The Final Report states that Australia’s financial system has performed well in the two decades since the Wallis Inquiry. The system is competitive with sophisticated capital markets and firms that adopt new technologies, improving customer outcomes. The Final Report acknowledges that Australia’s financial system held up well during the Global Financial Crisis (GFC) relative to its international counterparts. Australian taxpayers did not bail out an Australian Authorised Deposit-taking Institution (ADI) during the GFC. In response to the GFC, Australian banks and regulators have taken material steps to increase the resilience of the financial system.
This submission, ANZ’s third submission relating to the Financial System Inquiry (FSI), includes suggestions on how to build on the foundation of a robust and efficient financial system. The structure of the submission follows the FSI Final Report. ANZ has responded to each recommendation with particular emphasis on key recommendations including those relating to ‘resilience’. ANZ’s response to the Interim FSI report contains material that is relevant to this submission but is not replicated here.
ANZ fully supports the suggestion that the Australian Prudential Regulatory Authority (APRA) be granted responsibility for the development and implementation of the recommendations relating to resilience, if adopted by the Government. Given the importance and potential impacts of these recommendations on the financial system and the broader economy, it is essential that the Reserve Bank of Australia (RBA) and other members of the Council of Financial Regulators (CFR) are also involved in this process.
There must be a clear objective to minimise the frequency of regulatory change. This would reduce costs to consumers and provide banks with certainty to continue to invest in new products and business development, which will maximise growth and employment opportunities. Banks have implemented significant regulatory change since the GFC. Capital ratios are already approximately double pre-GFC levels. The implementation of Basel III reforms for liquidity has also been an important development in ensuring the Australian financial system is significantly more resilient to a shock than in the past. Further increases in capital requirements will have a diminishing marginal benefit for stability and resilience. Excess capital requirements result in a real impact on the economy, not just through the additional costs, but also because higher capital constrains Authorised Deposit-taking Institutions’ (ADI) capacity to lend to both the consumer and business segments.
Australia’s membership of the Basel Committee on Banking Supervision (BCBS) means that, even putting the FSI recommendations to one side, Australian banks are already facing additional regulatory change. This includes the introduction of a Leverage Ratio, the Net Stable Funding Ratio and potentially Total Loss Absorbing Capacity (TLAC). Recent announcements from the BCBS suggest the pace of regulatory change is not slowing, and arguably, some of the most material changes are still to occur. This includes significant revisions to standardised Risk Weighted Assets and the proposed introduction of capital floors (already being referred to as ‘Basel IV’).
The Basel IV proposals will potentially have material impacts on the way ADIs quantify and manage risk, invest in risk management capabilities, and structure their products and balance sheet, as well as the pricing of customer loans and deposits. The proposals may widen the gap between actual risk characteristics and the risk implied by capital requirements. A wider gap encourages the movement of lending from regulated to unregulated sectors and is economically inefficient in the allocation of capital resources.
As the proposals currently stand, they actually incentivise banks to reduce exposure to certain low risk sectors and portfolios, increasing the overall risk profile. The exact impact of these proposals will not be known until any new requirements are finalised by the BCBS and the capital floors are calibrated.
The potential consequences of the Basel IV proposals need to be carefully considered. In the residential mortgage market, for example, the proposals may encourage ADIs to implement much greater differential pricing between customer groups than currently occurs in the Australian market, to reflect the wider spectrum of capital requirements. This may include higher pricing to customers with higher loan to value ratios. It is important that the customer and economic impacts of these proposals are thought through and considered fully.
The Basel IV proposals also take a ‘one size fits all’ approach to capital requirements. As detailed in ANZ’s submission to the FSI Interim Report, Australia benefits from significant structural strengths. These include full legal recourse on lending (not prevalent in parts of weaker offshore mortgage markets, as evidenced during the GFC), the banks’ business models, strong financial performance, the strength of the sovereign credit rating, Australia’s robust legal and insolvency framework, and active and effective supervision by APRA. Australia’s structural benefits are not recognised in the recent Basel proposals. It is critical that if the proposals are implemented there is scope for appropriate national discretion and flexibility in setting the capital floor to reflect these benefits accurately.
Given the potential impact of these Basel IV proposals and the fact that the BCBS consultation process has only just started, it is critical that the work by the Committee is finalised before the Final Report’s recommendations in Chapter 1: Resilience are considered by APRA. Otherwise, the FSI recommendations may be obsolete before they are implemented.
Superannuation and retirement incomes
The efficiency of the superannuation system is fundamental to the ongoing welfare of all Australians. The superannuation system could be strengthened by further clarifying that the objective of superannuation is to provide retirement income.
Opening default funds to all MySuper products will help create a more competitive and accountable superannuation system. Improving employees’ choice of funds and strengthening the governance of funds by requiring funds to have a majority of independent directors would also improve outcomes for fund members.
A requirement for trustees to preselect a comprehensive income product which members could select if they wish, may particularly assist low income earners or retirees who do not wish to seek independent financial advice.
ANZ supports measures that remove impediments and foster an environment for innovation in the provision of financial services. Crowd funding, comprehensive credit reporting and improved access to public sector data should bring efficiencies to the market for financial services. ANZ welcomes the RBA review of payment system regulation now underway and looks forward to further consultation with the industry and consumer groups given the complexity of these issues.
ANZ supports further measures for improving consumer outcomes, noting that there has been extensive regulatory change affecting the financial services sector in recent years.
The recommendations dealing with competency of advisers and facilitating innovative product disclosure will aid the delivery of quality financial advice and greater financial literacy. ANZ is aware of the need to improve arrangements in these areas and is taking steps to progress the adviser register and enhanced educational requirements for financial advisers.
The strengthening of product issuer and distributor accountability is a significant change to current arrangements and care needs to be taken in the implementation of these proposals. Industry is keen to work with Government on the design of these proposals.
ANZ supports the Final Report’s endorsement of the current regulatory framework for the financial sector. We agree that there are steps that can be taken to improve regulator performance through greater accountability for the exercise of their powers.