Banking and finance in Australia will get more expensive for shareholders and the banks and other groups involved after the release of proposed new liquidity and capital rules on Friday.
All Australian banks and other "authorised deposit taking institutions’ will be forced to hold far more capital in the form of cash and other high quality and very liquid assets to enable them to survive financial crises of much longer duration than previously envisaged.
The new rules will be tough, once introduced.
They will have to hold better quality assets in their liquidity buffers: government bonds and any other security acceptable to the Reserve Bank; they will have to have enough liquidity to sustain a three month ‘market disruption’, a so-called ‘name crisis’ (or run where a specific named institution is in the public eye over its viability) of a month (previously five days), and they will have to have a funding plan for a minimum of 12 months (i.e. enough deposits and capital on hand and available to keep funding their business model for a year, including any rollover risk).
The proposed changes will bring howls and moans from the banks about how these changes will cause higher interest rates and curtail lending.
But they could also force the banks to cut back on dividend payments and capital management repayments or buybacks (which institutions and brokers like because it makes them look clever and earns fat fees and profits).
They will also force banks to cut back on remuneration because riskier forms of lending will cost too much, while punting the banks capital in so-called proprietary trading will also cost more.
The move has been signalled for months by Australia’s leading banking and financial regulator, APRA.
It follows agreement on a set of international rules at a meeting of regulators and central bankers in Basle in Switzerland earlier this week.
The new rules have been worked upon since September 2009 and are a reaction to the impact of the credit crunch and then the recession on local and international finance, especially in the wake of the collapse of Lehman Brothers a year ago.
The Lehman Brothers failure triggered a shutdown of international financial flows that effectively cut off a number of countries and regions from international markets for a month or more.
Australia was one of those countries.
The continuing guarantee of bank loans and deposits was introduced here in early October after a number of other countries introduced similar measures to try and stabilise their shaky markets.
The US, UK, Germany, Ireland, Holland, Belgium, France, Italy and a host of other countries saw their banks hit, with some collapsing to be rescued or nationalised; others saved by capital injections (such as Citigroup and Lloyds) and others teetering on the edge of a cliff, but survive.
Australia’s banks were not hammered like those offshore, but holes were found in their liquidity buffers (such as too greater dependence on offshore wholesale funds) and in their risk management practices.
On the whole these were minor compared with the problems in the US and UK, or among hedge funds and listed financial companies such as Allco, Babcock & Brown and property trusts and infrastructure investors.
Now, as part of a cor-ordinated move internationally, APRA is proposing significant changes for the banks and ADIs so that they will have to hold far more capital and far more liquid assets, as well as being far more transparent about these holdings and policies.
In a press release and discussion paper released late Friday, APRA revealed that all so-called "Authorised Deposit Taking Institutions (ADIs) would have to improve their risk management and liquidity policies and practices to new levels.
They will apply to all ADIs, whether Australian owned, or a foreign bank or ADI based here.
"APRA has undertaken a broad-ranging review of its current prudential framework for ADI liquidity risk management, set out in Prudential Standard APS 210 Liquidity.
"The review has taken into account financial market developments and changing ADI practices since the framework was introduced in 1998, lessons learned from the global financial crisis and recent international supervisory developments.
"APRA Chairman Dr John Laker said ‘APRA’s objective is to strengthen the resilience of ADIs to liquidity risk and improve APRA’s ability to assess and monitor ADIs’ liquidity risk profiles. These proposals represent the first round of consultation on a regime to build stronger liquidity buffers in our banking system."
APRA said the changes will see:
Enhanced
qualitative requirements consistent with the Principles for Sound Liquidity Risk Management and Supervision, issued by the Basel Committee on Banking Supervision in September 2008;
Extending the ‘going concern’ cash flow projection requirement to all ADIs and lengthening the projection to at least 12 months;
Strengthening the current APRA-defined stress testing to ensure ADIs meet a minimum acceptable level of resilience, which includes:
Lengthening the minimum survival horizon for the current APRA-defined ‘name crisis’ scenario from five business days to one month; and
An additional APRA-defined three-month ‘market disruption’ stress scenario; and
