On July 13 and 14 the Australian Centre for Financial Studies hosted the 20th Melbourne Money and Finance Conference (MMFC).
The conference brought together invited academics, industry participants and regulators to present and discuss specially prepared papers on emerging matters of significance to the financial sector.
This year’s papers explored the theme The Australian Financial Sector and Global Integration and provoked lively discussion about the future of the sector, and the potential opportunities and challenges of increased integration. The papers are reproduced below with the authors’ permissions.
The Conference was sponsored to ASIC and the RBA, and supported by Finsia.
Basel 4 and implications for Australia
Kevin Davis and Mark Lawrence
Recent (Basel 3) and proposed (‘Basel 4’) changes to bank capital requirements were designed for internationally active and/or systemically important banks, yet some of their biggest impacts will be felt on domestic, so-called “standardised” banks that are not large or sophisticated enough to deploy internal risk-based capital models. The calibration of proposed capital floors and leverage ratio requirements must be undertaken carefully to maintain appropriate risk sensitivities. Assuming this can be managed, it appears likely the Basel 4 changes could improve the competitiveness of small, standardised banks in Australia, particularly in SME and personal lending. it could also lead to growth in the share of the mortgage market held by standardised banks
Liquidity risk mitigation: Australian and international approaches
The traditional means of managing bank liquidity risk (including deposit insurance and lender of last resort facilities) have limitations, and their inadequacy is believed to have contributed to the global financial crisis. The regulatory response has included Basel III’s Liquidity Coverage Ration and Net Stable Funding Ratio (NSFR), with APRA expected to publish an Australian version of the NSFR in late 2015. The paper focused substantially on the Committed Liquidity Facility (CLF) and the extent to which the CLF really overcomes the limitations of the lender of last resort approach experienced during the GFC. If the CLF is not added to the APRA standard, banks may be required to replace some of their short term funding. Options for achieving this may be more costly, but the paper asserts that Australian banks should pay for their own insurance against risks they are bearing and from which they are benefitting.
Evolution of Australian Financial Market Infrastructure
Calissa Aldridge and Ben Cohn-Urbach
One key challenge for Australian financial markets is having the infrastructure to respond efficiently to technology developments with a regulatory framework that allows for efficiency improvements while maintaining confidence amongst market participants. Global competition has driven innovation by way of introducing new listing markets that directly compete with the ASX, development of crowdfunding as a new source of raising capital and reforms to OTC derivatives markets through increasing the use of Central Counterparty Clearing House (CCP). ASIC has spent substantial time and resources ensuring it understands, tracks and monitors these developments, and is increasingly engaged with overseas regulators and practices. As participants at the MMFC conference agreed, there is a greater need to be able to understand the complexity of technology advances and safeguarding against cyber crime, as Australian financial markets move towards becoming more globally integrated and complex.
New Technology, Data Protection and Implications for Financial Services Regulation
Recent innovation in financial services has three drivers: big data, cloud technology and data mobility. Presently Australia lags significantly, particularly compared with Europe, on critical issues of data protection laws and approaches to personal financial information security. Businesses, including financial services firms, are increasingly using data such as payments and location information, to derive personal attributes of customers without obtaining consent of customers to utilise their data. Businesses are also increasingly using cloud technology to reduce operational costs. Cloud computing opens the probability of data moving across borders, where there is complexity for both enforcement of multiple jurisdictions and policy formation. This is a significantly under-researched area with respect to provision of financial services in an Australian context.
Some Legal Issues in Cross Border Banking Regulation
Cross border banking can be undertaken in three modes: subsidiary banking (whereby a separate legal entity is incorporated in the domestic jurisdiction), branch banking (whereby a company may carry on business in more than one place) and cross border banking by contract (involves dealing outside the domestic jurisdiction without a physical presence). Regardless of which method is being adopted, it is common that regulation remains territorial. As international regulations are not uniform, there is a conflict of laws as banks venture beyond their domestic borders and into international banking systems. As such, development of reforms and frameworks are necessary to remove the difficulties and create efficiencies associated with banks contracting under foreign law.
Bank Levies in Australia: Lessons from Europe
Presently, as part of the Financial Claims Scheme, the Government provides deposit insurance for deposits up to $250,000 using an ex-post funded scheme. An identified problem with this model is that no funds are readily available in the event of a financial failure, and the system may undermine smaller banks. The proposal is to move to an ex-ante funding model to build a Financial Stability Fund (FSF). The proposal is supported by the RBA and adopted internationally, with 88% of countries with deposit insurance funded ex ante. In designing the FSF and taking learnings from international best practice, key questions revolve around the funds scope, scale, size and design particularly as to whether the fee be flat-rate or risk-adjusted. It is also a matter to determine whether the levy’s purpose should focus primarily on bank resolution, deposit insurance, or be used broadly. As participants argued there is insufficient evidence to suggest that an ex-ante model works and could create moral hazard problems in banks, particularly when the purpose has not yet been clearly identified.
Mutual recognition arrangements: Australia and Asia
Australia has one of the largest pools of assets under management in the world, and has developed a comparative advantage in investment management. Australia’s expertise makes it well-placed to capitalise on the growth of the funds management industry in Asia. There is bipartisan government support to grow the amount of foreign sourced funds managed in Australia, with mutual recognition agreements and passporting schemes forming a key element of trade facilitation. To be successful, Australian funds management businesses will need a sound understanding of the regulatory structure and cultural environment in which they will be operating. The winners will be businesses able to translate this understanding into effective and efficient business practices that provide investors access to attractive investment products.
The Australian financial sector and global integration: but not with New Zealand?
In response to the GFC most regions are embracing financial integration (through banking unions and proposed ‘capital markets union’). Creating a banking union between Australia and New Zealand would require harmonising regulation, a single supervisory mechanism and a single resolution mechanism. Closer financial integration should appeal to Australia as it would imply very little change, and create gains from reduced costs and better coordination. The proposal may be less attractive for New Zealand as the changes would be greater (for example determining the role of the RBNZ), but the gains for the smaller country accessing the larger market are normally also greater.
International Linkages of the Australian Banking System – Implications for Financial Stability
Grant Turner and James Nugent
Australian-owned banks’ have predominantly linked with New Zealand, UK and US, with New Zealand representing the largest share given the similarities of its banking system with Australia. Australia has also been building towards Asia to take advantage of the growing trade and investment flows between the two countries. International banking creates opportunities by allowing local banks’ to increase and diversify earnings; at a larger scale international banking promotes global economic growth by providing a channel to facilitate trade and allocate savings to investment opportunities; and the existence of foreign banks operating in other jurisdictions can help deepen local financial markets and raise competition and efficiency in the local banking system. However, as Australian banks’ expand internationally, with varying strategies and success, the Australian banking system is taking on more complexity, and as such regulators are constantly monitoring risks to financial stability.
Balancing safety, stability, competition and efficiency: the case for Australia’s major banks
In order to set capital requirements for major banks it is important to assess the degree to which they are systemic, financially sound, competitive and efficient. Analysis suggests Australia’s major banks are large as a share of GDPand have become more so over the past two decades. The major banks have demonstrated an ability to act as ‘shock absorbers’ for the Australian economy during the GFC, have grown their market share and appear competitive based upon several measures including the relatively limited size of Australia’s shadow-banking sector. ; Australian banks have amongst the highest efficiency (in cost-to-income terms) in the developed world. As such, an increase in capital would position the major banks better to deal with unexpected shocks without unduly impairing their competitiveness.
Quantitative easing: current developments and life in a low interest rate world
Panel discussion: Guay Liam, Chris Black, Stephen Walters
The Melbourne Money and Finance Conference is a unique conference series that brings together invited academics, industry participants and regulators under the Chatham House rule to discuss specially prepared and selected papers on emerging matters of significance in the finance sector.