Basel III Implementation Status In Australia

The Basel Committee published its latest status report on Basel III implementation to end-September 2017 – the 13th progress report. This includes a status report on Australia:

There are areas (in red) where the deadline has passed, and as yet plans are not announced. Many other countries have red marks, but it is worth noting the Euro area is ahead of many other regions. Disclose is a major gap in Australia according to the committee.

APRA provided comments on the status.

It also, once again, highlights the complexity in the Basel framework. Here the overall Basel Committee statement summary.

As of end-September 2017, all 27 member jurisdictions have final risk-based capital rules, LCR regulations and capital conservation buffers in force. 26 member jurisdictions have issued final rules for the countercyclical capital buffers and for domestic systemically important banks (D-SIBs) frameworks.

With regard to the global systemically important banks (G-SIBs) framework, all members that are home jurisdictions to G-SIBs have final rules in force. 21 member jurisdictions have issued final or draft rules for margin requirements for non-centrally cleared derivatives and 22 have issued final or draft rules for monitoring tools for intraday liquidity management.

With respect to the standards whose agreed implementation date passed at the start of 2017, 20 member jurisdictions have issued final or draft rules of the revised Pillar 3 framework (as published in January 2015, ie at the end of the first phase of review), 19 have issued final or draft rules of the standardised approach for measuring counterparty credit risk (SA-CCR) and capital requirements for equity investments in funds, and 18 have issued final or draft rules of capital requirements for bank exposures to central counterparties (CCPs).

Members are now striving to implement other Basel III standards. While some members reported challenges in doing so, overall progress is observed since the previous progress report (as of end-March 2017) in the implementation of the interest rate risk in the banking book (IRRBB), the net stable funding ratio (NSFR), and the large exposures framework. Members are also working on or turning to the implementation of TLAC holdings, the revised market risk framework, and the leverage ratio. The Committee will keep on monitoring closely the implementation of these standards so as to keep the momentum in implementing the comprehensive set of the Committee’s post-crisis reforms.

Regarding the consistency of regulatory implementation, the Committee has published its assessment reports on all 27 members regarding their implementation of Basel risk-based capital and LCR standards.

Bank Mortgage Lending Falls

The latest data from APRA, the monthly banking stats to August 2017 shows the first overall fall in the value of mortgage loans held by the banks, for some time, so the macroprudential intervention can be said to be working – finally – perhaps! Or it could be more about the continued loan reclassification?

Overall the value of mortgage portfolio fell 0.11% to $1.57 trillion. Within that owner occupied lending rose 0.1% to $1.02 trillion while investment lending fell 0.54% to $550 billion. As a result, the proportion of loans for investment purposes fell to 34.93%.

This explains all the discounts and special offers we have been tracking in the past few weeks, as banks become more desperate to grow their books in a falling market.

Here are the monthly growth trends.

Portfolio movements across the banks were quite marked. There may be further switches, but we wont know until the RBA data comes out, and then only at an aggregate level. We suspect CBA did some switching…

The loan shares still show Westpac the largest lender on investor mortgages and CBA leading the pack on owner occupied loans.

All the majors are below the 10% investor loan speed limit.

So the question will be, have the non-bank sector picked up the slack? In fact the RBA says $1.7 billion of loans were switched in the month. This probably explains only some of the net fall.


APRA Says Some Competition Good; Too Much Bad

APRA has published their submission to the Productivity Commission review into Competition in the Australian Financial System.

Their submission focuses on APRA’s role in the financial system, potential indicators of competitive dynamics within the industries APRA supervises and its approach to balancing the objectives of financial safety and stability with considerations of competition and competitive neutrality.

A strong prudential framework contributes to strong financial entities and these, in turn, help create robust competitors and intermediaries that are able to support economic growth and activity, throughout the economic cycle.

Most industry sectors regulated by APRA display relatively high levels of concentration, with a small number of large entities holding a significant combined share of the market. However, industry concentration may not, of itself, be a comprehensive measure of the level of competition in individual markets for financial services products. There appear to be strong indicators of competition in certain financial services product markets, for example residential mortgages.

APRA recognises that its objectives are interlinked, with a strong and stable financial system delivering significant efficiency benefits and the promotion of a competitive financial sector. The efficiency and competition benefits of a stable financial system are not limited to the financial sector but extend to the broader Australian economy.

APRA is of the view that, with the right balance, stability and competition are mutually reinforcing objectives. However, competition can also lead to instability in the financial system and there are times where it is important for APRA to actively temper competitive forces. Periods of excessive and unsustainable competition can result in financial institutions inappropriately pricing risk or unintentionally accepting excessive risk in order to gain or retain market share.

Turning to their specific observations on the banks, they say there has been no material growth in the combined market share of the major banks over recent years. The share of the four major banks as at end-June 2017 was 75.2 per cent, compared with 75.8 per cent as at end-June 2016. Five years ago, the corresponding figure was 74.5 per cent.

Return on equity (ROE) for the banking industry for the twelve months to 30 June 2017 was 11.7 per cent. This remains below the ten-year average of 13.4 per cent (which itself has declined in recent years) and is primarily driven by net interest margins, which continue to be challenged by the low interest rate environment. Margin pressure has eased following recent mortgage repricing actions (particularly on investor and interest only products); however, rising funding costs and slowing credit growth may offset much of the benefit afforded by upwards repricing. All else being equal, increasing regulatory capital expectations will also likely negatively impact industry ROE.

Since the global financial crisis there has been a significant convergence in ADI net interest margins. The net interest margins of other Australian banks (including the large regional banks) as shown in Figure 5 have increased over the past ten years, from 0.8 per cent at June 2008 to 1.6 per cent at June 2017, partly driven by wholesale funding being replaced with cheaper funding as volatility in funding markets has eased. Conversely, the net interest margins of other mutual ADIs have been compressed over the same period, falling from 3.2 per cent at June 2008 to 2.3 per cent at June 2017, driven by a combination of pricing competition in both lending and retail deposit markets

Expense management and efficiency continue to be a focus as both large and small ADIs seek to become more competitive and profitable. Cost to income ratios for the majority of ADIs continue to trend downward. The cost to income ratios of large banks compare favourably to those of peers in foreign jurisdictions.

Large banks are likely to have a strong competitive and information advantage in supplying lending products to these businesses through their ability to cross sell or bundle other banking products, particularly payment systems/merchant terminals and transaction accounts. For many smaller ADIs, offering finance to small and medium enterprises would potentially result in the ADI operating outside tolerance levels established by their own risk appetite. However, as an alternative to accessing funding from the larger banks, small businesses may also access trade credit or asset/equipment finance from specialist companies that are not regulated by APRA to fund their establishment or expansion.

Four observations. First, they should have compared returns and NIM on an international basis. Australian banks are super profitable relative to players in many other countries thanks to weaker competition and the market moving rates together (see the recent mortgage repricing).

Second, we may have better cost income ratios here, but that has more to do with income from superior profits than core efficiency. The cost-income metrics are meaningless in isolation.

Third, the current regulatory and competitive settings still create a significantly tilted playing field in favour of the big four, and the barriers to new entrants are too high.

Fourth, we have strong vertical and cross product integrated (e.g. wealth management, retail banking); financial advice, mortgage brokers, as well as product manufacturing.  This tight integration allows players to control prices and margins. This is a structural problem, which no-one wants to address.

We think APRA have traded off competition in favour of financial stability, which is their primary concern. But as a result consumers and small business customers are paying more than they should for financial service products, which is effectively a tax on all Australians.

Where the accountability problems started at CBA

From The Conversation.

The heads or deputy heads of the three main banking regulators (the Australian Prudential Regulatory Authority, the Australian Securities and Investments Commission and the Reserve Bank of Australia) spoke at the annual regulators’ lunch last week. Guy Debelle, who is relatively new to his role as deputy governor at the RBA, summarised the feelings of the regulators at the lunch in regards to the public’s lack of trust in banks:

No one feels that anything particularly has changed, because even if the issue occurred a few years ago, it still generates the headlines today, and just reinforces the belief [that the banks cannot be trusted].

Unfortunately that’s because these problems were never actually resolved at the time, with regulators being palmed off with internal inquiries, until the scandal went off the front page. Of course the problems that have occurred recently at banks, especially CBA, are going to be dredged up again and again, because customers (unlike regulators) really suffered and no one was ever held to account.

On the same day, APRA chairman Wayne Byers also announced the makeup of the inquiry panel to which it has outsourced its job. The agency also released the terms of reference that will govern the conduct of the inquiry over the next six months.

Way way down the list of things to do is assessing the CBA’s “accountability framework” and whether it conflicts with “sound risk management and compliance outcomes”.

Note the terms of reference do not discuss “accountability”, per se, merely whether the framework (i.e. organisation charts and policies) is effective or not. Instead, the terms of reference discuss whether it conflicts with other policies and organisation charts. It is Olympic standard navel gazing, rather than action on the part of APRA, and a very minor part of the panel’s work.

But, accountability is not only about “what” but about the “who” and, as the French philosopher Molière wrote, “it is not only what we do, but also what we do not do, for which we are accountable”.

Inquiry panel member, John Laker, is also chairman of the Banking Finance Oath initiative, which works to promote “moral and ethical standards in the banking and finance profession”. He will be well placed then to remind CBA directors and managers of one of the key tenets of that oath:

I will accept responsibility for my actions [and] in these and all other matters; My word is my bond.

Responsibility and accountability are personal not commercial constructs and, notwithstanding the latest knee-jerk reaction to the money laundering scandal, these values have been in very short supply in CBA, over the last decade.

In fact, while there have been belated apologies for some of the scandals, no one in a senior position at CBA has actually taken personal accountability for any of the sequence of scandals that have recently beset the bank.

A detailed description of the many failures of accountability at CBA would take many thousands of words, but one scandal stands out above all others, not least because it involved the largest fine ever visited on CBA’s long-suffering shareholders. It set the scene for how the CBA board would handle future scandals, that is to obfuscate, prevaricate and litigate.

On December 23, 2009, the CBA board announced a payment of some NZ$264 million to one of New Zealand’s public service departments, New Zealand Inland Revenue.

The NZ High Court found that CBA had been using ASB Bank, its NZ subsidiary, as a laundromat through which it washed a number of dodgy transactions each year with the purpose of avoiding NZ taxes, which fed directly into CBA group profits. It was tax avoidance on an industrial scale.

It should be noted that three other major banks were also fined in a total settlement of NZ$2.2 billion (about A$1.7 billion at the time), the largest fines ever paid by Australian banks.

The banks had fought the NZ Commissioner of Inland Revenue for several years all the way to the High Court, until Justice Harrison ruled the transactions were “tax avoidance arrangement(s) entered into for a purpose of avoiding tax”.

Why such a small number of transactions? Because they were huge Interest Rate Swaps (IRS) transactions, created at the highest levels of the organisations with the purpose of turning expenses into income, a clever idea that some tax accountant had dreamed up around 1995.

During the extensive and expensive litigation, the CBA board kept maintaining that they had rock solid advice that their actions were legally watertight. But they were very wrong.

So, did anyone take responsibility for this embarrassing, unethical and expensive failure of management and corporate governance?

No board member or senior manager ever took responsibility for being found to have tried to avoid huge amounts of tax in one of the bank’s key markets. In fact the opposite, Sir Ralph Norris, who had been CEO of ASB during the wash and spin cycle, was made CEO of the CBA group in 2005.

What message does such disgraceful and ultimately unproductive behaviour send to staff?

First it says, don’t take responsibility for anything, bluff and dissemble and, if found out, never ever admit to anything. If board members refuse to be accountable for their mistakes, why should anyone else, especially if whistleblowers are treated appallingly?

And the NZ scandal was only the first of many scandals.

While CEO, Ian Narev, has expressed “disappointment” at customers being treated shabbily, no senior leader has been held directly accountable for the financial planning scandal, the CommInsure scandal, the manipulation of BBSW and Foreign Exchange benchmarks, and now the money laundering action being taken by AUSTRAC.

Making belated apologies is not taking responsibility for misconduct unless corrective actions follow. But, in CBA the scandals keep coming, as the apologies appear to have changed nothing in the organisation.

Surely someone, somewhere in the huge CBA organisation has the ethical grounding to stand up and say – “yes, we did make mistakes and, yes, we should bear the consequences, and to start the ball rolling, I resign”. Actions speak much louder than mere words.

The APRA inquiry will undoubtedly find that the bank’s “accountability framework” was deficient but unless names are revealed, its conclusions will be suspect.

However, it is not up to the panel to name and shame, but to convince the senior management of CBA that only true accountability will restore trust in the bank and that someone has to step up and take responsibility for their actions and inaction, otherwise staff will never know the right thing to do.

The CBA inquiry panel is due to hand down an interim report by December but by then we should know if the inquiry has any teeth by any admissions of accountability coming from the CBA board and management. But don’t hold your breath!

Author: Pat McConnell, Honorary Fellow, Macquarie University Applied Finance Centre, Macquarie University

Rate hikes a result of regulation: APRA

From Australian Broker.

Banks would not have increased their investment and interest-only rates were it not for speed limits imposed by the Australian Prudential Regulation Authority (APRA), the regulator’s chairman Wayne Byres has said.

These statements come from a hearing held by the House of Representatives Standing Committee on Economics around APRA’s 2016 annual report held yesterday (13 September).

Committee chair David Coleman brought up comments by the Commonwealth Bank of Australia (CBA) which alleged that rates hikes were implemented “in line with what our regulators require”.

“Many banks make similar statements and we’ve been blamed for all sorts of things,” Byres said.

While banks have used higher rates to influence customer behaviour, APRA had been “deliberately silent” about the measures which could be used when it implemented these speed limits, he added.

Byres acknowledged that rate hikes were indeed linked to restrictions brought in by APRA.

“Based on what I know… the banks would not have made these interest rate changes if it were not for these regulatory initiatives.”

Coleman remained unsatisfied, pointing out that rate changes affected banks’ existing books despite speed limits only applying to new lending. He asked Byres as to whether these rate increases were a requirement rather than just a response to APRA’s restrictions. At first refusing to give a direct reply, Byres said bank statements linking rate hikes to regulatory measures were “vague and ambiguous”.

Coleman then expanded his question, pressing Byres about a hypothetical in which a bank makes a general move and links this to regulatory requirements despite being wholly unconnected.

“This is not ok,” Byres said.

However, he stressed that APRA was not to blame for any rate hikes, saying “a direct assertion that we made them put up interest rates is clearly not true”.

Commonwealth Bank inquiry: Is former APRA boss John Laker the right person for the job?

From the ABC’s Michael Janda.

It’s indisputable that the Commonwealth Bank hasn’t had a great time lately.

Sure, it recently turned in a record $9.93 billion profit, but Australia’s biggest bank has been hit by scandal after scandal.

First there was it’s involvement in lending to customers caught up by the Storm collapse, then the financial planning scandal, a series of complaints against CommInsure and finally the massive money laundering scandal, which could easily cost the bank billions of dollars in penalties.

While previous scandals were dismissed as “isolated incidents” by CBA, for regulators the money laundering scandal was the last straw.

Two weeks ago, banking regulator APRA announced an independent inquiry into governance, culture and accountability at CommBank.

On Friday, APRA announced the panel who will conduct the review.

All three panellists are eminent members of the business and financial world.

Jillian Broadbent was a long-serving Reserve Bank board member, along with stints as a non-executive director with Coca-Cola Amatil, ASX, Woodside and Qantas.

Graeme Samuel is best known for his eight years in charge of Australia’s consumer and competition watchdog, but also has extensive experience in the financial sector.

John Laker rounds out the panel — he was in charge of APRA until the end of June 2014.

And that is where the potential doubts about Dr Laker’s appointment arise.

“My first reaction when I saw his name announced was, ‘gee, that’s a bit poacher turned gamekeeper’,” said banking analyst Martin North from Digital Finance Analytics.

“I guess he also would have significant experience of CBA and the way it’s interacting with the regulator, so I guess it’s a bit of a two-way street.

The potential conflicts are obvious.

Most of CBA’s problems arose prior to July 2014.

As APRA’s then chairman, Dr Laker was responsible for the organisation that was supposed to be keeping an eye on CBA, ensuring that its finances, governance and risk culture were shipshape.

If it turns out that the Commonwealth Bank was seriously deficient in any of these areas, the review will require Dr Laker to sign off on a report that may highlight errors or oversights by APRA and himself as its boss.

That’s not to say he can’t or won’t do that if it’s called for, but it’s a potentially awkward position to be in.

CBA not unique amongst banks behaving badly

Dr Laker’s appointment is not the only flaw with APRA’s CBA inquiry.

While the nation’s largest bank has probably been embroiled in more scandals than the others, all of the big four have been found to have acted against the interests of consumers in numerous instances.

Martin North argues that’s because the short-term profit motive reigns supreme.

“In the process of trying to maintain shareholder returns at levels that investors are wanting are they compromising customer outcomes?” he asked.

“There’s been a litany of things over the years where things seem to have gone wrong and people tend to say, ‘well these are isolated events and issues’, but when you put them all together you start to wonder whether there’s a more structural set of questions that need to be thought through.”

The banking regulators appear to appreciate there’s a wider problem.

“There’s no quick fix here, it’s a deep-seated issue in the view of the community that there is a lack of trust,” APRA’s current chairman Wayne Byers told a business lunch in Sydney last week.

“The drip feed of issue after issue after issue just reinforces the view that’s out there,” Reserve Bank deputy governor Guy Debelle said at the same event.

Unfortunately the CBA review will not deliver that.

Not only is its credibility undermined by a panellist who many will conclude has no incentive to look into the darkest, dustiest corners of the cupboard, but also by its focus on just one bank.

Mr North isn’t really sold on a banking royal commission, but he does think a much broader inquiry into retail banking and wealth management across all the major institutions is what’s needed to restore trust.

“There is a bigger question about the way that the financial services sector operates in Australia,” he said.

“At the moment, there isn’t an appetite or a willingness to really pursue that, but I think that’s what we really need.”

In the meantime, it appears the burden will remain with investigative journalists such as Adele Ferguson to continue their piecemeal exposure of the financial sector’s dirty deeds.

Bank Capital and the approaching BEAR

Wayne Byers, Chairman of APRA spoke today at the ‘The Regulators’ Finsia event, Sydney.

His specific comments on bank lending practice, in terms of household affordability, benchmarks, pre-existing debt and overrides are important.

Unquestionably strong capital ratios
I’ll start with bank capital.
The quest for an answer to what ‘unquestionably strong’ capital ratios look like has been with us since the Financial System Inquiry (FSI) reported in late 2014. We had been keen to wrap up this recommendation alongside the international reforms we had hoped would emanate from the Basel Committee well before now. Once the Basel Committee’s deadline was missed, we indicated we didn’t think it appropriate to wait any longer to respond to the FSI.
So as you know, in July this year we set out our assessment on how much APRA’s minimum capital requirements would need to be strengthened for the banking sector to have capital ratios that would unquestionably be considered strong. For the major banks, for example, we flagged that we intended to increase their applicable capital requirements by 150 basis points, with a view to having them operate with a Common Equity Tier 1 (CET1) capital ratio of at least 10.5 per cent. For smaller ADIs that don’t use internal models to determine their capital requirements, the increase in minimum CET1 requirements will be less – in the order of 50 basis points. And we set out our expectation that these new benchmarks could be achieved in an orderly fashion by the beginning of 2020, if not before.
This announcement was designed to give the industry greater clarity as to the ultimate destination, and the time they had to reach it. What we haven’t done yet is identify exactly which parts of the capital framework we’ll adjust to deliver this increase. The adjustments – which we plan to say more about around the end of this year – are expected to accommodate domestic measures to target residential mortgage lending – about which I’ll comment more shortly – as well as changes eventuating from (we hope) the finalisation of the outstanding Basel III reforms.
I think our information paper was fairly well understood, but there’s possibly still some uncertainty about the impact of the future changes, and whether this will mean, for example, more capital might be required beyond that needed to meet the 10.5 per cent benchmark. That’s not our intent. If a major bank has sufficient dollars of capital to be above the 10.5 per cent benchmark under the current capital framework, we expect that – all other things being equal – it will have sufficient capital to meet whatever new requirements we implement.
However, its reported capital ratio may well change. When we change measures of capital and risk weights, we’re effectively using a new measurement system. A bank’s underlying position doesn’t change, even though the measure used to signify it generates a different ratio. The best analogy I can offer is when I switch from measuring my height in inches to centimetres: the number I report is larger but I haven’t gotten any taller. So as we revise the measurement of capital, it’s possible that the 10.5 per cent benchmark for the major banks may also change. But what’s important to remember is that that is primarily a difference in the units of measurement, rather than a change to the underlying capital requirement.
Housing lending
In thinking about where and how we allocate increases in capital requirements, we’ve flagged that at least some of it will be generated by addressing the risk in housing loan portfolios. There are two inter-related aspects to this: risk sensitivity (ensuring higher risk lending has appropriately higher capital requirements) and concentration risk (dealing with the dominance of housing lending on the balance sheet of the banking system). That shouldn’t be taken to imply that there will be a dramatic increase in capital requirements for housing lending. But housing is an obvious place to start in delivering stronger capital ratios.
Having said that, we don’t see more capital as the sole means to build resilience in bank balance sheets. We are spending just as much time on the quality of lending, and reinforcing sound lending standards. We do so for good reason. Done well, housing lending can be an important source of stability to bank balance sheets in times of stress. Overseas experience shows us what can happen when done poorly.
Here I’d like to like to make a distinction that will be important for our work in 2018: oversight of lending policies, and scrutiny of lending practices. For credit standards to be genuinely raised, both need attention: policies should be strengthened where needed, but they also must be genuinely put into practice.
Prudent policies
APRA’s oversight of lending policies has involved several steps. We’ve sought assurances from Boards that they were actively monitoring their credit standards. We’ve collected more granular data. We issued industry guidance on prudent mortgage risk management. As the risk environment continued to elevate, we took the somewhat unusual step of establishing specific benchmarks for investor loan growth and interest rate assumptions in serviceability assessments. Earlier this year, we added an industry benchmark on interest-only lending.
Overall, we see these measures as having a positive impact. We’ve seen serviceability assessments strengthen, investor loan growth slow and high LVR lending reduce. New interest-only lending has also fallen, and appears on track to fall below our benchmark later this year. All of these moves are strengthening the quality of banks’ home loan portfolios, in an environment that continues to be one of heightened risk.
Prudent practices
However, firmer lending policies are one thing. What if they aren’t always followed? We’ve therefore looked harder at actual lending practices, seeking additional assurance that tighter loan policies are actually translating into more prudent lending decisions.
While the review process is not yet complete, APRA has three core expectations in this area.
  • Firstly, it’s important that lenders accurately assess borrower income and living expenses. Living expenses, in particular, are difficult to measure, and so banks often utilise benchmarks as a proxy where borrower estimates appear too low. In fact, our recent work showed the lion’s share of loans by the larger lenders are assessed using expense benchmarks, rather than the borrower’s own estimates. There is nothing wrong in principle with using benchmarks, provided they aren’t seen as a substitute for proper inquiries of the borrower about their expenses. Benchmarks also need to be genuinely representative, incorporate a degree of conservatism, and responsive to a changing external environment. We still see scope for improvement here.
  • Secondly, a lender should have robust controls to check for information on borrowers’ pre-existing debts, to ensure that all debt repayments are accurately factored into loan assessments. Here, the industry has been slow to adopt positive credit reporting, creating a blind spot in terms of sound credit assessments. A move to positive credit reporting is needed to mitigate this shortcoming.
  • Finally, there should be effective oversight to ensure that lending practices consistently meet standards, with close management of any policy overrides, and well-targeted assurance processes. Stronger policies mean little if they can be overridden, or if data deficiencies mean compliance with policy cannot be fully monitored.
As I’ve made clear before, APRA’s supervision isn’t about managing conditions in the housing market or house prices; we have a simpler goal of ensuring that core standards stand up to scrutiny, both in policy and in practice. Given the environment that we are in – high house prices, high household debt, low interest rates and subdued income growth – that scrutiny won’t lessen any time soon.
Banking Executive Accountability Regime
I’d like now to turn to the package of measures announced by the Government in the budget to improve accountability in the banking system – now fondly known as the BEAR.
APRA has long had an interest in establishing appropriate accountability frameworks for regulated institutions. Tools to promote this are the standard fare of prudential regulators, and already exist within the Banking Act 1959 (for example, the power to remove and/or disqualify individuals from their roles) and our own prudential standards (in terms of requirements in relation to governance, remuneration and the fitness and propriety of individuals).
Therefore, the BEAR can be seen as a strengthening of the existing prudential framework. Although there are a range of new elements, it is not new territory.
Our existing regime – seen as overbearing (no pun intended) when it was introduced – would now be seen internationally as somewhat limited. APRA has therefore been providing input to Government on the overall design of the BEAR. Changes to the Banking Act will set out the overarching framework, to ensure that it achieves the Government’s objective that the BEAR has ‘teeth’, but it will then be up to APRA to implement the framework through our supervision process. It will also necessitate consequential changes to our supporting prudential standards.
Given the legislation is still being drafted, it is difficult to be precise about how the new regime will work. But the core objective – establishing clearer accountabilities for, and expected standards of behaviour by, senior executives within banks – is difficult to argue against. Indeed, once the new framework is put in place for banks, APRA intends to think about whether some of the concepts within the regime have broader application.
There have been questions raised about whether aspects of the new accountability regime will change the nature of APRA supervision. While our supervisory approach is always evolving, we intend to remain a supervision-led regulator, working to prevent problems rather than simply wait for them to happen and find fault after the event.
If we are successful in that approach, the new powers granted to APRA should only need to be used rarely. That should not be interpreted as saying we would be reluctant to use them. But the goal must be that, with clear boundaries and obligations set out by the regulatory framework, Boards and executives conduct their affairs in such a manner that intervention by APRA is not needed. It is a much better outcome, for example, that Boards hold their executives to account for poor outcomes than have to rely on the regulator to do it for them. My observation is that this has been the experience in the UK, where a similar regime is already in place. Although there are strong powers for regulators if and when needed, the industry has responded by adjusting the way it operates so that the need for regulatory intervention has been quite limited.
Concluding remarks
The three topics that I’ve talked about today are ultimately focussed on one underlying purpose: strengthening the resilience of the banking system. Whether it is in bank capital, the quality of loan portfolios, or promoting better governance and accountability, the objective is to ensure banks are well-governed, prudently managed, and financially sound. Banks that have these characteristics are most likely to meet the needs of the Australian community, through good times and times of adversity. So we see APRA’s ongoing intensive efforts in all these three areas in the year ahead as a very necessary investment for us to make.


APRA announces panel members and terms of reference for prudential inquiry into CBA

The Australian Prudential Regulation Authority (APRA) announced today it has appointed three panel members to conduct the previously announced prudential inquiry into the Commonwealth Bank of Australia (CBA).

On 28 August, APRA announced it would establish a prudential inquiry following a number of issues which have raised concerns regarding the frameworks and practices in relation to the governance, culture and accountability within the CBA group, and have damaged the bank’s reputation and public standing.

APRA has appointed Dr John Laker AO, Chairman of the Banking and Finance Oath, Professor Graeme Samuel AC, Professorial Fellow in the Monash Business School, and company director Jillian Broadbent AO to undertake the inquiry.

As previously announced, the goal of the inquiry is to identify any shortcomings in the governance, culture and accountability frameworks and practices within CBA, and make recommendations as to how they are promptly and adequately addressed. It would include, at a minimum, considering whether the group’s organisational structure, governance, financial objectives, remuneration and accountability frameworks are conflicting with sound risk management and compliance outcomes. The full terms of reference for the prudential inquiry, along with biographies of the panel members, is attached to this announcement.

The inquiry panel will be provided with support by APRA, and may obtain other external expertise and advice as its sees fit. The inquiry panel will provide a final report to APRA by 30 April 2018, with a progress report due on 31 January 2018. APRA intends to make these reports public.

APRA Chairman Wayne Byres said: “APRA is pleased to have secured the services of three highly experienced and credentialed panel members to conduct the prudential inquiry. Between them, John, Graeme and Jillian bring an excellent blend of skills and experience to the task, including in matters of corporate governance and organisational culture.”

APRA Prudential Inquiry into CBA: Terms of Reference

The purpose of the Prudential Inquiry is to examine the frameworks and practices in relation to governance, culture and accountability within the CBA group, so as:

  1. to identify, in light of a number of incidents in recent years that have damaged the reputation and public standing of the CBA group, any core organisational and cultural drivers within CBA that have contributed to these incidents.
  2. to assess, at a minimum, whether any of the following areas, or their implementation, are conflicting with sound risk management and compliance outcomes:

    a. the group’s organisational structure, governance framework, and culture;

    b. the group’s framework for delegating risk management and compliance responsibilities;

    c. the group’s financial objectives;

    d. the group’s remuneration frameworks;

    e. the group’s accountability framework; and

    f. the group’s framework for identification, escalation and addressing matters of concern raised by CBA staff, regulators or customers.

  3. to consider, where CBA has initiatives underway to enhance the areas reviewed under (1) and (2) above, whether these initiatives will be sufficient to respond to any shortcomings identified and, if not, to recommend what other initiatives or remedial actions need to be undertaken.
  4. to recommend, to the extent that there are other shortcomings or deficiencies identified under (1) and (2) above that are not already being addressed by CBA, how such issues should be rectified.

The Prudential Inquiry should not make specific determinations regarding matters currently the subject of legal proceedings, other regulatory reviews or investigations by regulators other than APRA, or customers’ individual cases.

The Inquiry Panel appointed to conduct the Inquiry will submit a progress report to APRA by 31 January 2018, and a final report by 30 April 2018.

APRA prudential inquiry panel members

Ms Jillian Broadbent AO

Ms Broadbent has had extensive experience in risk management and governance, through her executive career in banking and as a non-executive director.

Ms Broadbent serves on the board of Woolworths Limited, is Chair of the board of Swiss Re Life and Health Australia Limited and Chancellor of the University of Wollongong.  She was a member of the board of the Reserve Bank of Australia (RBA) from 1998 to 2013.  She was also the inaugural Chair of the Clean Energy Finance Corporation (2012 – 2017) and has been a director on the boards of ASX Limited (2010 – 2012), Special Broadcasting Corporation (SBS), Qantas Airways Limited, Westfield Property Trusts, Woodside Petroleum Limited (1998 – 2008) and Coca-Cola Amatil Limited (1999–2010).

In 2003, Ms Broadbent was made an Officer of the Order of Australia for service to economic and financial development in Australia and the community through administrative support for cultural and charitable groups.

Dr John Laker AO

Dr Laker is Chairman of The Banking and Finance Oath Ltd, a member of the Council of the University of Technology Sydney and a Director of Cancer Council NSW. He is also an External Expert for the International Monetary Fund (IMF) and has participated in reviews of banking systems and supervisory arrangements in the United States, Israel, Indonesia, the Euro Area and Spain. Dr Laker is a member of the External Advisory Panel of the Australian Securities and Investments Commission (ASIC). He also lectures at the University of Sydney.

Dr Laker was Chairman of the Australian Prudential Regulation Authority (APRA) over an 11-year period from 1 July 2003 to 30 June 2014. Prior to his appointment to APRA, Dr Laker had an extensive career in the RBA, holding senior positions in the economic, international and financial stability areas, both in Australia and London. Before the RBA, Dr Laker worked in the Commonwealth Treasury and the IMF.

Dr Laker was made an Officer of the Order of Australia in 2008 for services to the regulation of the Australian financial system and to the development and implementation of economic policies nationally and internationally.

Professor Graeme Samuel AC

Graeme Samuel AC is a Professorial Fellow in Monash University’s Business School and Chair of the Monash Business School Business Advisory Board. He is also a Councillor of the Australian National University and Chair of its Finance Committee, President of Dementia Australia, Chair of the South Eastern Melbourne Primary Health Network, Chair of Data Governance Australia, Chair of Lorica Health Pty Ltd, a CMCRC company, Chair of Airlines for Australia and New Zealand (A4ANZ), Member of CEDA’s Council of Economic Policy, Council Member of the National Health and Medical Research Council and Chair of its Health Innovation Advisory Committee and the National Institute for Dementia Research.

Prof Samuel has held a number of roles in public life including former Chairman of the Australian Competition and Consumer Commission, Associate Member of the Australian Communications and Media Authority and President of the National Competition Council.

He was appointed an Officer of the Order of Australia in 1998. In 2010 he was elevated to a Companion of the Order of Australia for eminent service to public administration through contributions in the area of economic reform and competition law, and to the community through leadership roles with sporting and cultural organisations.

Is The Mortgage Tide Receding?

APRA has released their monthly banking stats to July 2017. We see a significant slowing in the momentum of mortgage lending.  This data relates to the banks only. Their mortgage portfolio grew by 0.4% in the month to $1.58 trillion, the slowest rate for several month. This, on an annualised basis would still be twice the rate of inflation. Investment loans now comprise 35.08% of the portfolio, down a little, but still a significant market segment.

Owner occupied loans grew 0.5% to $1.02 trillion while investment loans grew just 0.085% to $552.7 billion. This is the slowest growth in investment loans for several years. So the brakes are being applied in response to the regulators.

Looking at the individual lenders, the portfolio movements are striking. CBA has dialed back investor loans, along with ANZ, while Westpac and NAB grew their portfolios. Westpac clearly is still writing significant business, but they expect to be within the interest only limit to meet the regulatory guidance.

The overall market shares have only slightly changed, with CBA the largest OO lender, and WBC the largest investor lender.

Looking at the 12m rolling growth, the market is now at around 4%, and all the majors are well below the 10% speed limit. Some smaller players are still speeding!

We will see what the RBA credit aggregates tell us about adjustment between owner occupied and investor lending, as well as non-bank participation. But it does look like the mortgage tide is going out. This could have a profound impact on the housing market.  It also shows how long it takes to turn a slow lumbering system around.



APRA inquiry into CBA is the new comedy in town

From The Conversation.

Just when you thought it could not get any more bizarre, the Australian Prudential Regulation Authority (APRA) announces it will open its new season with an inquiry into the Commonwealth Bank of Australia (CBA), specifically focusing on “governance, culture and accountability frameworks and practices within the group”.

This is an unexpected twist in the long running farce that is Australian banking regulation.

And the Treasurer, Scott Morrison, has weighed in on cue to lead the booing of CBA with as nice a piece of comedic irony that one could see anywhere, even in London’s West End:

Australia’s banks are well capitalised, well regulated and financially sound. However, there have been too many cases and events that have damaged their reputation and standing in the eyes of many Australians, that warrants our regulators taking action now.

The well-regulated bit brought the house down as did the next gag – that the inquiry showed a banking royal commission was not needed as the government and regulatory agencies were already taking action against the banks.

Yeah, already taking action – just five minutes ago!

The audience would have roared with laughter, especially when told they would not have to pay to see the show, but that CBA would be picking up the tab. Ice-creams all around at the interval, and CBA can pay for it out of the bonuses that have just been taken back from the departing CEO and the management chorus line.

But the opening of this new show raises some questions for the producers. Why now? Why CBA? And why, of all people, APRA?

Why now is obvious. A few weeks ago, a new sheriff in town, AUSTRAC, pointed out some serious criminals had been using the bank as a money laundromat.

At first the board ignored this upstart, but were woken out of their cosy slumber when AUSTRAC had the temerity to take them to court. Their usual first reaction, of fighting to the end (with their shareholders’ money) won’t work this time and they have been scrambling ever since.

Why CBA? Ineptitude mixed with hubris. There has been a long litany of scandals where CBA has been part of the cast, but like the heroine of the old movies, in the past it had been able to escape just before the train ran over it. This time the CEO forgot to bring the knife to cut the ropes and CBA has been squashed.

But why no other banks? Why not indeed, as the other three of the big four banks, like CBA, have been part of a long-running production in the Federal Court to do with the small matter of manipulating interest rate benchmarks. The banks had hoped this show would have closed by now, like the foreign exchange benchmark scandal, with a payment of a token gold coin donation.

But the big question on the audience’s lips is why APRA?

In Australia, the conduct regulator, that is the “culture guy”, is supposed to be the Australian Securities and Investment Commission (ASIC) but this time it does not get a look in – why?

It’s because the government doesn’t like ASIC. Its leading man, Chairman Greg Medcraft, has already been told he is no longer needed and the new leading man has not been announced yet.

In very bad timing for the government, the scandal has blown up just before the rumoured replacement could be unveiled. Try that move today and the critics would go feral.

Not that APRA has great credentials on “culture” matters. It is made up of more technicians than creative types. As the official insurance regulator, APRA missed the whole bit about culture when the CommInsure scandal blew up. And critics have been very quiet on the fact that money laundering is part of APRA’s operational risk mandate. But, like Marcel Marceau, APRA doesn’t say much about anything such as the fact that bank bill swap rate benchmark manipulation is also part of its operational risk responsibilities.

As for “culture”, APRA actually tried out for that role a few years ago, but wasn’t called back for a final audition – the leading role went to ASIC but at the time it was not bent out of shape too much.

In the UK, the so-called “twin peaks” of banking regulation, the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA), actually talk to one another and work on common problems, such as whistleblowing.

In Australia, APRA is the prudential regulator which means its main job is to ensure that banks can meet their “financial promises”. By starting this inquiry, does APRA really want us to believe that the board and management at CBA pose a threat to the ability of the largest bank in Australia to repay its financial commitments? Surely not! But maybe APRA has been pushed into this unusual role by backstage prompting from the Treasurer – anything to head off a royal commission.

So why has this inquiry not been shared between ASIC and APRA, surely in this case the combined expertise would help create a truly independent report? The two regulators are officially part of the Council of Financial Regulators (CFR), which is headed by the RBA, and whose role is to coordinate “Australia’s main financial regulatory agencies” – boy if ever cooperation was needed.

So off we go with a six month run of a completely new production. The script hasn’t been written yet (terms of reference to follow) – maybe they are going to workshop it first? The actors are already lining up for auditions and venues are being hired. The problem is we don’t know whether it will be farce or fiasco, but it will definitely run and run.

Author: Pat McConnell, Honorary Fellow, Macquarie University Applied Finance Centre, Macquarie University