This week we saw the final ripple from the fallout from the Hayne Royal Commission into banking and financial services and it came not from the banks, but from global ratings giant, S&P.
In fact it could be argued from what S&P said in a sweeping upgrade of Australia’s bank system to where it is among the safest in the world – that the ratings giant would not have been assured but for the way the findings of the Royal Commission because much tougher law and regulation for bankers.
They and their mates in the markets might whinge about the toughest of the capital requirements, the risk assessments and much tougher accountability rules, but it it is clear those elements reassured S&P.
S&P Global upgraded most of the non-major Australia-based banks and other financial institutions but left the ratings of the big four banks – Commonwealth, Westpac, NAB, ANZ and Macquarie unchanged.
The firm "upgraded all the rated Additional Tier 1 and Tier 2 instruments issued by Australian banks and their New Zealand banking subsidiaries”- those are the bonds, notes and other securities that make up the already high levels of capital held by the banks across the entire financial system.
"These upgrades reflect improved stand-alone creditworthiness of the Australian banking groups,” S&P said in its long statement this week.
So why the upgrade? Well, S&P reckons that the financial system, and especially the big four (and this also applies in New Zealand) has become much stronger financially and operationally, with stronger regulatory oversight and higher capital requirements key parts.
S&P said that Australian banks face reduced industry risks.
"The rating actions reflect continued strengthening of institutional and governance standards in the Australian banking sector that have reduced industrywide risks. Simplified business models and advances in risk management have also contributed to this improvement.
"We now assess the institutional framework for the banking industry in Australia at the lowest risk level on our scale, and in line with that in Canada, Hong Kong, and Singapore. Consequently, we revised our industry risk score on Australia to 2 from 3, and the overall Banking Industry Country Risk Assessment (BICRA) to 2 from 3.
"These scores are on a scale of 1 (lowest risk) to 10 (highest risk). There are no banking systems that we currently assess as having a lower-risk overall BICRA score."
And in particular, S&P pointed to what it called the “strengthened institutional framework” with "examples of improvements in risk management, governance, and conduct include an accountability regime jointly implemented by the Australian prudential and corporate regulators.
"A key feature of this framework is to hold senior executives and directors of financial institutions accountable for their actions, decisions, and conduct.
"The Australian Prudential Regulation Authority's (APRA) regulatory approach remains more conservative than international standards. For example, APRA is the only prudential regulator that requires banks using an internal risk-based approach for regulatory capital measurement to hold a Pillar 1 capital charge against interest rate risk in the banking book.
"A greater focus on core Australian and New Zealand banking activities has simplified their business models.The major Australian banks have divested almost all their wealth management and insurance businesses. This should lower the risk of lapses in regulation and conduct because many past issues emerged out of these businesses owned by the major banks.
So where did the tougher regulation, stricter capital rules and especially the requirement that senior executives and directors of financial institutions are accountable for their actions, decisions and conduct?
Why from the Hayne Royal Commission and its evidence and findings that saw huge changes at bank board and management level and in Canberra where the then Morrison government was forced to accept most of the recommendations of the Hayne inquiry and didn’t stand in the way of APRA (supported by Treasury, the Reserve Bank and ASIC) to tighten regulations significantly.
This will in turn will, over time lower borrowing costs for all banks – especially the big four. That in turn should help ease interest rate pressures, though you can depend on the banks to keep any improvements in interest costs for themselves and their bonuses.
S&P’s move follows February’s announcement that it was reaffirming its AAA stable rating for Australia as a whole in February.
