Banking Royal Commission could force S&P revision

Standard & Poor’s has warned that a Royal Commission into the banks could force the ratings agency to revise its view of the Australian banking sector.

Following Standard & Poor’s (S&P) Australian banking sector update, the agency’s director of financial institutions and ratings, Sharad Jain, stated that despite its current view of the sector’s compliance with regulation as “very high quality”, S&P could be forced to “revise” its current assessment of the banks.

Mr Jain said that while the ratings agency currently believes banking governance and risk management is “as good as anywhere else globally”, he warned that if the Royal Commission finds that “systematic manipulation of rules and regulations” is “putting the banking sector at risk”, S&P could take appropriate precautions in response to the findings.

“If that does come out, then we would obviously need to take that into account, and we may indeed revise some of our current assessments, because that would suggest there are elements of greater risk in the banking system than what we had considered,” the director said.

He added that while banks are currently able to “price for risk”, restrictions that may be introduced following the Royal Commission could tempt the banks to “indulge” in risky activities like principal trading and investment banking.

“The other things that such an inquiry may lead to is that if that inquiry is then followed up with some restrictions put in place onto the banks’ behaviour, then that could have some unintended consequences.

“If there are some restrictions put in place that would make it difficult for the banks to post the earnings that they consider reasonable, then there is a potential for the banks to move to some riskier strategies to try and get those returns that they consider reasonable in that hypothetical scenario.”

Further, Mr Jain noted that a draining of the banks’ management resources during the Royal Commission could be another factor which influences S&P to revise its view of the sector.

The director concluded: “The final point I would have on such an inquiry is that in the interim, obviously as any inquiry does, is it would suck up a degree of management resources, and could prove to be some degree of distraction for management.”

[Related: Government agrees to hold Royal Commission into banks]

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