Strict Regulation May Put Australian Banks At Disadvantage

   By Caroline Henshaw 
 

SYDNEY--Australia's banks could find it harder to compete with international peers and will have to pay more to raise funds because of the local regulator's more stringent approach to new international banking rules, according to two of the country's major lenders.

Commonwealth Bank of Australia (CBA.AU), Australia's largest bank by market capitalization, said in a submission to a Senate enquiry that the Australian Prudential Regulation Authority's conservative approach to calculating the banks' capital holdings would make Australian banks seem less creditworthy.

"Australian banks will be placed at a competitive disadvantage when accessing global debt and capital markets as Australian banks' capital ratios will appear lower," CBA said. "This may lead to a higher cost and/or reduced access during stressed periods."

National Australia Bank Ltd. (NAB.AU), another one of Australia's big four banks, calculated in its submission that the base cost of funds for the banks will rise to 115 basis points in the first quarter of fiscal 2014, up from 104 basis points in the third quarter of 2012. The cost of cash plus assets will rise to 128 points from 120 points over the same period.

"Changing the funding model to make it more stable comes at a cost that will be borne in part by borrowers," NAB said.

Australia's banks are some of the most creditworthy in the world thanks to their strong balance sheets and the resilience of the local economy. But the introduction of the Basel III accords, which aim to strengthen the financial system by increasing banks' capital requirements, are forcing them to compete more for deposits and lengthen their funding profile--all at a cost.

APRA is also introducing particularly strict local rules in excess of Basel requirements which strip out riskier assets from the balance sheet and adds risk weighting to assets perceived to be more vulnerable. This means the Australian banks' core equity ratio seems lower than their peers--the headline 9% rate here is equivalent to around 11.5% in the U.K.

In a paper published in April, APRA rejected the suggestion that the banks would be at a disadvantage in global capital and funding markets due to the lower headline figure.

But CBA argues that this will create the perception that Australia's banks are less-well capitalized than their peers. It points to a note by Royal Bank of Scotland stating that "all four of the major commercial Australian banks fall below the 9% Core Tier 1 threshold."

"If Australian banks report lower 'headline' capital ratios due to APRA's conservative approach to the adoption of Basel III reforms they may be disregarded," said CBA.

Australia and New Zealand Banking Group Ltd. (ANZ.AU) and Westpac Banking Corp. (WBC.AU) round out the top four banks.

Write to Caroline Henshaw at [e-mail]