ANZ: APRA's Approach To Regulation Is Holding Us Back

Facebook/ ANZ Stadium. Could be home to the 2015 NRL Magic Weekend.

Australia’s major banks have been recognised as domestic systemically important banks (D-Sibs) for the Australian economy by the prudential regulator APRA.

By earning the acronym D-Sib, the majors have an extra level of capital added to their Tier 1 capital requirement as an insurance policy. That’s not for the Big 4 specifically, but for the Australian Government and economy so that if – and it is of course a big “if” – they get into trouble they have more capital on which to draw before any government assistance or bailout is required.

But while more capital being held by the majors means they can take on less leverage, are likely to be more stable and less in need of a bailout, it also has the effect of lowering potential profits at the banks because of the need to carry more capital.

Equally the imposition of new liquidity rules under Basel III are supposed to safeguard the banks from the types of runs which brought down Bear Stearns, Lehman Brothers and others during the GFC.

But it seems the ANZ’s deputy CEO Graham Hodges is not happy with these new rules because they will limit the expansion of his bank into Asia.

The AFR reports this morning that Hodges told them that the way APRA is applying the rules around trade finance and infrastructure loans penalises Australian banks looking to Asia for growth. Hodges said that Australia is counting on Asia to build up its capital markets but “you’ve got the Basel rules which are working against [that]”.

While the imperatives of strong growth for our banks internationally is likely to be well-understood by APRA – given their role as supervisors on behalf of the Australian Government and Australian taxpayers to whom the bill for the ultimate resolution of a bank would come – it is equally easy to understand why they are taking a hard line.

The “Murray” Inquiry into the Australian Financial System is likely to look into the economic and banking ties into Asia and make recommendations to the Government and APRA.

Let’s hope they get the balance right.

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