Australians should be confident the banking system can withstand a crisis due to tighter regulation amid the continuing roil in markets as investors flee riskier assets, spooked by the collapse of Credit Suisse and Silicon Valley Bank.
Money is “safe and available on demand,” APRA chair John Lonsdale said at the Australian Financial Review’s banking summit in Sydney earlier this week.
“The trust Australians feel in their banks’ ability to withstand a crisis in the product of many years of regulatory reform designed to reinforce the system’s financial and operational resilience,” he said.
“APRA’s prudential framework is super-equivalent, meaning it goes above and beyond the minimum Basel requirements.”
The major banks ANZ, Commonwealth Bank, NAB and Westpac are holding additional capital equivalent to 150 basis points, placing them in the top quartile of all banks for capital strength, said Lonsdale.
The sentiment has been backed up by Assistant Treasurer Stephen Jones who told the Conexus Financial Political Series breakfast earlier this month the stricter prudential rules in Australia would prevent the current banking crisis from hitting our shores.
Stable outlook
According to a recent report by Moody’s, the outlook for Australian banks was stable due their strong balance sheets, notwithstanding the slowing economy.
“Australian banks are well-positioned to weather a deterioration of their operating environment as tightening monetary policy slows economic growth in 2023,” said the ratings agency.
Australian banks are also at the fore in the area of managing interest rate risk in the banking book or IRRBB. Australia is the only jurisdiction that demands banks carry capital to address the risk of rising interest rates as part of their core Tier 1 capital requirements.
While some banks have expressed annoyance about having to raise additional capital to cover rising interest rates as the Reserve Bank tightened borrowing rates, Lonsdale said “the IRRBB requirement provided its worth”.
System still safe under stress
The regulator recently completed a stress test of the country’s 10 largest banks around the scenario of a deep and prolonged global recession, hit by rising rates, sustained inflation and energy supply shortages explained Lonsdale.
The result of the test was each bank remained above minimum capital requirements, despite a sharp fall in profits.
Under APRA’s modelling, GDP dropped 4 per cent, unemployment jumped to 11 per cent while housing pricing plunged by 43 per cent over three years. The modelling included a scenario that each of the 10 banks had fallen victim to a major cyberattack.
Super fund regulation tightening
The corporate and prudential regulators have also increased oversight on the $3.4 trillion super fund industry, recognising the growing out-size role funds have in the Australian economy.
ASIC commissioner Danielle Press told delegates at last week’s Australian Institute of Superannuation Trustees’ Conference of Major Superannuation Funds it was critical to update the values of unlisted assets due to the re-weighting in public markets. Asset prices have been hit due to more expensive borrowing costs and the sell-down in public markets after the collapse of Silicon Valley Bank and Credit Suisse.
APRA’s general manager of superannuation Katrina Ellis told super funds to increase the frequency of the valuations of their assets.
“We think trustees should be much more proactive given the state of the markets,” she said.
