Higher bank capital will mean higher rates
- Richard Gluyas
- The Australian
- April 5, 2016
ANZ deputy chief executive Graham Hodges effectively belled the cat yesterday on a further round of interest rate hikes for business late this year or in early 2017, as the major banks respond to the proposed crackdown on the use of internal models to calculate their risk-weighted assets.
The Basel Committee on Banking Supervision, which is the global standard-setter for the banking industry, issued a consultation paper on the issue last month. However, it’s clear there’s only one possible outcome — higher regulatory capital requirements, and therefore greater cost embedded in the system. One of the lessons of the financial crisis was that some credit exposures were not capable of being modelled with sufficient reliability. This led to significant variations in regulatory capital, despite institutions having broadly similar risk levels.
The BCBS consultation paper proposes to correct this anomaly by removing the option of internal modelling for certain categories of risk, including loans to financial institutions and large corporations, as well as holdings of equities. One of the concerns yesterday of the parliamentary committee examining customer loan impairments was that more stringent capital requirements could reduce the banks’ appetite for more risky commercial lending. While Hodges played down the prospect of any fundamental reassessment of the sector, he said the cost of banking would go up and trigger the inevitable question of: “Who pays for the system’s improved safety?”
As always, it would be a balance between the customer and the shareholder. By early last month, all of the big four had locked in higher rates for business customers, citing changes to regulatory capital requirements that had forced them to reduce leverage in their mortgage books, and an increase in their funding costs. National Australia Bank, the nation’s biggest business bank, moved first, along with ANZ, with the moves by Westpac and Commonwealth Bank coming after Reserve Bank governor Glenn Stevens said the banks’ funding costs had only risen “a bit”. Hodges predicted a lively debate about the cost of making the banking system “unquestionably strong”, in line with the financial system inquiry’s core recommendation, and the diminishing benefits to the system from regulators’ ever-increasing capital demands.
Ruddock v Cohen
It was round two yesterday of the Ruddock v Cohen slugfest, as Liberal Party elder Philip Ruddock repeatedly probed but failed to secure any kind of redress on behalf of Bankwest “victims” from CBA chief legal counsel David Cohen. Ruddock again raised the spectre of a royal commission recommendation in the joint parliamentary committee’s report, which will have to be finalised with some urgency if it’s to be considered in this parliament. But Cohen, despite hoots and derision from some victims in the public gallery, was unmoved, saying he understood the distress of aggrieved Bankwest customers but neither CBA nor Bankwest had done anything wrong. A royal commission was therefore unwarranted, as was Ruddock’s suggested compromise of independent mediation for a collection of disputes dating back years.
The committee previously asked CBA for an in-depth review of eight key accounts, including high-profile property developer Rory O’Brien’s development at Whisper Bay near Airlie Beach. Instead of contrition, the bank came back with the bald facts as it saw them. Its behaviour was professional in all cases, and rather than benefiting from a clawback arrangement with Bankwest’s seller, HBOS, the write-offs on these eight accounts alone had come to $190 million. Cohen said CBA had incurred more than $2 billion of losses on Bankwest commercial loans without recourse to any other party. The losses were all borne by CBA shareholders.
Ruddock countered that he had already received emails from two of the eight customers in the review who had completely rebutted the bank’s version of events. Would CBA really prefer a recommendation for a royal commission, or was Cohen prepared to look at independent mediation?
Cohen stared Ruddock down, saying it was ultimately up to the government to determine if a royal commission should be held. “But it does not seem warranted,” he said. The truth is that CBA can sense an emerging divide in the committee. Sure, there are members like Ruddock and Nationals senator John Williams who wouldn’t hesitate to call CBA’s bluff on a royal commission. But in the bank’s judgment, they are likely to be outnumbered by members who are more focused on practical outcomes to rebalance the commercial equation in favour of the customer, at the expense of the all-powerful bank.
CBA, in the meantime, has answered more than 50 questions on oath, reviewed in detail 36 submissions by Bankwest customers to the committee, and provided in-depth responses to the group of eight customers of particular interest to the committee. This is the second parliamentary committee inquiry into Bankwest, with the bank appearing twice at each inquiry. It has also answered questions regarding Bankwest at two other inquiries. At one point yesterday, a testy Cohen told Ruddock there was nothing that the committee couldn’t obtain from CBA by simply asking for it.
Cohen held back on any challenge to questions relating to financial redress for customers. It would be surprising if CBA hadn’t considered the issue, because the terms of reference state that the committee will not “investigate or seek to resolve disputes between customers and banks”. The parliament reigns supreme, but any challenge would have precipitated a gripping round-three decider to Ruddock v Cohen.