The banking regulator has signalled it could support calls for bank balance sheets to be strengthened and has warned it is intensely scrutinising how banker pay could breed cultures that would potentially lead to another crisis.
In his first public comments reacting to the financial system inquiry chaired by David Murray, Australian Prudential Regulation Authority chairman Wayne Byres said the recommendations for banks to hold more equity, to increase their resilience to shock, and for the big four to adopt a more cautious approach to risks in their mortgage books, are "quite important recommendations, obviously" and the banking regulator is "thinking about them very hard".
International concerns that models used by global banks are underestimating risk – flagged by the Basel Committee on Banking Supervision two weeks after the federal government released Mr Murray's report – had made it more difficult for APRA to settle on its response to the inquiry, Mr Byres said.
However, global regulators are moving in the same direction as Mr Murray, Mr Byres added, suggesting Australia will continue to be part of the global moves to reduce leverage in the banking system in order to help fortify it against future financial shocks.
Mr Byres, the former secretary-general of the BCBS, told a conference hosted by the Centre for International Finance and Regulation in Sydney on Wednesday that "directionally the FSI recommendations and the ideas floating around in the international bodies are all heading in the same direction. They are not mutually exclusive with one another, and are not going to conflict with one another. But they are not necessarily the same in detail, so we need to give quite a lot of thought about how we bring these things together given the importance of Australian financial institutions being able to demonstrate they do meet these international standards for access to international financial markets which is very important for this country."
Australia's banks generally oppose increasing capital requirements, especially equity, saying they are already strongly capitalised and have warned that the higher cost of more equity will be passed on to customers in the form or higher interest rates or to shareholders in the form of lower dividends.
Mr Byres said capital was a "safety net" and in order to reduce the probability of banks running into trouble, management and boards must improve their cultures. With APRA last month putting the banks on notice it was concerned about the wake from the financial planning scandal at National Australia Bank, Mr Byres said on Wednesday the regulator was adopting a "focused and more intensive" approach on culture, including how remuneration might be driving bad behaviour.
"We would much rather [have] bank management and bank boards run themselves in a way that was more focused on long term sustainability than 'Can I meet my earnings target for the next quarter'," he said.
"Ultimately, if we are to avoid problems repeating, cultural change is actually at the heart of it and incentives are at the heart of cultural change – so that is where we need to look. I don't want to suggest that means regulators have to start setting proscriptive incentive frameworks but certainly we are now prodding and trying to push people to look harder at these issues … You can't expect regulators to come along and ensure everything will be okay if industry doesn't choose to take that and do something itself."
APRA had no concerns about the financial system inquiry calling for it to increase its consideration of how competitive the banking system is, Mr Byres said, but noted "we shouldn't pretend competition and stability are mutually exclusive, we shouldn't necessarily have to trade off one with the other".
"It is possible to have too much competition," he said, pointing to the financial crisis in 2007 and 2008 and, before that, the collapse of insurer HIH in Australia, which was "a very competitive organisation until it drive itself into the ground". "Sustainable competition will also deliver financial stability."
Responding to Mr Murray's call for a new Financial Regulator Assessment Board to be established to advise government on the performance of financial regulators, Mr Byres said APRA did not object in principle to such a board, but care was needed to ensure it fit within the existing accountability framework and strengthened those mechanisms, which include providing statements of intent, attending Parliament committees and having process reviewed by the Office of Best Practice Regulation, the courts and Parliament.
My Byres indicated that APRA would have more to say about bank capital once the industry had made submissions to Treasury which are due at the end of the month. "We are thinking hard and haven't said a lot about it quite deliberately at this point as we are keen to see what comes out of consultation process which is underway at present. We will see what that consultation process delivers and then we will have more to say about how we take that forward."Author: James Eyers
Source: The Age