APRA confirms risks posed by big four banks
The banking watchdog has today confirmed that the big four banks are now so big that they need more intense oversight and higher capital to combat their “too big to fail” risk to our economy.
The Australian Prudential Regulation Authority says the big four banks’ “implicit guarantee” can encourage systemically important banks to take excessive risks, reduces market discipline and creates competitive distortions, further increasing the probability of distress in the future.
“APRA’s declaration that the big four banks are ‘Domestic Systemically Important Banks’ is very timely with the Financial System Inquiry now getting underway,” said COBA CEO Louise Petschler.
“This issue is bigger than something APRA can deal with by tweaking the prudential standards.
“It turns out that having four such dominant banks is a source of greater risk because of what APRA calls ‘a large and unacceptable implicit public subsidy of a private enterprise’.
“APRA is emphasising that designation of a bank as systemically important does not make it immune from failure but is recognising that such a failure would cause significant dislocation in the financial system and adverse economic consequences.
“Winding back the dominance of the big four banks and promoting competition and competitive neutrality must now be key objectives of the Financial System Inquiry.
“APRA’s decision to increase the regulatory capital requirement on each of the big four banks by one per cent is at the lower end of the range set by other countries. Switzerland and Sweden have imposed regulatory capital increases of five per cent on their systemically important banks and in the EU, the US and Singapore it is two per cent.
“The big four banks also have the advantage of being required to hold much less capital than their smaller competitors against credit risk in their major asset class – home loans.
“APRA notes that proactive supervision is likely to be more effective in dealing with risks posed by systemically important banks than an increase in capital requirements.
“COBA supports strong regulation of the banking sector but it’s time the big four banks paid their fair share of the levies that fund APRA’s supervisory activities.
“Currently, the big four banks pay APRA levies of around $12 per $1,000,000 in assets compared to around $60 per $1,000,000 for customer-owned banking institutions. The smallest banking institutions are paying five times the rate of the big banks on a per-assets basis. This is not a level playing field.”
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