Clik here to view.
APRA's Wayne Byres rebuffs the banks on levy and says capital will rise
Australian Financial ReviewMay 30 2017 11:03 PM
James Eyers
Banking regulator Wayne Byres has issued a sharp rebuke to the big banks' resistance of the budget's bank tax, saying their profits are big enough to pay it and arguments it creates risks for the economy are overblown.
The Australian Prudential Regulation Authority chairman also strongly suggested on Tuesday night that mortgage risk weights for the big banks are heading higher. This would result in more capital being required, pressuring returns on equity.
Earlier in the revealing session before the Senate economics legislation committee in Parliament House, Mr Byres said increases to APRA's powers unveiled in the budget would make it more effective and not compromise its approach to proactive supervision, as some bank chairs had suggested.
Capital for mortgages
APRA will release its position on "unquestionably strong" capital "in the next month or so", Mr Byres confirmed. It will set out the "definitive view of how we are going to define that concept of unquestionably strong", the standard set down by the financial system inquiry.
The work would take into account the government's bank levy, he said, but "I don't see it as having a material impact on our plans".
"We think banks in this country are soundly capitalised… but the FSI said we should aspire to this concept of unquestionably strong."
Asked whether further changes are planned to the level of mortgage risk weights for the big banks - which determine the level of equity they have to raise as a buffer to protect them from a crisis - Mr Byres said "Yes" and pointed to previous announcements that mortgage risk weights would be reviewed to "recognise we are in an environment of heightened risk, it is the biggest asset portfolio on bank balance sheets, there is very big concentration of housing risk in the Australian banking system, [and] the risk weights, in their current form, don't really take into account that concentration".
He would not confirm by how much the gap between higher capital levels for small banks and less onerous requirements for big banks would contract, "other than to say the likely outcome is that it narrows further".
However, he added it remains important for some differential in risk weights to continue to exist, to encourage banks to invest in sophisticated risk modelling systems.
The bank levy
Just hours after the bank tax legislation was introduced into the Parliament on Tuesday, Mr Byres comprehensively dismissed the banks' arguments the tax was designed in a way that would increase risks in economy.
The banks had argued in submissions to Treasury the $1.5 billion a year tax is inconsistent with regulators' desire to create safer banks, because it created disincentives to fund lending with high quality and longer term borrowings. But asked whether the tax created an incentive for banks to increase risks on their balance sheets, Mr Byres said: "I don't think there is, but even if there was, I think there are enough compensating controls in the prudential framework that it wouldn't concern me."
At around 5 per cent of annual profits, the level of the tax "immediately seems to me to be not something that threatens the viability of institutions," he said, in his first public comments since the budget three weeks ago.
After the 6 basis point levy was codified into legislation in a win for the banks, Mr Byres said this added to cost of a class of liabilities so the overall impact would be than 6 basis points spread over the entirety of their funding structure.
"Funding costs move by more than that quite regularly, so it didn't seem to be, in that sense, in any way destabilising or such a shock to the system that it couldn't be managed in a fairly orderly fashion," he said.
"I came to the view that was something that the industry could take on. They were never going to be happy about it, obviously, but they could take it on without it threatening the resilience of the system or an individual institution."
"They will still be, even after that levy is paid, quite profitable institutions."