Capital proposals not just stringent but excessive
The consensus view of the local banking industry on what most irritates them on the international version of the overhaul of banking rules can be read in the Australian Bankers Association submission, published by the Bank for International Settlements and the ABA yesterday.
After a single, opening, sentence of boilerplate that links the GFC to the "need for regulatory change", it's straight on with tackling the many reservations and objections of local banks to the proposals of the BIS.
The theme is made clear in the document's executive summary: the "over-calibration" of the capital changes, combined with more stringent liquidity rules, "will give rise to a significant slowdown in the availability of credit, and an increase in its cost."
On liquidity, the ABA warned that banks in Australia would need to hold more than double their current (and already elevated) holdings of liquid assets if the global proposals were put into affect.
In turn, these effects will present "an impediment to economic recovery and longer-term growth."
The ABA said the "main channel through which the impact will be transmitted is interest rates. More stringent capital requirements, coupled with the requirement to hold lower yielding liquid assets, will inevitably put pressure on banks to recover the additional costs incurred through increases in the cost of lending.
"This outcome, coupled with the changes to bank lending resulting from the revised liquidity requirements, and the potential flow-on effects from lower bank share prices, will ultimately give rise to contractions in economic growth."
The ABA also warn of "a much more prescriptive level of supervision, with the proposal to introduce a capital conservation range effectively transferring a significant element of responsibility for capital management from banks' boards to regulators."
The submission argues that efforts to adjust capital buffers in response to excessive credit growth may lead to an overall increase in minimum required capital greater than the minimum that a bank regulator such as APRA might set under the BIS' scheme.
"This change, coupled with the proposal to require larger banks to hold additional capital and for banks to build and conserve capital in normal times, suggests that banks will be required to hold significantly more tier one capital than they are currently holding."
The ABA urged a shift in emphasis from doctrinaire setting of minimum capital levels to one based on specific review of a bank by their local supervisor, with a tailored review process "to suit each bank's risk profile", and more or less the manner in which APRA supervises banks in Australia at present.
(One outcome of this is that the minimum capital requirement for any bank is unique to the bank. A second outcome is that APRA will not allow banks to tell outsiders what the requirement is, and no bank does so.)
In respect of liquidity policy the ABA called for recognition of liquidity management practices as a "local construct" and informed by features of the local financial market; for example, the availability, or lack of availability, of sovereign bonds.