Banking inquiry: APRA to brief on risk culture

APRA will brief a banking inquiry on some key aspects of its review of the risk culture of the Australian banks.

APRA chairman Wayne Byres. Picture: Britta Campion

The financial services industry regulator is nearing completion of a major project on the risk culture in banks and insurers, and is likely to brief its parliamentary oversight committee today in its bid to strip the industry of some of its well-chronicled cultural excesses.

The Australian Prudential Regulation Authority set up a small unit last year to assess the industry’s approach to a new standard requiring boards to form a view on risk culture and the extent to which firms operated consistently within their risk appetite.

There was also a longer-term project to review pay arrangements to ensure they take ­account of risk-taking behaviour.

It’s understood APRA chair Wayne Byres is in a position to brief the House economics committee, which probed the major-bank chief executives last week, on some of the key aspects of its risk culture review, which will be completed soon.

An APRA spokesman declined to comment. Mr Byres, however, has previously said that the three issues of governance, culture and remuneration were “highly interrelated”.

In addition to a build-up in capital and liquidity, behavioural changes were also needed to minimise the risk of another financial crisis.

“On culture and remuneration, we have more to do before we can be confident that these are genuinely supportive of long-term financial strength rather than, as we have seen in the past, possible threats to it,” the APRA chief said.

The Australian Securities & Investments Commission will appear first before the committee, followed by APRA and the competition watchdog.

After interrogating the major-bank chiefs for 12 hours, the committee is expected to follow up with the regulators on a number of key issues, particularly conduct and competition.

It emerged in last week’s hearings that no senior bank executive had lost their job, despite a string of financial planning “scandals” and mishaps. This is likely to be a line of questioning for ASIC.

On competition, the regulators will be probed on bank account portability, more open data, and a lighter regulatory touch to encourage new entrants into the heavily concentrated financial services industry.

ASIC chair Greg Medcraft was reported yesterday to be a backer of rate tracker mortgages, in line with evidence given to the committee by ANZ Bank chief executive Shayne Elliott.

Mr Medcraft’s intervention, which included a reference to the “inequity of the capital charge” between big and small banks, was condemned by the head of the financial system inquiry, David Murray.

“Product design and pricing is not a matter for the market conduct regulator,” Mr Murray said.

“In my view, it’s imprudent for a bank to price mortgages solely off the bank bill rate because it doesn’t reflect their cost of funds.”

He said the RBA, in its 2014 submission to the inquiry, had concluded there was strong competition between the major banks.

This had helped market efficiency and provided important benefits to consumers through increased choice, innovation and lower prices for financial services.

Mr Murray also said the inquiry’s recommendations to improve competition in the mortgage market, including an increase in major-bank risk-weights, had been implemented.

Despite this, the Customer Owned Banking Association said yesterday that APRA should act promptly to further narrow the gap in risk-weight requirements by requiring the average risk-weight for major banks to be at least 30 per cent, up from 25 per cent. This compares to a 39 per cent average for smaller players.

“The other significant structural advantage enjoyed by the major banks is the implicit guarantee that flows from the perception that they are too big to fail,” COBA said. “This gives the major banks a significant and unfair funding cost advantage, built on the back of the government’s balance sheet.”