Australian bank capital sanctions stuck in the shadows

The Australian Prudential Regulation Authority's practice of keeping an authorised deposit-taking institution's minimum capital requirements a secret from counterparties will continue, Wayne Byres, the regulator's chairman, made clear to a Senate committee on Friday.

Fiddling with the capital requirements for any one bank is one of the measures APRA may consider in response to unduly elevated growth in home lending, particularly for investors.

Byres told the Senate Economics Committee the macroprudential tool most likely to be deployed by APRA would be a targeted increase in capital for particular banks whose growth in lending to property investors continued to exceed ten per cent.

The Financial Review reports him saying: "If risks [in housing] continue to grow, then clearly we will need to think how else we respond to that to make sure the banking system remains stable and able to absorb whatever happens in the market place.

"In this current exercise we are going through, we are targeting those [banks] that are pursuing the most aggressive lending strategies and to the extent there is extra capital imposed, that will be imposed on those housing portfolios where the risks are."

The capital levels would be known only to insiders.

"Consistent with the fact we don't want to advertise that any financial institution might have some issue that requires our intervention, we do not disclose [imposing additional capital through the PCR] and, within our powers, we have the capacity to tell [banks] that they should not disclose it as well," Byres said.

He said prudential regulation was more effective if conducted "below the radar", which was crucial to maintain public confidence in the banks.

"I recognise this is something we have to balance with the broader objectives to have transparency… but we find our capacity to do [work] behind the scenes is a very effective way of getting things dealt with without causing undue angst more broadly," Byres said.