Restoring faith in banks a worldwide task

Another day. Another regulator. And another reminder that the drums are beating on shifts in the landscape for banking and that the objections of local banks to what are worldwide proposals are yet to cut through.

The forum yesterday was a periodic "estimates" hearing of the Senate's economics committee, and included a short appearance by the three members of the Australian Prudential Regulation Authority.

John Laker, the head of APRA, used the appearance to refresh the rationale for the general thrust of reform of standards on bank capital and liquidity.

"The impetus for structural reform around the globe has come from the G20.

"No part of the financial system can be substantially dependent on government and central bank support to the extent that the global financial system ultimately relied on it in 2008.

"Clearly the foundations, when tested, were not enough. The level of intervention was unprecedented.

"Clearly the global financial system needs stronger foundations. It needs stronger capital underpinning. It needs stronger liquidity buffers to cope with stress.

"It needs a better set of incentives for senior executives of banking institutions in taking risk, and a range of other requirements.

"It is really to restore the trust in the faith of the community in the operation of the financial system and the trust of financial participants in each other, both of  which were very badly frayed in the course of the financial crisis."

Laker went on to respond to the inevitable question from one senator that Australia's banking system did not warrant the same reforms.

"It is quite understandable to hear that we did well …. We don't need the reforms, [and] where the reforms are directed at weakness in the behaviour of banks and our banks are not [weak]. Our banks didn't carry those weaknesses and they didn't carry those risks.

"But out major institutions do fully participate in offshore funding markets. Those markets virtually froze and our banks were not given a free pass. While they were well managed they couldn't access funding either."

The G20 proposals, Laker said, are "intended to recover confidence so our banks can tap markets.

"So you need stronger banks around the globe and that's why it's a global initiative."