A sound and stable banking system is dependant, in part, on a clear and certain regulatory environment. It is clear that the constantly shifting and complex dynamics which we have seen over recent years since the global financial crisis and which impact decision making by bank regulators mean that rule making is challenging.
However, continuing delays and uncertainties can themselves contribute to financial instability and, in our view, there is scope for more definitive, certain and timely rule and decision making in this area.
Financial institutions plan their funding, capital and liquidity needs on a rolling 12-24 month basis and, in order for such plans to be effective, financial institutions need to be confident in their ability to execute against their plans. Market conditions can be difficult to predict and impossible to control, so implementing a funding plan necessarily will be subject to those market conditions. However, a financial institution is entitled to clarity about its legal position and the effectiveness of each funding tool in the relevant regulatory environment. Prolonged uncertainty in this context is avoidable.
Given the turbulence in financial markets, certainty of regulation is even more important. The lack of certainty makes selecting an appropriate mix of funding tools to improve and maintain the financial position of our financial institutions even more challenging.
We have set out a high level analysis of the key funding tools currently available to Australian financial institutions. Each funding tool has been assessed against a number of key criteria. They have then been colour coded to reflect our high level thoughts on performance of the funding tool against each criteria. In certain cases where the colour coded response is based on a particular analysis we have included that analysis. Pricing is not one of the criteria that we have included (as it is purely a commercial matter) but is also clearly a critical driver to the decision making process.
This analysis may be useful to different people for different reasons. For those who do not operate in this market or who are new to it, we hope that this analysis will provide you with a starting point from which you may be able to make sense of the various options for the funding, capital and liquidity needs of a financial institution and the dynamics at play. For those with an intermediate degree of knowledge, this analysis will hopefully serve to further develop your understanding of the interplay between funding options and the market. Lastly, for those with a sophisticated degree of knowledge we hope that, broadly speaking, it reflects your daily thoughts on the topic! Where you do not agree with the analysis, we would be very interested to hear from you.
While there are additional layers of complexity beyond what can be represented in a table, clearly:
- the appropriate mix of funding tools in the large part remains a function of the current circumstances of the relevant financial institution;
- there is no perfect funding solution. Deep insight into an institution's business, the market and the regulatory environment is critical to develop an effective funding plan; and
- choosing appropriate funding tools is a moving target as the market changes constantly.
Importantly, it is also clear that the assessment of each funding tool would be more favourable in a material respect if regulatory uncertainty was reduced from the analysis as quickly as possible. Regulators should maximise the flexibility available to a financial institution to satisfy their funding, capital and liquidity needs. Therefore, finalising the implementation of the Basel III reforms in Australia in a sensible, concise and timely manner is critical. As an example, the threat of including “bail in” requirements for certain instruments overhangs the market. These requirements, if they are included at all, should not extend to senior debt, but the market would benefit from a clear regulatory statement to this effect.
As foreshadowed, the issues are complex for some instruments. Therefore clear, concise and timely regulation is easier said than done. In those cases the key to market stability is:
- clarity around when the proposals will come into effect and confirmation that they will not have retrospective effect;
- avoiding regulation by press announcements - we are not sure that the internal approval processes which instil rigour and checks and balances into a formal regulatory process are adopted in connection with press announcements;
- clear transitional relief (which in some cases has been indicated, as a matter of principle, to be available but can be slow and hard to obtain in practice); and
- clear statements of interim or transitional arrangements.
The future security of our financial system requires a delicate balance between protective safety measures on the one hand and pragmatism in the face of heavy global competition for limited funds on the other. Australia can not afford to be left in a competitively disadvantaged position as a result of delays or uncertainty in implementation.
Regulatory uncertainty is a material impediment and is within the direct control of our regulators.