CBA criticises blunt reform measures

Reforms to the banking system being considered by the Australian Prudential Regulation Authority could result in a reduction in hybrid issuance, higher prices for customers and higher compliance costs.

Commonwealth Bank chief financial officer David Craig yesterday gave a rundown on the key reform proposals and their implications, offering mostly negative commentary on the proposed changes.

Craig reiterated the points made by a number of senior bankers about APRA's proposed changes to liquidity rules. The requirement for a minimum one month liquidity coverage (up from seven days) would lead to a doubling of the liquid asset requirement.

The proposal that only "high quality" assets be included as liquid assets would cause problems because there would be insufficient government securities to meet demand. Another proposal is that funding with terms longer than 12 months would be required to fund assets "not deemed to be readily converted to cash."

Craig said the liquidity changes could have a significant cost impact for customers and a potential economic impact if lending capacity was constrained.

Commenting on APRA's proposals relating to capital, Craig said the more stringent conditions for hybrids would result in a reduction of hybrid issuance. He said the new leverage ratio, a measure of capital over exposures, looked like a "blunt measure" with no recognition of asset quality.

He said the International Accounting Standards Board's proposal for a move from the incurred loss model for treating impairments to expected loss would be a high cost change to implement, with little actual change to outcomes. He said it would lead to greater subjectivity in cashflow modelling.