Greg Medcraft’s successor at ASIC could have last laugh on banks

The Australian 12:00am November 17, 2016

Richard Gluyas

The three major banks in ASIC’s crosshairs for alleged manipulation of the nation’s benchmark interest rate have started to contemplate life without Greg Medcraft breathing down their necks.

In this dreamy state, the thought has occurred to them that it might be possible to “wait Medcraft out” in the expectation that his successor will adopt a less hostile approach.

It’s a variation on the unsuccessful bid to wait out the relevant six-year limitation period by seeking to delay ASIC’s investigation at almost every turn.

Medcraft’s tenure, which has already been extended by 18 months, expires in November 2017.

That’s several months after the August start of any Federal Court trial flowing from the writs lodged against National Australia Bank, ANZ Bank and Westpac.

Superficially, the wait-out strategy is not a bad idea.

The problem for the banks is that ASIC commissioner Cathie Armour, who is one of only a few internal candidates to succeed Medcraft, is a rusted-on supporter of her boss’s approach.

A backdown would be almost unthinkable if Armour were to be become the regulator’s first female chair.

Yesterday, NAB lodged its 108-page defence to ASIC’s allegations, describing the case as “embarrassing”, simplistic and short on detail.

The bank said its positions in products referenced to the bank bill swap rate were not managed on a whole-of-bank basis but rather on a business unit or “desk” basis. “NAB’s profit and loss was affected by many factors, of which the movement in the BBSW of the relevant tenor on any given day was one component,” the defence says.

NAB has retained top commercial silk Neil Young to conduct its case. Every word in yesterday’s defence would have been chosen advisedly, and designed to send a message to Medcraft and any ­potential successor that the BBSW prosecution is completely unfounded.

However, the fact remains that the case originates from Armour’s markets domain.

Armour, who started as an ASIC commissioner in June 2013, has had extensive experience in the markets. Before ASIC, she spent 18 years in chief legal counsel roles, most recently as general counsel for Macquarie Capital and as an executive director of Macquarie Group.

She advised on equity, debt and private capital markets, mergers and acquisitions and financial investment transactions.

Armour was a Labor appointment to ASIC, which would probably have counted against her prospects for a promotion under an Abbott government.

Happily, Malcolm Turnbull does not seem to regard that as grounds for automatic disqualification from higher office.

Mutuals try to close gap

An APRA estimate of the major banks’ funding cost advantage under regulatory capital rules has presented the regional banks and mutuals with more ammunition in their long campaign for competitive neutrality.

The banking regulator has told the house economics committee that the more lenient capital regime for the majors translates to a $19 billion reduction in tier one capital requirements — equivalent to a 14-basis-point, pre-tax differential in funding costs.

Sure, it’s not a massive advantage.

However, it’s a conservative estimate and sensitive to assumptions, including a target tier one capital ratio of 9 per cent when the mutual sector operates at a much higher level due to its limited capacity to raise funds in a crisis.

The regionals and the mutuals want the competitive gap to the majors closed sooner rather than later.

They rightly point out that the first three recommendations of the 2014 financial system inquiry relate to regulatory capital rules.

It’s further noted that competition regulator Rod Sims and ASIC boss Greg Medcraft both expressed concern about a lack of competitive intensity in banking in their recent appearances before the same house committee.

Also, the Reserve Bank has valued the implicit commonwealth guarantee for the “too big to fail” majors at between $1.9bn and $3.7bn.

The impatience of the regionals is understandable, given that APRA chief Wayne Byres has said that implementation of the FSI’s first recommendation that Australian banks should be “unquestionably strong” won’t happen until 2018 — four years after the David Murray-chaired inquiry.

However, Byres’s timing makes sense. The international capital framework is scheduled for release early next year, after which APRA will consult for a year on “unquestionably strong”.

APRA was never going to embark on its own capital frolic without knowing the so-called Basel IV global reforms.

The regulator has already closed part of the gap between the regionals and the majors in relation to mortgage risk-weights.

While the estimated pre-tax funding cost advantage is 14 basis points, it narrows to 11 basis points because the majors have to hold an extra 1 per cent of tier-one capital due to their status as systemically important domestic banks.

It’s a bit less than half the usual adjustment in the cash rate.

But for the regionals and mutuals, it can’t be closed quickly enough.