Bank regulator tightens screws

Australia’s top bank regulator has warned that the hubris starting to stir in the banking sector needs to be quashed despite Australia's lenders emerging from the global financial crisis relatively unscathed.

Australian Prudential Regulation Authority chairman John Laker has also hit out against banks that have been campaigning against global efforts aimed at making banks safer by bolstering capital buffers.

Top bank executives have argued that rules on liquidity proposed by APRA would be likely to force bigger banks to set aside billions of dollars in largely unproductive assets such as cash and government bonds that cannot be lent out, hurting their profitability.

But speaking at an Australian British Chamber of Commerce lunch yesterday, Dr Laker said Australian lenders would be required to fall into line with what was emerging as a consensus on global banking standards.

''If you don't want to play by those standards, then you've got to have a very careful explanation to the market,'' Dr Laker said.

In recent weeks executives ranging from ANZ boss Mike Smith to Westpac's Gail Kelly have warned that increasing banking regulation in Australia may have a negative effect on the economy.

Analysts, including Jarrod Martin, from brokerage RBS, have estimated that the planned changes to liquidity could cost each of the banks about $500 million a year - or add 15 to 20 basis points to the cost of borrowing. In some cases, the costs could be as high as $1 billion, he said.

Mr Martin said liquidity was one of the larger regulatory risks. If regulations were not uniformly enacted, bank shareholders could bear the costs.

However, the APRA chairman seemed to leave the door open on a planned measure requiring banks to increase their holdings of government bonds substantially. Lenders, including the big four banks, have claimed this would be unworkable given Australia's relatively shallow sovereign bond market.

''On a simplistic view, we know the government bond market at the moment may not generate the volumes that would be available for banks to hold as a first line of defence,'' he said. ''So we are are talking to the industry over what other assets might provide confidence for liquidity and what role they may play as lines of defence.''

But as a matter of principal, liquidity buffers should be made up of high-quality assets that were liquid in private markets in times of stress, Dr Laker said.

He also acknowledged that the sum of planned reforms should not strangle the banking system.

However, with the global economic recovery not firmly established, Dr Laker sounded a warning over the dangers of complacency stirring among Australia's banks.

''Some say global reform initiatives will go too far given how well Australian financial institutions performed through the crisis,'' he said. ''Any self-congratulatory tone here needs to be curbed - after all, many hands were involved in the lifting.''