In a speech by APRA Chairman Wayne Byres, “Finding success in failure” delivered in Sydney today at the Actuaries Institute conference, ‘Banking on Capital’, he discusses capital standards for authorised deposit-taking institutions (ADI’s) and why a sole reliance on capital to deliver financial stability is an unwise strategy:
- ‘When we judge a bank’s capital to be high or low, or something in the middle, we are making a judgement that takes into account a range of issues that impact on bank risk profiles: funding and liquidity, asset quality, governance, risk management and risk culture, to name a few, all come into the equation in some way or another.’
- ‘To attempt to provide the community with an iron clad guarantee that nothing can go awry would require severe limitation on the risk-taking ability of the banking system, and prevent it from fulfilling the vital and productive roles that it plays in intermediating between borrowers and lenders and facilitating the smooth functioning of payments throughout the economy. Put simply, a zero failure regime is not desirable.’
- ‘If we accept that failures, while hopefully still reasonably rare, are nevertheless inevitable, then preparation to minimise their impact is an essential investment.’
- ‘Planning and investing to facilitate their own demise is something that financial firms inevitably struggle to do, so APRA will be reinforcing its expectations in relation to ADI’s [Financial Claims Scheme (FCS)] testing programs in the near future, with a view to ensuring there is genuine readiness to activate the FCS if it is ever needed.’
APRA, along with our colleagues amongst the Council of Financial Regulators, has spent a great deal of time in recent years looking in a fairly hard-nosed way at how well Australia stacks up against these preconditions. The conclusion was somewhat mixed: there are no glaring deficiencies, but a number of areas for improvement.
- The importance of active supervision, and a willingness to intervene where appropriate, were some of the hard lessons that APRA took to heart following the HIH episode. Justice Owen found APRA under-resourced to identify problems, and slow to respond to them once found. These were fair conclusions, and APRA worked hard under my predecessor to build both its capacity and conviction. Fifteen years on from HIH, efforts to further improve our supervision – to identify risks early and respond promptly – remain at the forefront of our latest strategic plan, and I expect they will always feature prominently in APRA’s priorities.
- When it comes to powers to intervene, the FSI’s Final Report noted there are some gaps and deficiencies in the Australian statutory framework for crisis management and resolution when compared with international standards.6 This includes the need for such things as broader investigation powers; strengthened directions powers; improved group resolution powers; enhanced powers to deal with branches of foreign banks; and more robust immunities to statutory and judicial managers. In his speech last week, the Treasurer noted the Government’s intention to make improvements in this area, which we see as a very valuable (and low cost) investment in the stability in the financial system.
- Crisis planning is critical. Last year at this event I spoke about our plans for recovery and resolution planning. During the past year, I’m pleased to say larger ADIs have submitted new plans based on updated guidance issued by APRA, and we are now reviewing and benchmarking the plans in order to highlight areas of better practice that will further increase the credibility of plans in subsequent iterations.7 On resolution planning, more detailed work is also underway with specific firms to consider the planning required to ensure that APRA is able to use our resolution powers when needed. Our focus here is on the assessment of critical functions, intra-group dependencies such as critical shared services, and the identification of potential barriers to resolvability.
- No matter how good the plan, however, stabilising and restructuring a financial firm that is no longer viable in its current form is rarely going to be a quick and easy exercise. So it is important that, while a resolution plan is being implemented, the firm’s critical functions can be maintained so as to reduce potential losses and minimise the disruption to the broader financial system. Key to doing this is that the firm has the financial resources to allow it to continue to operate while its business is reorganised.
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