Regulator may win power to fire foreign bank boards during crisis

THE banking regulator could 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 could 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 letting regulators remove individual trustees or directors who threaten financial 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 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 argued this represented a significant gap in the law, with the sector accounting for almost 10 per cent of total assets in the Australian banking system.

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

However, it said in times of crisis it might 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 operating in Australia, Treasury said 39 were operated through a branch structure, with $297.6 billion in assets. The rest, with $110.6 billion in assets, were subsidiaries of global firms.

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Frequently Asked Questions about this Article…

What new powers could APRA gain to sack the boards of foreign-owned banks in Australia?

The government’s discussion paper proposes giving the Australian Prudential Regulation Authority (APRA) extra crisis powers to remove and replace boards of foreign-owned banks operating in Australia. These powers would be targeted for serious circumstances where local management might ignore APRA’s orders.

Which foreign banks in Australia might be affected by the proposed board removal powers?

The proposals apply to foreign-authorised deposit-taking institutions (ADIs) operating in Australia. Of the 48 foreign banks in Australia, 39 operate through branch structures (holding about $297.6 billion in assets) and the remaining subsidiaries hold about $110.6 billion in assets. Banks that take retail deposits, such as HSBC and Citi, are specifically noted in the discussion.

Can APRA already take control of foreign banks like HSBC and Citi?

Yes — under current rules APRA can take control of foreign banks that accept retail deposits. The discussion paper says APRA lacks the power to appoint its own management for foreign banks that focus on wholesale or other markets, which is the gap the proposals aim to address.

Why is the government proposing tougher rules for foreign banks and trustees?

Treasury’s discussion paper argues there’s a legal gap because foreign ADIs can potentially transmit financial shocks to Australia’s banking system. The foreign-bank sector accounts for almost 10% of total Australian banking assets, so the extra powers would be available to protect financial stability in serious crises.

How could the proposed rules affect the $1.4 trillion superannuation industry?

The discussion paper suggests tougher restrictions for superannuation, including powers for regulators to remove individual trustees or directors who threaten financial stability. These are proposals aimed at strengthening safeguards for the broader financial system.

When would APRA use the power to replace a foreign bank’s board?

According to the discussion paper, replacement of a board would be an exceptional measure used only in serious circumstances. Most of the time APRA expects to rely on local management to follow its instructions without needing to replace the board.

What are the current limits on foreign banks accepting retail deposits in Australia?

Under current rules, foreign banks operating through branches cannot accept retail deposits under $250,000 via those branches. As a result, most foreign banks focus on wholesale markets and commercial lending rather than small retail deposits.

What might these proposals mean for everyday investors and savers?

The proposals are designed to bolster financial stability, which could indirectly protect everyday investors and savers by giving regulators stronger tools in a crisis. The discussion paper also signals possible changes for superannuation governance, such as the removal of trustees or directors who threaten system stability — though these are proposed measures and not yet law.