Speaking on a panel at the A50 Australian Economic Forum in Sydney on Friday, APRA chairman Wayne Byres said that while the regulator also oversees the superannuation and insurance industries, the banking sector is where APRA is currently busiest.
“The government’s recent Financial System Inquiry (FSI) suggested a number of policy reforms to make the banking sector both more resilient and more competitive,” Mr Byres said.
“These twin objectives, coupled with the ongoing reforms emanating from the Basel Committee, will occupy much of APRA’s banking policy agenda in the year ahead."
Mr Byres noted that the FSI touched on Australia’s dependence on foreign capital, and the significant role played by the banking sector in intermediating between foreign lenders and domestic borrowers.
“As a result, risks to the banking sector’s access to foreign funding have the potential to be highly disruptive,” he noted.
“The FSI’s first recommendation was therefore that capital standards for Australian banks should be set such that their capital ratios are ‘unquestionably strong’, with a view to ensuring that, even during times of market stress and turbulence: foreign creditors retain their faith and confidence in Australian banks; while at the same time the potential for a call on public sector support is reduced.
“Over the year ahead, we’ll be watching how the international capital framework is finalised with a view to establishing an ‘unquestionably strong’ and robust set of domestic capital requirements for Australian deposit-takers.”
Mr Byres said the result of the changes in the pipeline will, in all likelihood, lift capital requirements somewhat higher, but still well within the capacity of the banking sector to absorb in “an orderly fashion” over the next few years.
While APRA doesn’t have a competition objective per se, Mr Byres said the regulator is also mindful of the FSI’s desire for the banking sector to be more competitive.
“So we’ll be looking at policy choices that, where possible, add to the competitive dynamic of the industry when this doesn’t undermine prudential outcomes,” he said.
“Some of the changes we’ve already made, for example to risk weights for mortgages, are consistent with the FSI’s objective.”
In addition, APRA will be working with the government to strengthen its failure management powers, as recommended by the FSI.
“Our current framework broadly aligns with international standards, but could nevertheless be strengthened to make sure that APRA has a strong and comprehensive suite of powers to help ensure a failure can be dealt with in as orderly a fashion as possible,” Mr Byres said.
“We’ll also be seeking to make sure banks’ own recovery plans are enhanced at the same time.”