Australia lags in ending too big to fail

  • By Elizabeth Fry

Australia’s prudential regulator is dragging its feet over ending the too big to fail agenda by not drawing up rules that govern banks in liquidation.

The regulator has not progressed with writing detailed resolution plans which set out how a bank will operate if APRA is forced to take the reins should a bank goes bust, says Kevin Nixon, the global regulatory expert.

"We are not advanced as other jurisdictions," he will tell delegates at RFi Group’s Australian Retail Banking Summit in Sydney on Tuesday.

There are a couple of elements to this agenda; a recovery plan which is written by the banks detailing their approach if they get into trouble and a resolution plan which is written by the regulator.

Australian banks have written recovery plans or  a "living will" - detailing their ability to wind down in an orderly fashion without the need for a taxpayer bail out and without destabilising the banking system.

"But APRA needs to get the resolution plans done," Nixon will say during his presention to the conference.

“This is one of the lessons of the crisis. Let’s not wait until a crises hits and then try and work out what happened and what we do about it.”

Crisis powers

Further, Nixon noted that the accompanying legislation giving crisis powers to APRA was only signed into law in March. These powers relate to how APRA's powers can be used to bail-in all bank securities in a time of crisis in line with global practice.

Meantime, the debate about total loss absorbing capacity (TLAC) rages on.

The regulatory expert says Aussie regulators have taken a much more measured approach than their peers with ending the too big to fail.

"We have implemented recovery planning, passed legislation on crisis management powers given to APRA but we haven’t been as aggressive as other jurisdictions.

Resolution planning has resulted in significant structural reform that has prevalent in parts of the world – the ringfencing of retail banking from investment banking.

“There has been a long debate on prepositioning - which is how far do you go in getting ready to break up a bank in the unlikely event that the bank fails.

"Australian authorities haven’t moved on pre-positioning; they haven’t seen the need to go that far.

"This is not necessarily a bad thing as it gives much greater time for consideration of the impact and effectiveness of these reforms.”

Dirty Laundry

Clearly, the banks have more capital now, and more liquidity, he went on to say, so the probability of failure is lower, thanks to Basel three and a host of other regulations.

“But however, small that probability is, there is still a chance of a bank failure.

“So, the question is how much prepositioning you should do before a possible failure to deal with that failure."

In Nixon's view, Australia does not lag the rest of the world in terms of regulation but it was late in exposing vulnerabilities in the financial system and potentially bad behaviour. 

“The dirty laundry was aired a lot sooner after the crisis in other parts of the world," he noted.

"Our financial system didn’t have the near-death experience that other parts of the word did and through that experience a lot of the weakness and risks in the financial system were exposed lot earlier and with a lot more force.

"Their Royal Commission moment happened before ours."

Nixon said the regulations are already in place here.  That what’s being exposed in the Hayne royal commission are allegations of breaking existing rules.

Overall, aside from resolution planning, he thinks the adoption of the Bank Executive Accountability Regime puts Australia in line with jurisdictions which have implemented personal accoutability regime after having seen it bedded down in the UK.