More power over foreign banks for APRA

THE banking regulator would gain the power to sack the boards of foreign-owned banks operating in Australia in times of crisis, under sweeping new proposals released by the government.

By InvestSMART · 13 Sep 2012

By InvestSMART ·
13 Sep 2012

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THE banking regulator would gain the power to sack the boards of foreign-owned banks operating in Australia in times of crisis, under sweeping new proposals released by the government.

The $1.4 trillion superannuation industry could also face tougher restrictions, with the proposed rules giving regulators the ability to remove trustees or directors who threaten stability.

Under current rules, foreign banks cannot accept retail deposits of less than $250,000 via branches, and are mostly confined to wholesale markets and commercial lending.

While the Australian Prudential Regulation Authority can take control of foreign banks that do take retail deposits, such as HSBC and Citi, it does not have the power to appoint its own management to foreign banks that focus on other markets.

A discussion paper published by the Treasury yesterday said this represented a gap in the law, with the sector accounting for almost 10 per cent of the assets in the Australian banking system.

The extra powers would only be used in serious circumstances. Most of the time, APRA expects it would be able to rely on the local management following its instructions without the need for the board to be replaced.

But it said there was a risk that in times of crisis it may need extra powers because its orders could be ignored.

"There is a growing recognition internationally that foreign ADIs [authorised deposit-taking institutions] have the potential to transmit financial shocks to the host system in which they are operating," the discussion paper said.

Of the 48 foreign banks in Australia, the Treasury said 39 were operated through a branch structure, with $297.6 billion in assets. The remaining nine, with $110.6 billion in assets, operated as subsidiaries of global companies.

The paper also suggested wider powers for the supervision of super and insurance.

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Frequently Asked Questions about this Article…

What new powers is the government proposing for APRA over foreign-owned banks in Australia?

A Treasury discussion paper proposes giving APRA the power to remove or sack the boards of foreign-owned banks operating in Australia during serious crises. The proposals aim to close a legal gap so regulators can act if local orders are ignored and stability is threatened.

How would the proposed APRA powers affect foreign banks that already take retail deposits, like HSBC and Citi?

APRA already has the ability to take control of foreign banks that accept retail deposits in Australia — examples named in the article are HSBC and Citi. The proposed changes are targeted at banks that currently fall outside that control, by giving extra tools for use in crisis situations.

Why is Treasury proposing tougher powers for supervisors of foreign banks and super funds?

The discussion paper says there’s a gap in the law and a growing international recognition that foreign authorised deposit-taking institutions (ADIs) can transmit financial shocks to the host system. With foreign banks accounting for nearly 10% of Australian banking assets, the measures are aimed at protecting financial stability.

Could the proposals affect the superannuation industry and how?

Yes. The paper suggests the $1.4 trillion superannuation sector could face tougher restrictions, including giving regulators the power to remove trustees or directors of super funds if they threaten stability. It also suggests broader supervisory powers for superannuation and insurance.

What is the current rule on retail deposits for foreign bank branches in Australia?

Under current rules, foreign bank branches in Australia cannot accept retail deposits of less than $250,000. As a result, many foreign banks focus on wholesale markets and commercial lending rather than small retail deposits.

How many foreign banks operate in Australia and what are their asset sizes?

The Treasury paper states there are 48 foreign banks in Australia: 39 operate through a branch structure with about $297.6 billion in assets, while nine operate as subsidiaries with about $110.6 billion in assets.

Will APRA use these new powers frequently?

No. The discussion paper says extra powers would be reserved for serious circumstances. Most of the time APRA expects local management would follow instructions without needing to replace the board.

What risk is the government trying to address by letting APRA remove boards of foreign banks?

The aim is to reduce the risk that foreign ADIs could transmit financial shocks to Australia’s banking system and to close a legal gap where APRA’s orders might be ignored in a crisis. The proposed powers are intended as last-resort tools to protect financial stability.