Small banks seek fairer funding

The customer-owned banking sector wants the regulator to follow New Zealand’s lead in narrowing the big four funding advantage.

The customer-owned banking sector is calling for a “fair go” and wants the banking regulator to follow New Zealand’s lead in narrowing a funding advantage held by the dominant four lenders.

The Customer Owned Banking Association (COBA), which represents the $116 billion industry, has lodged a submission with the Australian Prudential Regulation Authority on a proposed broader capital framework and the introduction of a leverage-ratio requirement for banks.

COBA chief Michael Lawrence used the submission to stress the difference in capital requirements had helped cement the major banks’ dominance in the home loan market.

“Customer-owned banking institutions and other challenger banks want a fair go and a level playing field,” he said.

“The major banks’ sheer size gives them enough advantages. They should not be getting extra help from the regulatory framework.”

APRA wants to set a minimum leverage ratio, which measures the proportion of a bank’s assets funded through equity capital rather than debt, for the largest banks.

The minimum leverage ratio requirement for larger banks is being proposed at 3.5 per cent, rather than its initial threshold of 4 per cent.

APRA plans to allow smaller banks — those with $15 billion or less in total assets — to be exempt from a strict ratio but they will have to report to the regulator under a simplified model.

COBA welcomed the proposals around leverage but wants APRA’s threshold for smaller lenders lifted to $20bn.

The industry association represents credit unions, mutual banks and building societies.

“COBA support the simplified leverage ratio for standardised ADIs (authorised deposit-taking institutions) and disclosure for simple ADIs but APRA should consider reporting efficiencies,” the submission said. “The leverage ratio will discourage excessive leverage and protect against the underestimation of risk” by the biggest banks.

The leverage ratio measure is part of a broader regulatory framework being imposed by APRA, including requiring that the nation’s banks are “unquestionably strong”.

COBA is urging APRA to take further action on closing the funding gap between large and small banks and differences in the amount of capital held against mortgages. It points to proposals made in New Zealand in December — that may be implemented in five years — to boost tier-one capital buffers and change risk weightings applied to bank assets.

“We note that the Reserve Bank of New Zealand has taken a more pro-competition position, adopting a key principle that ‘where there are multiple methods for determining capital requirements, outcomes should not vary unduly between methods’,” COBA said.

But local investors see the reforms in NZ as a significant capital impost on Australia’s banks, which may have to raise billions of dollars to comply. UBS in January warned that the proposed NZ capital requirements could prompt Australia’s banks to cut ­dividends.

Last year the Productivity Commission highlighted the funding advantage enjoyed by the major four banks that are deemed too big to fail.