Stanford professor Anat Admati slams local banks, labels APRA reforms ‘outrageously inadequate’

An international finance expert has slammed the local banking sector and called APRA’s reforms “outrageously inadequate”.

A top international finance expert has slammed the banking regulator’s prudential reforms as “outrageously inadequate”, suggesting the post-crisis reforms, part of a global rollout, have done little to make banking safer or more ethical.

Anat Admati, Professor of Finance at Stanford University, said the misconduct uncovered in the royal commission was common place in banking around the world.

“The financial sector is particularly prone to these problems because it’s easy to confuse people, it’s easy to hide harms that we can’t see physically,” she said.

“You in Australia have four big banks, with little competition, that are too big to fail, and which fund themselves abroad in very fragile way,” she added, speaking to Your Money today.

Australia, she said, had avoided the worst of the financial crisis but was now among the group of countries facing financial problems, along with Canada and Sweden.

Professor Admati, whose best-selling, 2013 book Bankers New Clothes advocated much higher equity levels for banks, said APRA’s decision to reduce from 4 per cent to 3.5 per cent the minimum “leverage ratio” (the minimum share of a banks’ assets that need to be backed by equity to apply from 2022), was “just outrageously inadequate”.

“The big banks barely need to have a business model beyond access to cheap debt and they enjoy the upside of the risks that they take,” she said.

Ms Admati said bankers’ pay and bonuses, a recurring theme of the royal commission hearings, were high because they could borrow so cheaply as a result of implicit and explicit subsidies.

“It’s easy to get the upside, which is magnified when you have so much debt and so little equity, and they’re not ever clawed back when things turn out badly,” she added. The big four banks have reduced their debt funding since the financial crisis from 95.5 per cent to 94.5 per cent, as part of global reform efforts.

Professor Admati said the rapid growth in financial services in developed countries, which contribute 9 per cent of GDP here, wasn’t healthy. “This industry does not have market forces to make it efficient. It has incentives to be bloated and inefficient and extract from the rest of the economy,” she said.

Ms Admati said banks that were too big to fail should be stopped from paying out dividends until their equity ratios had increased to at least 15 per cent.