APRA rediscovers the merits of simple banking models
The perception that Australia's prudential regulator is inclined to equate a larger bank's balance sheet with a lower risk profile has been a live issue since mutual deposit takers and regional banks lobbed their submissions to the Murray Inquiry in 2014.More recently, the Productivity Commission published a comprehensive assessment of how APRA's approach to regulating the financial services sector might have enhanced the market dominance of the four major banks.If consumer advocates and small financial institutions once believed that APRA was not listening to their grievances, the regulator's discussion papers released on Wednesday should allay some of their concerns.Under the proposed new capital framework, the regulator has indicated it will provide relief to small deposit takers from having to comply with much of the complexity of Basel 3.APRA is seeking submissions from "small, less complex ADIs" on how a simplified prudential framework could be designed to reduce the regulatory burden on their operations."APRA's longstanding approach has been to base the capital framework for all ADIs on the Basel Committee's internationally agreed framework," the regulator states in a discussion paper outlining its intentions when revising the capital framework."This framework has become increasingly complex following the global financial crisis."For small ADIs, the cost of these measures may outweigh the benefit to prudential safety."APRA said it was considering proposals to lighten the compliance load on small institutions in four areas:• operational risk• counterparty credit risk• leverage ratio• public disclosuresIn relation to operational risk the regulator is proposing to introduce a flat-rate capital add-on for small deposit takers.It is also offering to take over a large portion of the public reporting obligations of credit unions by publishing information on the APRA website.Moreover, APRA will also consider - on a case-by-case basis - whether some small deposit takers should be released from having to comply with a minimum leverage ratio.Standardised banks and credit unions that remain subject to a minimum leverage standard would have to keep the ratio at three per cent.That requirement would be less onerous than the four per cent floor that is expected to apply to the internally rated major banks.In a second discussion paper on leverage ratio requirements, APRA said the internally rated banks had more complex balance sheets and larger off-balance sheet exposures, which made leverage "more difficult to measure".For this reason, APRA said it was proposing a minimum leverage ratio of four per cent for the major banks.It's becoming increasingly clear that the country's prudential supervisor has revised its comparative assessments about where certain risks are magnified in the banking system.That's a big advance on a decade ago, when the major banks were securing capital discounts on almost everything because they were assumed to be better than standardised institutions at mitigating operational and other risks.APRA seems to have rediscovered the prudential merits of simple business models.