Tough APRA regulation could push up interest rates: Ralph Norris

APRA’s hard-line stance on enforcing new global banking rules could result in higher interest rates and a credit squeeze, former Commonwealth Bank CEO Ralph Norris has warned.

The warning from Norris follows a week of annual general meetings where the banks complained of high funding costs and political pressure to lower interest rates and just two weeks after the ANZ said it would adjust its mortgage rates independently of the RBA.

It also follows reports – denied by ANZ, with other major banks declining to comment – that APRA is requiring all the major banks to “stress test” how they would cope should a European financial collapse reach Australia.

Norris’s chief concern is the prescriptive approach APRA is taking to the implementation of Basel III banking reforms, announced in Switzerland in December 2010.

The reforms require (among other things) that banks hold higher reserves of cash as well as have sufficient high-quality liquid assets “to survive a significant liquidity stress scenario for a minimum period of 30 calendar days”.

Norris says regulators in Europe and the US are taking a softer approach to implementing the regulations, whereas Australia is at risk of scoring “an own goal” by moving too far ahead of what the rest of the world is doing.

“Of course there are benefits in having a strong and stable financial sector, as was demonstrated during the financial crisis, but Australia’s stable banking sector withstood the GFC because it is already well capitalised and well regulated. Raising the bar again may lead to a marginal increase in stability but, it must be asked, at what cost?” Norris writes in The Australian Financial Review.

“It is difficult to be precise about stability benefits at the margin versus cost, but it is clear that higher or increased capital levels did not necessarily correlate with increased stability and resilience during the crisis. It is also true that financial crises can originate outside the financial system, and increased stability within the system may not avert such crises,” he says.

“The cost of getting it wrong, because of flawed assumptions or models, could be very great, and would have a direct impact on the price and availability of credit for Australian customers,” Norris says.

According to Norris better capitalised banks are not necessarily more resilient in times of crisis. 

APRA intends to issue the final version of its prudential standard covering capital adequacy requirements in mid-2012.

Following this, qualitative and reporting requirements as well as changes to minimum liquidity holdings requirements will be implemented in late 2012 or early 2013.

The liquidity coverage ratio– which requires banks to hold enough liquid assets to survive a 30-day period of acute stress – will be implemented on January 1, 2015, while net stable funding ratio requirements – the proportion of long-term assets that are funded by long-term, stable funding  - will be implemented on January 1, 2018. Both are in line with an internationally agreed timetable.