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Regulators reviewing crisis management framework

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By Charbel Kadib
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4 minute read

Australia’s regulatory institutions are assessing the financial system’s preparedness for a major shock to the banking system amid ongoing stability concerns in the United States and Europe.

The Council of Financial Regulators (CFR) has released its latest quarterly statement, in which it has flagged risks in the global banking sector following three collapses in the United States and the demise of Swiss giant Credit Suisse.

The council — made up of the Australian Prudential Regulation Authority (APRA), the Australian Securities and Investments Commission (ASIC), the Australian Treasury, and the Reserve Bank of Australia (RBA) — acknowledged “new complexities and challenges” faced by policymakers in responding to bank stress.

The CFR partly attributed Australia’s relative resilience to recent volatility to the “strength of APRA’s prudential framework” but said shock waves have raised the need for regulators to “further consider crisis preparedness and management arrangements”.

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The regulators made specific reference to the “speed of impact” following recent bank collapses, with depositors of failed banks — Silicon Valley Bank, Signature Bank, First Republic Bank, and Credit Suisse — withdrawing funds at record speeds.

As such, the regulators revealed they are exploring new methods of shoring up bank resilience, including by clarifying crisis management tools and deposit guarantees.

“Council members have been closely engaged with their international counterparts to understand developments and share learnings,” the CFR stated.

“International experience has highlighted the importance of crisis management tools, including additional Tier 1 capital operating as intended and guarantee schemes being able to provide depositors timely access to funds.

“The council is assessing Australia’s crisis management settings to ensure they remain robust in light of international developments. Communication and coordination arrangements across the council agencies have also been reviewed and updated.”

This comes just weeks after APRA chair John Lonsdale noted concern over the treatment of additional tier 1 (AT1) bonds, or “hybrid” bonds — higher yield bank instruments with no maturity date.

This issue, he said, surfaced following the decision by the Swiss Financial Market Supervisory Authority (FINMA) to write off CHF 16 billion (AU$25.6 billion) AT1 capital notes issued by Credit Suisse.

The move was designed to ensure local competitor UBS would have enough capital to secure its AU$4.8 billion acquisition of Credit Suisse, helping to fund costs associated with the takeover.

But the move rattled markets, casting doubt over the security of AT1 investments.

Mr Lonsdale said the move broke convention, with shareholders typically carrying the cost of a bank failure.

“Usually, you would see shareholders actually be the ultimate carriers of the loss where an entity is in trouble,” he told a Senate estimates committee hearing.

“Now, in Credit Suisse’s case, the AT1 holders bore quite a lot of that burden.

The APRA chair said developments in Switzerland warranted a review of the “hierarchy” of risk associated with the collapse of a publicly listed institution.

He said this was particularly important in Australia, given retail investors have higher relative exposure to AT1 bonds.

“That is an interesting issue that we need to think about, as well as the guarantees that were applied by governments globally,” Mr Lonsdale observed.

Other matters discussed by the CFR in its quarterly statement include the ongoing battle to quell inflation and the associated impact of higher interest rates on households.

“The council continues to closely monitor the resilience of Australian households to higher interest rates and cost-of-living pressures,” the CFR noted.

The CFR claimed most households are well placed to manage the impact on budgets “due to strong labour market conditions and sizeable saving buffers”.

“…This includes fixed-rate borrowers, who have, to date, generally managed the transition to higher interest rates at the end of their fixed term,” the CFR observed.

But the regulators acknowledged some households are experiencing “significant pressure” on their finances.

“As economic conditions have become more challenging, the share of housing and business loans in arrears has increased a little, albeit from very low levels,” the CFR stated.

“The council will continue to closely monitor lenders’ approaches to supporting customers experiencing financial hardship or other changes in financial circumstances.”

Regulators reviewing crisis management framework

Australia’s regulatory institutions are assessing the financial system’s preparedness for a major shock to the banking system amid ongoing stability concerns in the United States and Europe.

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