In its second submission, the BCA warned the FSI review panel not to meddle with existing banking policy frameworks unless there are good reasons to do so.
While the council recognises that the FSI review panel is “grappling with complex economic and policy matters” it could not find any evidence in the interim report to justify “major additional regulation in the banking system”.
“Unless a clear problem in Australia is identified, the panel should refrain from recommending major changes to current policy frameworks governing the financial system, as this can add to the cost, complexity and uncertainty in the sector and throughout the economy,” it said.
“They risk detracting attention from the important need for policy changes that will lift global competitiveness and the ability of the system to efficiently fund future growth.”
The BCA stressed that any changes that are recommended in the final report should be clearly explained and be carefully designed not to add to regulatory risk or reduce incentives to finance opportunities to grow the economy.
“There are three key areas discussed in the interim report where regulatory reform is being considered but, if not done well, could impose costs on the system and make it harder for the financial system to efficiently fund Australia’s future growth,” it said.
The three areas currently being considered for reform include bank risk-weighting systems, ‘too big to fail’ and ring-fencing.
The non-majors have been aggressive in their recommendations that risk-weighting systems be changed so that the majors do not continue to benefit from a capital advantage, which allows them to lend lower LVR home loans at a cheaper rate than their smaller competitors.
One suggestion has been to increase the internal risk-weighting systems of the majors, but the BCA believes this would lead to higher lending costs.
“Increasing internal ratings-based risk weights of those that use them, without a strong justification for doing so, would be expected to lead to higher lending costs for businesses and consumers with flow-on effects on the wider economy,” it said.
“Rather, a positive approach to reduce the gap should be preferred by tasking the Australian Prudential Regulation Authority (APRA) to find opportunities to improve standard risk-weighting systems or faster IRB accreditation for non-IRB banks.
“The system as whole can benefit from improved risk systems.”
On the issue of ‘too big to fail’, the BCA notes that the FSI interim report observes that a legacy of the global financial crisis is the perception of some banks being ‘too big to fail’ and also asserts, appropriately, that "the government should minimise the expectation of taxpayer funds being used to support the financial system".
“However, we do not see that the interim report identifies a need to increase capital ratios for large banks ‘perceived’ to be too big to fail in order to reduce these potential costs to taxpayers,” the BCA said.
“The lifting of capital ratios would not be without cost as it would flow through to higher costs of funds for business and consumers,” it said.
“This would be undesirable for funding future growth, especially in times of low investment activity such as the phase of contracting private business investment we are currently expecting, according to federal budget projections.”
In a speech last week, APRA chairman Wayne Byres made comments suggesting that there is an increasing likelihood the big four will need to hold more capital.
Mr Byres was critical of the internal risk-weighting models of the majors.
“Banks now face substantially higher minimum capital requirements, and must hold higher quality capital to meet these requirements,” he said.
“But these efforts are being undermined somewhat by an increasing lack of faith in the use of internal models by the largest banks to calculate risk-weighted assets.”