Former RBA Governor Ian Macfarlane put in a personal submission to the Murray Financial System Inquiry (FSI) which was released on the FSI website Friday.
Macfarlane, who these days is a director of the ANZ, took aim at APRA’s classification of Australia’s major banks as domestically systemically important financial institutions (DSIFIs) under new global banking rules.
Macfarlane blasts this classification as unhelpful because it distorts the playing field for financial services by sending a message to the market and ratings agencies that these four banks are more important than others.
The concept of a DSIFI is an unhelpful one in several ways. First it applies the capital penalty to the largest and most secure banks – the ones that depositors moved to in
the Financial Crisis. Second, it unfortunately entrenches the concept of “too-big-to-fail”, something that all countries have been trying to downplay. By designating four banks as being systemically important, it implies that the other banks and ADIs are not important. It is therefore not surprising that the public (and the ratings agencies) assume that the important ones will receive more official support in a crisis than the unimportant ones.
All of this is true but what Macfarlane doesn’t say is that APRA, and its banking regulator colleagues around the world, are simply recognising a situation that the rating agencies have been stating and the public believed a long time before global regulators gave the designation to financial institutions as either globally or domestically important.
Macfarlane believes that it’s not credible “for a government or regulator to promise not to step in and prevent large scale bank failure in a financial crisis. The public know they will, and no amount of words will dispel this expectation.”
Which is the point of the designation that APRA has given the majors.
In an era of living wills for banks, the designation of “DSIFI” means APRA can insist that the major banks take an active role in ensuring that they protect themselves by holding more capital.