APRA Review of The Australian Banking System, 2009    
Industry News

Source : Australian Banking and Finance

John Laker, APRA Chairman, takes a personal look at the major forces that shaped the Australian financial services sector throughout the 2009 calendar year.

The performance of the Australian economy in 2009 has been unrivalled amongst industrial economies. Accommodative monetary policy, strong fiscal stimulus and the rebound in Asian export markets have obviously played their part. However, there is another contributing factor that needs acknowledgement.

Throughout the global financial crisis, the Australian banking system has been able to support Australia’s economic growth and it has not acted, as in many other countries, as a dragging anchor.

Over the past year particularly, APRA’s supervisory intensity has been dialled to its highest level and, for obvious reasons, has been most sharply focussed on authorised deposit-taking institutions (ADIs). These institutions (banks, building societies and credit unions) were not able to avoid the pronounced impact of the crisis on the cost and availability of wholesale funding (including the freezing of securitisation markets) and, subsequently, on global and domestic economic growth. The Australian Government’s guarantee of deposits and wholesale funding in October 2008 proved pivotal in assuring ADIs’ access to funding, domestically and offshore.

Supported by solid growth in core earnings, the current profitability of the ADI industry would be the envy of many other banking systems. ADIs have remained well capitalised through the crisis and strong investor support has enabled a number of listed ADIs to bolster their capital base.

APRA’s other supervised industries are traditionally less susceptible to cyclical developments in the economy and though the crisis intensified over the past year, their story is broadly similar to the previous year.

Although it may now seem a case of ‘steady as she goes’, the operating environment for financial institutions supervised by APRA will remain testing for some time to come.

Uncertainties about the global economy and the durability of recent improvements in market sentiment will continue for some time. As these uncertainties lift, boards and management will need to be particularly careful not to drop their guard on risk if relief at surviving the most challenging circumstances gives way, as it may, to excessive confidence that their institutions are now invulnerable. In the words of the G20 Leaders’ Statement in Pittsburgh in September:

“A sense of normalcy should not lead to complacency.”

Boards must satisfy themselves that they are receiving strong advice from an independent and authoritative risk management function in their institution and must be confident to challenge management when complex business or product proposals return to the agenda.

Certainly, we in APRA are not ready to dial down the level of our supervisory intensity.

We will continue to target our attention and resources on those institutions we judge likely to be at greater risk; these institutions can expect us to remain in close and probing contact. In the ADI industry, we will maintain our longstanding focus on credit quality and capital management and our recent heightened focus on ADI liquidity and funding plans. If needed, the specialist teams we brought together in APRA to monitor and coordinate responses to specific risks can be reactivated at very short notice.

Australia’s prudential framework has per- formed well during the crisis and a ‘root and branch’ review is neither necessary nor contemplated. Nonetheless, the comprehensive global reform initiatives now underway will obviously have implications for Australia. The Basel Committee on Banking Supervision is developing measures to raise the quality and quantity of capital in the global banking system and address issues of pro-cyclicality; the Committee is also promoting the establishment of stronger liquidity buffers. Remuneration in banking institutions is the subject of another major global reform effort.

APRA will be working very hard, through our membership of the Basel Committee and other international fora, to ensure that our supervised institutions do not bear the unnecessary brunt of global solutions to problems they were sufficiently prudent to avoid. Together with a number of ADIs, we will be taking part in a comprehensive impact assessment before global reforms to capital and liquidity are finalised, and we will be consulting fully before any changes to Australia’s prudential framework are implemented. Our reform proposals on remuneration and ADI liquidity risk management are already in the public domain.

All in all, no respite for APRA in 2010 on either the supervisory or policy front.

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