A year of populism and regulation
With 2011 coming to an end and the 2012 year edging into view, Australia’s largest banks are facing a public debate that’s all about interest rates, with the spectre of populist politics not far away, writes Bernard Kellerman.
Ever since the middle of this year, when economists began tipping a series of rate cuts by the Reserve Bank of Australia, the first Tuesday of each month has been a difficult time for Steven Münchenberg, the Australian Bankers Association’s chief executive.
Then came the first cut, on the first Tuesday in November – a long-awaited and widely expected quarter percentage point rate cut, matched very quickly by most banks and building societies.
NAB was the last of the Big Four banks to react and when it did, the bank announced it was to shave 20 basis points from its variable mortgage rate to a level that remained below its competitors. For its troubles, and the attempt to retain a valuable five point margin on its burgeoning mortgage book, NAB was pilloried by Treasurer Wayne Swan for “only” passing on 20 points.
“The banks know they’ll get a very negative backlash from politicians, the media and the public if they don’t pass on the RBA rate cut in full,” Münchenberg told AB+F during what turned out to be a three-day waiting game among the Big Four after the RBA announced a 25 basis point cut to its cash rate on 5 December.
“At the same time, they’ve got real funding cost pressures at the moment, but also they will be looking at what’s likely to happen next year. They are very nervous about the situation in Europe and the potential for it to get a lot worse very quickly.
“Essentially they’re balancing the global picture against the picture of the family with the mortgage in the middle suburbs.”
“The danger for the banks is that if the government is sufficiently outraged, or feels itself under sufficient political heat as a result of the rate cut being passed on in full, that [Swan] will – as he did last year – introduce another package of reforms.”
Münchenberg suggested that the banks need to find a way to break the nexus in the banking public’s mind between RBA rate cuts and mortgage payment expectations. Not to mention dealing with politicians looking for an easy win (see also Münchenberg’s comments below on the dangers of the Big Four becoming “political footballs”.)
Playing politics
So, to the rate cut by the RBA in December: It was here that ANZ showed an appreciation of the fine art of interest rate brinksmanship.
Australia’s fourth largest bank gained first mover kudos – albeit on the third day after the RBA’s announcement, along with becoming the first bank to take positive steps towards cutting the perception that the central bank can dictate mortgage rate movements.
“Bank funding costs are now largely unrelated to movements in the Reserve Bank’s Official Cash Rate,” said Philip Chronican, ANZ Australia’s CEO.
He then added, tellingly: “We have therefore taken a decision to announce future pricing changes for retail and small business variable interest rates on the second Friday of each month. This provides a measure of predictability for customers on when rate changes will occur and it provides us with the flexibility to reflect movements in funding costs across the full spectrum of funding sources – not solely in response to the Reserve Bank’s cash rate.”
Bring on Basel III
Politics aside, the serious discussions between the banking industry and the regulators – involving entities across the spectrum – have been much more about capital and liquidity, with the next round of Basel III reforms always on the agenda.
The actual rules should present few surprises, as John Laker, chairman of the Australian Prudential Regulation Authority (APRA) has said more than once in recent months that APRA is proposing to maintain a more conservative approach to capital than the Basel III minimum requirements.
The changes that will continue to get aired throughout 2012 are: the short-term Liquidity Coverage Ratio (LCR), intended to ensure banking institutions have adequate funding liquidity to survive one month of stressed funding conditions; and a longer-term Net Stable Funding Ratio (NSFR) to address mismatches between the maturity of a bank’s assets and those of its liabilities.
As Guy Debelle, the RBA’s assistant governor, financial markets, re-iterated in his address to an APRA workshop on the subject late last month: “the issue in Australia is that there is a marked shortage of high quality liquid assets that are outside the banking sector.” That is, there is a shortage of acceptable quality instruments that banks can buy, outside their own industry sector.
Issuing more government debt raises its own problems, he observed, as does allowing the banks to keep more of their liquid assets with the RBA than is really necessary – where would the RBA be able to invest?
“Moreover, it would be a perverse outcome for the liquidity standard to be dictating a government’s debt strategy,” said Debelle.
At the same event, Charles Littrell, APRA’s executive general manager for policy, research and statistics agreed and said his agency will work with the banks to determine their overall liquidity needs.
“An important consideration in that discussion is ensuring that the banking system’s holdings of government paper are not so large that they compromise the liquidity of the market,” he said.
Banks become political footballs
The 2012 year is again shaping up as a mix of political grandstanding, economic turmoil and regulation – just like 2011, in fact.
Steven Münchenberg, chief executive officer of the Australian Bankers Association, is unequivocal when it comes to the ABA’s outlook for 2012: “The number one challenge for banks next year is making sure that we protect the Australian banking system in the face of whatever is going to be thrown at us,’ he said.
“We’re optimistic about that, but it needs to be managed.”
Münchenberg said the second of his top three priorities is to deal with the push for regulation – not only the amount of regulation, but also the nature of the regulation. “The fact that the government can come out and ban specific fees, or come out with a piece of legislation like the original price signalling legislation, with all these serious unintended consequences, is a product of the fact that the banks are very vulnerable to [being made into] political footballs,” he said.
“And the reason for that is the community’s general attitude to the banking sector. We know that customer satisfaction is at record highs, but nonetheless a similar level of people have a dark view about the industry as a whole.
“That leaves us vulnerable to political intervention. If the industry really wants to make a substantial difference to the regulatory environment, we’re going to have to find a way of significantly improving our standing in the community.”
He readily conceded that is going to be a major challenge to the industry next year. “And it’s going to be made a lot harder by priority number 1, which may lead to some tough calls having to be made,” Münchenberg added.
“We can continue to fight rearguard actions against regulatory proposals but if we really want to stem the flow of regulation then we’ve got to go to the source, and the source is clearly that we are vulnerable to be used as a political football or we leave ourselves exposed to community outrage. We need to address that.”
The third area can be classified almost as “business as usual”: the continued progression of Basel III rules, the development of an account switching package, consumer protection measures flowing out of the debate on banks 12 months ago. “There’s quite a bit of activity at that level which we have to deal with,” noted Münchenberg.
One small win has been that the government has not gone with its original plan for account number portability, which could have meant a complete redesign and rebuild of many systems. “What the government and the banks are looking at is to deliver substantially the benefits of full account number portability without having to do the complex and technical build involved in that.”
He also agreed that there is a risk that the European banks will be forced to decrease their own leverage ratios, and the easiest way to do that is to not roll over loans as they come due. This will certainly impact the real economy.
“There is a tension here in that Basel III is intended to make banks more risk averse by carrying capital penalties,” he noted. “Making banks more cautious is probably a good thing [overall] but it may have manifestations which aren’t helpful to the economy, in that banks are more wary of lending to certain sectors because of the capital and liquidity implications.
“If banks tighten up their lending it could exacerbate an economic slowdown. That’s a fairly well-recognised phenomenon.”
- Categories
- Banking
- Tags:
- APRA, Australian Bankers Association, Steven Munchenberg, Guy Debelle, Charles Littrell, Philip Chronican, John Laker
- Author:
- Bernard Kellerman, bkellerman@financialpublications.com.au
- Article Posted:
- December 15, 2011
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