Risk Australia 2010: risks and regulation

Participants attending this year’s Risk Australia conference held in Sydney on August 31 largely supported a move towards global regulatory harmonisation. But significant concerns remain regarding the practicality of such initiatives and its impact on the Australian banking model. Wietske Blees reports

A number of regulatory proposals currently being debated around the world could have significant implications for the way in which Australian institutions fund themselves, according to speakers and delegates attending Risk Australia 2010 in Sydney on August 31.

The proposed introduction of two new regulatory standards to strengthen liquidity risk management by the Basel Committee on Banking Supervision is a case in point. The proposals are intended to improve the resilience of banks against both short and longer  term funding shocks, by introducing a shorter term ‘liquid assets ratio’, and a longer term ‘net stable funding ratio’.  But the narrow definition of ‘liquid assets’ poses a range of practical challenges for Australian banks, while the proposed introduction of a ‘net stable funding ratio’ is likely to increase banks’ already substantial reliance on foreign funding.

Simon Maidment, head of group funding at the Commonwealth Bank of Australia (CBA), says that during the past 12 months, CBA has increased its holdings of government and semi-government paper to increase its share of liquid assets on balance sheet. “We do not know where [the regulations] are going to end up, but we certainly know the direction. We have been increasing the amount of government securities and semi-government securities that we hold and we have been winding back some of our exposure to bank paper,” he said, adding: “The main focus for us now is the liquidity changes. We already hold liquids well in excess of the statutory minimum, but a portion of those liquids are unlikely to meet the Basel recognition.” Meanwhile, the bank has also increased the amount of term wholesale funding relative to short-term funding. “The proportion of short-term wholesale funding as a share of our overall portfolio has fallen from around 54% to 43%, so that is quite a dramatic change,” said Maidment. 

While Australia’s banks have enjoyed relatively easy access to foreign funding sources to date, Maidment also expressed concern that a change in economic circumstances could result in funding risk. “At this stage, my perception is that we have not reached the level where there is a constraint in terms of offshore demand,” he said. But he recognised this could change if the market were to take a turn for the worse. “If you extrapolate the issuance that banks have undertaken over 10 to 15 years, our share of the overall global capital market starts to exceed our global share of gross domestic product, which to me, is a bit of a flag as to how big we have become, so I think there are issues that are out there,” he said.

The inability for local financial institutions to tap the country’s superannuation pool of savings adds a further blow to efforts to diversify some of their funding requirements. “One obvious disconnect at the moment is the regulatory framework and the advantage position for superannuation compared with banking. While this is playing out in the specific requirements from the Basel Committee for longer term funding, these are Australia-specific issues that we do need to address,” said Bruce LeBransky, principal adviser, financial risk management at KPMG.

With a range of possible new risks emanating from global efforts to increase the robustness of the system, there are also concerns that a move towards more and increasingly stringent rules worldwide will detract from the importance of prudent supervision, an approach for which Australia’s Prudential Regulatory Authority (Apra) has received critical acclaim. “The key point is not what the rules say, it is really about how they are enforced,” said Edmund Bosworth, head of risk reward at Westpac. “The great danger to the future regulatory environment is that it does not lead or support a future supervisory environment. Unless you have that change in supervision, unless all supervisors act like Apra, then we simply will not see all the outcomes that the regulatory environment is trying to achieve,” he said, adding: “We do not necessarily want to see the weakening of supervisory standards that we have seen in some other jurisdictions being implemented in Australia.”

Meanwhile, Guy Debelle, assistant governor of financial markets at the Reserve Bank of Australia, called for better use of common sense. He laid part of the blame for the global financial crisis on the use of models that failed to account for immeasurable uncertainties. “Comfort was taken in the precision of the measurements without thinking enough about the measurement itself. Not enough judgement was exercised; indeed, at times it seems to have been turned off,” he said, adding: “Risk measurement based on historical models can only take you so far. Judgement must play an important role. Ultimately, the future is uncertain in the sense that it cannot be quantified. The goal would be to design systems for financial markets that are as robust as possible to guard against this uncertainty and a system with less leverage is one obvious means of enhancing robustness.”

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