The banking regulator APRA has given three major banks, including the high profile Macquarie a whack by threatening to impose tougher funding rules on them after a review found that the trio misstated the stability of their funding that could have seen them forced to the brink of collapse in the events of another GFC-like event.
In a statement issued yesterday, APRA said Macquarie Bank and the Australian operations of HSBC and Rabobank had been ordered to tighten their funding arrangements with their parents.
APRA said the order applied to what it called “intragroup funding” which is the way subsidiary banks are financially supported by parents or order companies in the group.
“APRA’s review found these banks were improperly reporting the stability of the funding they received from other entities within the group.
“These banks had provisions in their funding agreements that would potentially allow the group funding to be withdrawn in a stress scenario, undermining the stability of the Australian bank,” APRA said in the statement yesterday.
APRA said it is now requiring these banks “to strengthen intra-group agreements to ensure term funding cannot be withdrawn in a financial stress scenario.”
“APRA is also requiring these banks to restate their past funding and liquidity ratios where these had been reported incorrectly, to provide transparency to investors and the broader community. Supervisors are considering a range of further options, including the imposition of higher funding and liquidity requirements on these ADIs.”
Macquarie Group has its annual meeting in Sydney today and the news is likely to see questions asked of directors.
APRA says it will require the three banks to strengthen intra-group funding arrangements and is considering further action including imposing higher funding and liquidity requirements on the three banks.
APRA deputy chairman John Lonsdale said that Macquarie Bank, Rabobank Australia, and HSBC Australia were “financially sound, with strong liquidity and funding positions in the current stable environment”.
“However, to ensure they would be able to withstand a scenario of financial stress, group funding agreements for Australian banks must be watertight, so they can be relied on when they would be most needed.”
Macquarie Group, the parent company of Macquarie Bank, said in a separate statement yesterday that since 2007, it had made intra-group loans to MBL, which made up about 10% to 15% of the bank’s funding.
Macquarie said the loan contracts included a “material adverse change” clause, and APRA had recently indicated this clause could accelerate repayment of the loans, breaching a requirement that Australian banks have enough funding to withstand a 30-day financial shock.
This clause has now been dropped from the loan documents, meaning Macquarie Group and its shareholders now are 100% exposed to Macquarie Bank in a financial crisis.
Macquarie said it would restate some of its financial ratios, and these would likely show non-compliance with an APRA requirement known as the liquidity coverage ratio.
MBL is a key subsidiary of Macquarie, housing the group’s Australian retail bank and important trading operations.
An HSBC spokesman told Fairfax Media “As APRA has confirmed, HSBC Australia has maintained a strong liquidity and funding position. We will continue to comply with our legal and regulatory obligations.”
