The chairman of the Australian Prudential Regulation Authority (ARPA) has raised concerns over the methods Australian banking groups have used to reduce costs, in particular, cuts to staff.
John Laker used his speech at Friday's American Chamber of Commerce in Australia to comment on the risks banking groups are potentially opening themselves up to by taking 'short-sighted' approaches to cost-cutting.
"APRA does not have an issue with cost-cutting per se; the level of staff expenses is quite properly a matter for boards and senior management. APRA's concern is how cost-cutting might be achieved," Laker told delegates at the Melbourne event.
"Risks arise when efficiencies are sought through reductions in critical support functions and underinvestment in risk management capabilities
"This would leave ADIs [authorised deposit-taking institution] more exposed in the event of any future deterioration in economic conditions, with weaker risk control frameworks at a time when they are most required."
If the industry is making cuts to staff because it is deemed "an easy cost centre target", and not because ADI has "reined in" its risk appetite or exited certain activities, then such a move Laker said is "short-sighted approach" that APRA would strongly challenge.
As reported in InvestorDaily last month, employees in Australia's banking industry had approached the Finance Sector Union (FSU) with fears about future job security.
At the time, ANZ terminated 230 staff from its wealth management arm as part of the 1000 job cuts the company announced at the start of the year.
Industry sources have since said job cuts across Australia's $330 billion plus wealth management industry are likely to continue as all major groups within the sector experience significant strategic change.
Laker said outsourcing and offshoring is becoming a more frequent path by ADI's to find efficiency gains, and while APRA is not opposed to the practice, Laker said participants need to recognise that it also reduces control.
"While outsourcing can also reduce risks where functions are taken over by well-trained specialist providers, core expertise leaves the ADI, possibly never to return. And poor control over outsourced service providers can actually lead to higher costs in the long run," he said.
"As a result, we are increasingly convinced that major outsourcing projects require close involvement of ADI boards to ensure that the trade-offs involved are well understood and that the risks are being considered in a transparent manner."
Laker said the prudential regulator has begun questioning ADIs over their risk appetite in regards to outsourcing and offshoring.
