Australia’s banks are ‘too big to get sick’: APRA

Sally Rose at The Age quotes APRA’s executive general manager of supervision and support, Charles Littrell:

“Australia has taken a big national bet on the rise of Asia, in particular on the rise of China, from a developing country to developed status,” Mr Littrell said.

He described APRA’s stance of forcing the banks to hold higher levels of equity than they might like as an “insurance policy” against that bet.

“Most of Australia does business on the basis that China is going to continue to rise relatively smoothly and that the Communist government can manage macroeconomic policy. At APRA we are not so convinced,” he told an Australian Centre for Financial Studies event in Melbourne on Friday.

“Australia’s economy has done absolutely brilliantly well for a really long time, but it is brittle: this could all go away quite rapidly. Our aspiration for the major banks is that they are not accelerants in that situation, but shock absorbers.”

Too big to get sick
The financial system inquiry chaired by David Murray said Australia’s banks should be “unquestionably strong” compared to global banks because of Australia’s reliance on international funding for its growth; APRA has said strength will be determined on a range of measures. Mr Littrell said there is plenty of focus internationally on banks that are “too big to fail”, but the relative importance to the economy of the Australian banks means they are “almost too big to get sick”.

Australian banks face three problems:

  1. Huge exposure to residential mortgages in a toppy market;
  2. Low capital reserves against those assets compared to international competitors; and
  3. Reliance on volatile wholesale funding in international markets which, like the proverbial umbrella, international lenders will want to take back when it rains.

Source: Australia’s banks are ‘too big to get sick’: APRA

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