APRA ready to start implementing FSI recommendations

Australian Prudential Regulation Authority chairman Wayne Byres says the regulator is ready to act on recommendations of the Financial System Inquiry, without waiting "for every i to be dotted and t to be crossed in the international work."

Speaking at the Financial Review Banking and Wealth Summit yesterday, Byres said some recommendations, particularly those dealing with mortgage risk weights and international capital comparisons, could be dealt with sooner rather than later.

Byres said: "The key thing for APRA in bringing together FSI and Basel is that they are going in the same direction.

"The jury is still out on how high the capital requirement will go but we know the direction.

"The best way to deal with change is to start out early and work on it steadily."

The FSI recommendation on mortgage risk weights is that the prudential regulator narrow the difference between the mortgage risk weights used for capital purposes by lenders using the internal ratings-based methodology (the big banks) and lenders using standardised risk weights.

The objective is to improve the competitive neutrality of capital regulation by limiting distortions caused by the differential regulatory treatment of different classes of ADI.

The recommendation on international capital comparisons is that the regulator develop a reporting template for authorised deposit-taking institution capital ratios that is transparent against the Basel minimum capital framework.

The FSI found that there was no benchmark of international practice for calculating capital ratios, with all countries using variations to the Basel framework.

The aim is to reduce disadvantages that may arise for Australian ADIs due to difficulties in comparing their capital ratios to international peers.

Byres said he was pleased that the FSI report appeared to agree with APRA's argument that there was no trade-off between financial stability and sustainable competition.

"At its core the Inquiry is advocating a set of policy changes designed to produce a more competitive and a more stable financial system. It is not arguing that one objective must be sacrificed to achieve the other," Byres said.

He said the financial services industry had become more concentrated over the past decade and this meant that the failure of the "average" entity would be more painful and destabilising than may have been the case a decade ago.

At the end of 2004 APRA supervised 1850 entities with total assets of a little over A$2 trillion. By the end of last year APRA was supervising 600 entities with total assets of $5 trillion.

"That is an increase in average assets per entity of almost eight times in the space of a decade," Byres said.