HomeView 2016 Media ReleasesAPRA analysis shows regulatory rules favour major banks

COBA today welcomed analysis by banking regulator APRA which quantifies the funding cost advantage given to the major banks by regulatory capital rules.

COBA today welcomed analysis by banking regulator APRA which quantifies the funding cost advantage given to the major banks by regulatory capital rules.

“Common equity tier 1 regulatory capital is the most expensive form of funding and APRA allows the major banks to hold less of this form of funding against mortgages compared to their competitors,” COBA CEO Mark Degotardi said.

“APRA has now confirmed that the difference in the regulatory capital rules equates to a reduction in common equity tier 1 capital requirements for the major banks of approximately $19 billion.[1]

“Based on certain assumptions, and comparing a major bank to a competitor using the ‘standardised’ regulatory capital rules, APRA estimates that the pre-tax funding cost advantage for a major bank is approximately 14 basis points.

“This estimate is based on conservative assumptions so changing the assumptions would deliver a much larger estimate of the funding cost advantage.

“What it means is that in the mortgage market, the major banks have a head start built into the rules of the game.

“It’s important for all stakeholders to understand the various barriers to a more competitive banking market because only genuine, sustainable competition can deliver better pricing, choice, innovation and service for consumers.

“APRA is the banking regulator so it is significant that it has removed any doubt that major banks gain a funding cost advantage from the regulatory capital rules and also from implied government support being reflected in their credit ratings.”

The Financial System Inquiry’s top three recommendations are to reform the regulatory capital rules.

Recommendation 1 is that regulatory capital for major banks should be ‘unquestionably strong’. APRA is suggesting it may implement this recommendation in 2018, four years after the FSI.

Recommendation 2 is about narrowing the gap in mortgage risk weights between the major banks and other banking institutions. APRA has taken an interim step to narrow this gap but should go further.

Recommendation 3 is about reducing the effect of the implicit guarantee enjoyed by major banks because they are considered by the market, and by ratings agencies, as ‘too big to fail’ and therefore can access cheaper funding courtesy of the taxpayer. APRA says it will ‘hasten slowly’ in implementing this recommendation and has not indicated a timetable.

“COBA would like to see APRA acting with greater urgency in implementing reforms that add to banking system resilience and reduce the advantages major banks have over their smaller competitors,” Mr Degotardi said.

“Customer owned banking institutions – mutual banks, credit unions and building societies – are eager to build on their 4-million strong customer base, but we need a fairer regulatory framework.”

In recent testimony before the House of Representatives Economics Committee, the ACCC and ASIC both expressed concern about competition in banking.

ACCC chairman Rod Sims said:

  • there is a lack of robust competition
  • banking is a cornerstone of the market economy and if competition is not strong in the financial sector, there are adverse effects for the economy
  • market share of the major banks has gone up over the last 10 to 15 years and their profitability has gone up during that period.

ASIC chairman Greg Medcraft said:

  • the banking market is an oligopoly, where a small number of firms have the large majority of market share and exercise market power
  • competition has declined since the global financial crisis and we have a more concentrated banking sector
  • we have a lack of competition.

For more information please contact:

Daniel McDougall, Senior Manager – Media and Communication

02 8035 8444 or 0407 637 541, This e-mail address is being protected from spambots. You need JavaScript enabled to view it

Customer Owned Banking Association is the industry body for credit unions, building societies, mutual banks and friendly societies.  See coba3.nexusone.com.au

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