The assumption that the Australian government would bail out the banks in a crisis is so strong that it is factored into credit ratings.
And any change in that willingness to provide direct support would cause a reassessment of the credit ratings of the banks.
An analysis by Moody’s Investors Service says Australian policymakers remain cautious about introducing a statutory bank creditor bail-in regime which would switch responsibility from the government to creditors.
“The policymakers’ cautious stance is supportive of the Australian banks’ senior unsecured debt ratings, since it lowers the likelihood of a statutory bail-in regime being introduced in Australia in the near term,” says Ilya Serov, a Moody’s Vice President and Senior Credit Officer.
Moody’s bases its conclusion on analysis of a selection of the second round submissions to the Australian Financial System Inquiry.
These submissions included those from the Australian Prudential Regulation Authority (APRA) and the Reserve Bank of Australia, two of the principal supervisors of the Australian banking sector, and reveal a nuanced stance towards bail-in.
“The policymakers’ position reflects their recognition of the higher-than-usual costs of introducing a bail-in regime in a banking system characterised by a high degree of interconnectedness and reliance on offshore wholesale funding, such as Australia,” says Serov.
“This raises the likelihood that the government would provide support to prevent a disorderly failure or broader contagion.”
Moody’s analysis says that requiring the banks to hold higher levels of loss-absorbing capital coupled with a strengthening of APRA’s crisis resolution powers appears to be the industry’s preferred policy alternative.
The cautious approach of the Australian authorities also needs to be placed in the context of Australia’s membership of the Financial Stability Board which raises the probability that Australia may ultimately adopt a bail-in regime.
Should one be introduced, the implications for bank creditors would need to be evaluated and Moody’s would reassess the willingness and ability of the government to continue to be a source of support for the banking system.
In Moody’s view, under the current supervisory framework, the senior unsecured creditors of the major national and larger regional banks benefit from a high likelihood that the government would provide support if required.
However, a credible bail-in regime could result in a transfer of risk towards banks’ creditors and a reduction in Moody’s support assumptions underpinning the banks’ senior debt ratings.
The blue area is how much of the overall ratings are due to perceived government support: