S&P Warns It Could Downgrade Australia's Major Banks On Regulatory Changes

Huge news for the Australian banking industry today from Standard & Poor’s, which is rethinking its approach to the implied government guarantee that gives major banks and Macquarie a ratings advantage over smaller players in the Australian financial landscape.

At present, Standard & Poor’s essentially assumes that the majors and Macquarie are too big to fail. As a consequence, the agency assumes “extraordinary government support” for those organisations, and boosts their ratings by 1 notch.

But APRA is considering a new approach to crisis management that would force creditors of troubled banks to write off some of the debt they are owed, allowing banks to avoid bankruptcy without taxpayers having to step in.

Standard & Poor’s has not made a final decision on the ratings impact yet but its report, released this week, suggests that it is seriously considering a change.

This has huge implications for the Australian economy, the cost of borrowing in the economy, the attractiveness of Australian assets and the level of the Australian dollar if Standard & Poor’s decides to take the path of downgrades.

Removing the “extraordinary government support” boost would drop the ratings of all the major banks from AA- to A+.

That’s still a good rating internationally, but it will attract a significantly higher cost of funds for them and by extension the Australian economy given the structural nature of our current account deficit and the banks position in funding it.

While such a move would level the playing field for smaller Australian banks, credit unions and building societies, the long run impact economy-wide would be negative.

Shane Oliver, chief economist at AMP Capital, says such a change would be regulatory only and the fundamentals of the banks would be unchanged.

“I must admit it’s an unusual change but it’s not like S&P downgrading the European banks because they are exposed to sovereign debt,” Oliver says. “Of course when banks are written down that means the cost of borrowing will go up.”

Greg McKenna is a Director of Police Bank a Member Owned Bank based in New South Wales.

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