Regulation for all, says top banker

The world's top central banker, Jaime Caruana, has a message for Australian banks: prepare for tougher rules, whether you like them or not.

For months Australian banks have been arguing they should not be subject to the full impact of extensive planned global reforms aimed at making banks safer, because they did not have the same problems as their rivals around the world leading into the financial crisis.

Stepping up warnings on regulation, Commonwealth Bank chief executive Sir Ralph Norris said yesterday that measures such as requiring banks to hold more liquid assets and higher levels of capital would restrict banks' ability to lend and potentially cause interest rates to rise.

This would hit the broader Australian economy hard, Sir Ralph said, as the bank reported a 54 per cent surge in its first-half cash profit to A$2.94 billion (NZ$2.4b), buoyed by fast-paced lending and improving wealth-management returns.

Last October, New Zealand became the first country to introduce stricter liquidity rules. They take effect from April 1.

The Reserve Bank had already started work before the crisis to deal with the short-term nature of local bank funding, which it considered too risky. As a result, banks in New Zealand will have to hold a higher proportion of assets such as cash and government bonds from April 1.

Massey University banking specialist David Tripe said that banks, in response to the tougher liquidity rules, were increasing their proportion of retail deposits, and the length of maturity of deposits, which has driven up interest rates paid to savers. "So certainly it is an example of regulation increasing costs," he said.

Holding more money aside to cover a liquidity crisis would add an estimated 20 to 40 basis points to the cost of funding for banks. That would be passed on to borrowers.

It was unlikely mortgage interest rates would rise on April 1, however.

Banks were more likely to pass on the cost more gradually, and that might already be reflected in current mortgage interest rates as they prepared to meet the new requirements by April 1, Mr Tripe said.

But Mr Caruana, general manager for the Swiss-based Bank for International Settlements – which acts as a central bank to the world's central banks – said Australian banks could not expect to be exempted from changes in the global banking system.

The inter-connected nature of bank balance sheets and common lending exposures between banks meant that the entire financial sector was responsible for its own stability, he said.

- © Fairfax NZ News