It is the price we have to bear for getting through the GFC and recession unscathed.
Our four big banks are now simply too big to be allowed to fail, so we have to work out a way of firstly stopping that (hold more capital and liquid assets) or managing the situation if failure can’t be prevented.
And it’s no use Westpac (as it did this week) and the others arguing that it can’t happen.
Australian banks have gone to the edge in the last two decades.
The State banks in Victoria and South Australia all but failed and were bailed out.
The ANZ was crippled by dud property loans in the recession in the early 1990s and worse, Westpac was rescued by support from the AMP and a huge rights issue.
For a while Westpac’s fate hung in the balance. Failure can happen and we should plan on that basis.
That’s what regulators here and overseas are doing, with many banks screaming and resisting the move.
But, Lehman Brothers, Bear Stearns, Merrill Lynch and Washington Mutual are no longer with us or independent and Citigroup is a basket case, along with Bank of America.
Who would have thought that could happen three years ago?
The biggest debate for years in financial services will be offstage as our big four banks try to defeat moves by APRA and the RBA to force them to hold more capital and liquid assets to help them get through any future credit crisis.
The Reserve Bank details some of the suggested ways of bolstering the financial system by getting banks to hold more liquidity in the first Financial Stability Report of the year, released yesterday.
"Proposals are also being developed …that would require banks to increase capital in the good times that can then be run down during a downturn," the bank explained.
"APRA’s proposals to give effect to these changes were released in December 2009, along with associated draft prudential standards. Subject to consultation, the changes will be implemented from 1 January 2011, though they are not expected to have a significant effect on ADIs in Australia.
"It proposed to introduce a global minimum liquidity standard for internationally active banks that includes a 30-day liquidity coverage ratio requirement (relevant for stressed funding situations), underpinned by a longer-term structural liquidity ratio.
"This in turn would be likely to mean that banks would need to hold more cash or highly liquid assets such as government or highly rated private sector bonds," the RBA explained.
"APRA’s final prudential standards on liquidity have been postponed to the middle of 2011, given the importance of the results of the QIS."
(The QIS is a survey across banking systems around the world to see what impact the proposed changes will have on banks and their customers, the various economies and demand and supply of services).
The results will make or break some of the suggestions.
The main banking regulator, APRA produced a
this week in its September 2009 quarterly look at the 55 banks operating in Australia that highlight the utter dominance of the big four.
The figures make the case, quite forcefully, that Australia now has four banks that are enormous and just too big to fail, no matter what anyone might argue to the contrary.
That’s especially so after the CBA’s purchase of Bank West and the Westpac takeover of St George.
Unlike the US and UK, where this argument continues (indeed Fed chairman, Ben Bernanke had another go on Sunday), we are just not having this debate, except when a chairman or CEO of one of the big four moans and groans in public, as Westpac chairman, Ted Evans did this week.
That gave us a rare glimpse of just how hard Australian banks, or rather the Big Four, the ANZ, NAB, Westpac and CBA, are fighting to stop regulators from forcing them to hold more capital and liquid assets to protect themselves and the country in the event of another financial crisis.
Mr Evans had a go at the issue in an interview with the AFR.
As a former head of Treasury, Mr Evans should know better and have a better appreciation of the systemic risk now embedded in the Australian financial system from having four massive banks that completely dominate the market.
All four banks and others know the extent of this utter domination; most bank customers share that knowledge, but would be hard-pressed to put figures into their arguments.
Well, APRA’s latest report provides the evidence and support for the unease everyone should have with the current situation.
Normally it’s a compendium for train spotting between banking analysts in brokerages, banks and fund managers, while it’s analysed by the banks themselves. You won’t find any of the big four banks boasting about many of the points made by APRA.
For example, APRA’s report reveals that:
The 55 banks had total assets of $3.035 trillion at the end of September 2009, down slightly from the $3.056 trillion at the end of September, 2008.
The big four banks had assets of $2.318 trillion at the end of last September, or 76.37% of total assets, which was up from the $2.064 trillion, or 67.5% of total assets a year earlier.
The amount of capital employed by the banks
