growth). But that will depend more on the economy (and the health of sectors such as housing) than anything else.
In fact in a speech he will make in the US later today, Mr Stevens makes the case for banks (not only in Australia) increasing their capital levels ‘‘faster, rather than slower.”
Mr Stevens was due to speak to the Federal Reserve Bank of San Francisco’s Symposium on Asian Banking and Finance. The RBA released text of his speech ahead of the address, on last night.
His comments make only a passing reference to Australia, which is on track to meet new global standards faster than many other nations.
But they suggest that the RBA strongly supports the push from APRA, the lead banking regulator, to force our big four banks to add more capital to better protect them and the financial system in the event of future financial shocks.
That will in turn place pressure on the Financial Inquiry being chaired by former Commonwealth CEO, David Murray. the banks have been mounting a strong campaign with inquiry seeking support against the pressure from APRA (and the RBA) without actually directly criticising the key regulators (because that is dangerous).
Mr Stevens dismissed the key argument that bankers commonly make against tougher capital rules – that they will be forced to curtail lending, which would damage growth.
He cited reports that found forcing banks to amass bigger capital buffers had only a ”small” effect on growth, especially when you look at the "costs of large financial crises."
Mr Stevens asked "did the highly leveraged expansion of some parts of the financial sector in the period prior to the crisis really add much, sustainably, to growth?"
He answered that "It is far from obvious that it did. It seems more likely, to me, that it was the other way around: a period of good global growth and, in particular, unusually stable growth, led to a rise in leverage."
Instead, he argued banks should be more concerned with strengthening their balance sheets to prepare for the next economic slowdown.
”The big question is not, in fact, what more demanding capital standards will do to economic growth. The question is: what will economic growth, or lack of it, do to banks’ capital positions?’‘ Mr Stevens said.
If there was no economic slump by the time the Basel III standards had been fully implemented in 2019, he said ”one would hope” big banks were exceeding the minimum standards by then.
”One would hope that balance sheets by that time would be at their strongest position for the cycle. This is a reason to go faster, rather than slower, in accumulating capital to higher minima, while one can,” he said.
"Put simply, we are applying the lessons learned during the crisis about the extent and nature of risk, the set of incentives that allowed it to build up, the channels of contagion for distress once the extent of risk became apparent, and the weaknesses in our collective capacity to manage a crisis when one emerged.
"This does not equate to a desire to eliminate all risk. In fact, risk-taking is, to a point, good. We want it to occur. That is how society advances.
"A problem right now, arguably, is that there is not enough genuine entrepreneurial risk occurring – judging by the low levels of private capital spending in many advanced countries," Mr Stevens said.
In a reference to the domestic debate in Australia, Mr Stevens said the point was ‘‘of some relevance” to discussions here, where the CBA has been leading the opposition.
Back in February, the Commonwealth Bank’s chief financial officer David Craig said the regulator’s tough stance could hurt the bank’s international competitiveness.
And the banks have been supported by Trade Minister Andrew Robb has said Australia should not be rushing ahead of other countries in introducing Basel III, while Small Business Minister Bruce Billson has said APRA ”over-implemented” the rules.
Mr Stevens’ speech laid out key priorities in financial regulation for the G20 leaders’ meetings that Australia is hosting later this year. This means the issue will be on the agenda for the G20 meeting in Brisbane and the banks and their supporters in the Federal Government will have to go up against considerable odds here and offshore to water down he higher capital proposal.
Mr Stevens revealed the major themes of international bank regulation which will be on the agenda at the G20 meetings.
He said the four were:
• increasing the resilience of financial institutions, which in the main means implementation of the Basel III standards for banks;
• reforming markets for trading, settling and clearing derivatives;
• addressing risks to the financial system from certain types of ‘shadow banking’;
• addressing the ‘too big to fail’ problem at a global level.
"Highlighting these four themes doesn’t mean other things are forgotten. But it is an attempt to prioritise, to focus energies and to use the opportunity of the Leaders Summit in Brisbane, Australia, in November as a focal point for our efforts to get some important things across the line this year," Mr Stevens said.
