FINANCIAL SYSTEM INQUIRY – FINAL TERMS OF REFERENCE

A financial system inquiry, to be led by David Murray, former chief executive officer of the Commonwealth Bank of Australia received the final terms of reference from the government on 20 December 2013. A previous statement released by Prime Minister, Tony Abbott, and Treasurer, Joe Hockey, said the inquiry would report on:

  • how the financial system can more efficiently allocate Australian sourced capital to minimise Australia’s exposure to volatility in global capital markets;
  • how the system can best balance competition, innovation and efficiency, with stability and consumer protection;
  • the role and impact of new technologies, market innovations and changing consumer preferences; and
  • international integration, including international financial regulation.

The inquiry will comprise of a five man committee, including Murray, as well as an external council made up of five international business people. Following broad support of the draft terms released in November 2013, there were only minor changes made to the final terms. The Inquiry will first receive submissions in line with the terms of reference. Stakeholders have been asked to consider the following in framing their submissions:

  • the impact of changes to Australia’s financial system since the 1997 Wallis Report;
  • identify factors most likely to influence the future development of the system;
  • the principles which should underpin the system; and
  • discuss options for responding to them.

An interim report will be compiled by mid-2014 before the final report is delivered to the Government, which is currently expected by November 2014.

APRA RELEASES FINAL BASEL III LIQUIDITY REFORMS

On 20 December 2013 the Australian Prudential Regulation Authority (“APRA”) announced its final position with regard to implementing the Basel III liquidity reforms. The reforms involve two new quantative measures, requirements of which will apply only to the larger and more complex authorised deposit taking institutions (“ADI’s”) in Australia. The smaller ADI’s will remain subject to the simpler minimum liquidity holdings regime.

The Basel III’s new liquidity reforms were announced in response to a submissions paper following APRA’s discussion paper in May 2013 on the liquidity prudential standard and prudential practice guide. The reforms comprise of the following:

  • a 30-day Liquidity Coverage Ratio which will address an acute stress situation. This ratio will come into effect on 1 January 2015; and
  • a Net Stable Funding Ratio which will encourage longer term funding resilience. The text dictating the rules on this ratio are yet to be defined, once they are there will be a consultation on the implementation of it before coming into effect on 1 January 2018.

In line with the Basel Committee’s “Principles for Sound Liquidity Risk Management and Supervision” paper in 2008, all ADI’s in Australia will remain subject to the enhanced qualitative requirements to manage liquidity risk. These requirements include enhanced Board oversight of an ADI’s framework of managing risk as well as confirmation and clarification of an ADI Board’s tolerance of liquidity issues such as risk and quantification.

APRA RELEASES FRAMEWORK FOR DOMESTIC SYSTEMICALLY IMPORTANT BANKS IN AUSTRALIA

At the end of December 2013, the APRA released an information paper on its framework for dealing with domestic systemically important banks (“D-SIBs”). The framework will come into effect on 1 January 2016.

Following the financial crisis in 2008 a spotlight appeared on the risks posed by the meltdown and subsequent government bailout of financial institutions that were perceived as “too big to fail”. This issue became an international regulatory priority and the FSB has been developing a multi-pronged global policy framework which dictates that no firm should be “too big to fail”.

Australia’s D-SIBs paper sets out the methodology APRA has used in order to identify D-SIBs which looks at size, interconnectedness, substitutability and complexity. Based on this methodology, APRA has identified four D-SIBs in Australia: ANZ Bank, Commonwealth Bank of Australia, Westpac and National Bank of Australia. These four D-SIBs will be subject to the higher loss absorbency (“HLA”) capital requirement (1%), designed to reduce the likelihood of failure compared to non-systemic institutions. This 1% capital requirement is an extension to the capital conversion buffer and must be met by Common Equity Tier 1 capital.

In the accompanying press release, APRA states that the four identified D-SIBs currently hold “significant management capital buffers above the minimum requirements set by APRA” and therefore the APRA do “not believe that phase-in arrangements for the HLA requirement, beyond the two-year lead time, are necessary”.

AUSTRALIA CONSULTS ON VARIATIONS TO THE MASTERCARD AND VISA ACCESS REGIMES

On 6 December 2013 the Australian Payments System Board initiated a second consultation on “possible changes to access arrangements for the MasterCard credit, Visa credit and Visa Debit systems”. The consultation includes draft variations to the Reserve Bank of Australia’s access regimes for the relevant systems.

The current arrangements have allowed new entrants to participate in the card schemes who would otherwise have been ineligible to partake without compromising the financial safety of the schemes. New developments suggest the existing access framework could now be unnecessarily preventing potential participants from entry to the Access Regimes.

In response, as set out in the consultation press release, the Reserve Bank of Australia has drafted variations to allow MasterCard and Visa to widen eligibility for membership through the Access Regimes. The eligibility criteria would be transparent and have considered risks including having reports to the bank on access developments.

The consultation paper is open for written submissions until 17 January 2014.