Australia weathered the last financial crisis well, but this does not guarantee immunity from future shocks. We cannot be complacent.
Our financial system is strong, stable and well regulated, but has a number of systemic features which represent potential vulnerabilities. Our banks source a considerable share of their funding offshore, reflecting Australia's position as a net importer of capital. Banks provide close to 90 per cent of the domestic credit that local firms and households receive. Our major banks have also adopted similar business models, with home mortgages accounting for around 60 to 70 per cent of their domestic lending. This creates some concentration of risk in the system.
For these reasons, Australia's financial sector regulatory framework needs to be stronger than those of comparable economies. The resilience measures will ensure the banking system is more stable by holding more capital, and will address risk weights, leverage, loss absorbency and regulators' crisis management powers. The Inquiry's focus on bank capital builds on the actions already taken to bolster bank liquidity arrangements in recent years. Both the content and timing of regulatory changes will take into account developments in the Australian economy and in international financial regulatory frameworks.
In simple terms, these measures aim to ensure our financial system remains robust in the face of severe external shocks. The system must be able to maintain its core economic functions in crisis circumstances, including the provision of credit to households and firms. By requiring banks to take greater responsibility for their own resilience, the need for taxpayer-funded bailouts is reduced. The measures reduce the advantages the larger banks have over their smaller counterparts, increasing competition and leading to better outcomes for consumers.
- To date:
- The Australian Prudential Regulation Authority (APRA) released an international capital comparison study on 13 July 2015.
On 20 July 2015 APRA announced an increase to mortgage risk weights for our larger banks which will improve the resilience of the banking system to crises and promote competition. The major banks have subsequently undertaken capital raisings to increase their capital ratios.
- By end-2015:
- Develop legislation to facilitate participation of Australian entities in international derivative markets and better protect client monies.
- By mid-2016:
- Consult on measures to ensure financial regulators have the tools they need to manage any future financial crisis.
- By end-2016:
- APRA to take additional steps to ensure our banks have unquestionably strong capital ratios.
- Beyond 2016:
- APRA to ensure our banks have appropriate total loss-absorbing capacity and leverage ratios in place.