Former Reserve Bank governor Ian Macfarlane has taken a pot shot at the prudential regulator over its hardline application of global bank reforms to the local financial services industry.
In a personal submission to the financial system inquiry, made in his capacity as an ANZ non-executive director, Mr Macfarlane questions why the Australian Prudential Regulation Authority seems “so keen to exceed the international norm”.
“This overachievement is most apparent in the extremely stringent definition of capital applied in Australia,” he says.
The former RBA governor echoes some of ANZ’s criticisms in its submission, particularly the requirement for Australian banks to deduct from their capital ratios the entire equity position they own in listed overseas banks.
ANZ holds a number of these partnership interests, which the bank is reviewing as a result of the new capital rules and other factors, such as the lack of any pathway to control.
Where it’s not possible to expand in Asia using its own brand, or to build controlling stakes, ANZ is now looking to exit minority positions unless the joint venture is strategic and working well, such as the 24 per cent stake in AMMB Bank of Malaysia and the 20 per cent holding in Shanghai Rural Commercial Bank.
Mr Macfarlane says there is room for argument about the value to assign to the partnership interests.
“(But) it is hard to believe they are worthless,” he says.
Such interpretations, he says, mean an Australian bank reporting its capital ratio has to show a number lower than it would on an internationally harmonised basis. This meant that local banks were more highly capitalised than they appeared to be.
Mr Macfarlane says there was a temptation for regulators to err on the tough side.
While there was an advantage in this, particularly in crisis-prone countries, there was a cost at the margin in terms of the competitiveness of Australian banks.
A further example of APRA’s desire to overachieve was its decision to implement certain commitments earlier than required under the Basel III capital and liquidity timetable.
Mr Macfarlane is also critical of the classification of the four major banks as systemically important financial institutions, which he says is “unhelpful” in a number of ways. He says the requirement for these banks to add an extra 1 per cent on to their capital ratio applies a capital penalty to the largest and most secure banks — the ones that depositors moved to in the global financial crisis.
“Second, it unfortunately entrenches the concept of ‘too big to fail’, something that all countries have been trying to downplay,” he says.
“By designating four banks as important, it implies that the other banks ... are not important.
“It is therefore not surprising that the public (and the rating agencies) assume that the important ones will receive more official support in a crisis than the unimportant ones.”
Mr Macfarlane says APRA has had to deny this.
However, it was not credible for a government or regulator to promise not to step in and prevent large-scale bank failure in a financial crisis.
“The public know they will, and no amount of words will dispel this expectation,” he says.