APRA urged to act on FSI recommendations

Mark Degotardi, CEO of the Customer Owned Banking Association (COBA), said regulators appearing before the House of Representatives Economics Committee today have the opportunity to talk about how they are responding to the Financial System Inquiry (FSI) blueprint to promote competition in banking.

“It’s now two years since the FSI issued its recommendations so the measures need to be implemented without further delay,” Mr Degotardi said. “The major FSI recommendations on regulatory capital are designed to increase the resilience of the system and also to reduce the advantages the major banks have over their smaller counterparts, increasing competition in the market.

“APRA should act promptly to further narrow the gap in risk weight requirements for mortgages by requiring the average risk weight for major banks to be at least 30 per cent.”

Mr Degotardi highlighted that the major banks’ current average risk weight is 25 per cent while their smaller competitors’ average risk weight is 39 per cent. The COBA chief argues that narrowing this gap would build capital levels in the system and foster competition.

“The other significant structural advantage enjoyed by the major banks is the implicit guarantee that flows from the perception that they are too big to fail. This gives the major banks a significant and unfair funding cost advantage, built on the back of the government’s balance sheet,” he said.

“APRA should increase the capital surcharge it imposes on the four systemically important banks from 1 per cent to 2 per cent. The current surcharge is at the low end of the international spectrum, which ranges up to 6 per cent.”

COBA has welcomed comments made this week by ASIC chairman Greg Medcraft highlighting the problem of the regulatory capital settings and their impact on competition.

“Customer owned banking institutions — mutual banks, credit unions and building societies — are eager to build on their 4-million strong customer base and bring their customer-focused model to more Australians, but we need a fair regulatory framework,” he concluded.

[Related: Customer-owned banking surpasses $100bn in assets]