Do the Big Four Australasian Banks Require Special Regulation?

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The Australia-New Zealand Shadow Financial Regulatory Committee (ANZSFRC), an independent group of senior finance academics, today released its latest statement. It addresses the question of whether the big four Australasian banks warrant any special regulatory treatment by virtue of being systemically important banks (SIBs). International regulators have recommended additional capital requirements for 29 international banks (but not including our big four) because of the negative social externalities which failures of such institutions cause.

The Big Four are Regional SIBs (R-SIBs), dominating the financial markets of Australasia. Given likely spillovers and contagion should either an Australian parent or its New Zealand subsidiary get into financial trouble, Trans-Tasman arrangements for dealing with a troubled R-SIB are important. While there are quite striking differences in resolution policies in the two countries, these do not appear to pose insurmountable problems. But greater clarity from the Australian government on how it would deal with a troubled SIB would assist.

Summary:

  • the fact that the big four would likely be too big to swallow by other banks, if in trouble, means that a different regulatory approach is appropriate compared to other smaller institutions where regulators can arrange smooth exit via takeovers (or allow failure)
  • requiring additional contingent capital (which are hybrid securities which convert into equity when a bank is in distress) for the big four has merit
  • there is merit in considering making a relatively simple leverage ratio the primary bank capital requirement instead of the increasingly complex and costly risk weighted capital requirements which the Basel Committee favours
  • while Australian and New Zealand policies for resolution of troubled banks are quite different, and the Big Four are SIBs in both, those differences do not look to pose insurmountable problems in dealing with potential failure of either the Australian parent or subsidiary. A requirement for conversion of operations to Non-Operating Holding Company (NOHC) structure (where both Australian and New Zealand operations were separate subsidiaries of the NOHC) would reduce direct spillover effects. But, in the absence of greater clarity from the Australian Government on how it would deal with a troubled SIB, risk of Trans-Tasman contagion and runs would remain.

Download ANZ Shadon Regulatory Committee Statement no.10: Do the Big 4 Australasian Banks Require Special Regulation?


About ANZSFRC
Following the example of the Shadow Financial Regulatory Committees in Asia, Europe, Japan, Latin America and the United States, a group of well known professors from Australia and  New Zealand, who are all experts in the fields of banking, finance, and the regulation and supervision of financial institutions and markets, set up the Australia-New Zealand Shadow Financial Regulatory Committee (ANZSFRC). The ANZSFRC had its inaugural meeting in Sydney in December 2006 when its first statement entitled “Managing Bank Failure in Australia and New Zealand: Rapid Access Matters” was issued during the 2006 Australasian Finance and Banking Conference. Co-chairs of the ANZSFRC are Prof. Glenn Boyle and Prof. Kevin Davis. Glenn Boyle is Professor of Finance at the University of Canterbury, Christchurch. Kevin Davis is Research Director of the Australian Centre for Financial Studies and Professor of Finance at the University of Melbourne.

For more information on the ANZSFRC click here


Media contact details:

Professor Kevin Davis
Research Director, Australian Centre for Financial Studies &
Professor of Finance, University of Melbourne
T: +61 3 9666 1050 M: +61 409 970 559

 

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