The Australian government’s acceptance of almost all of the recommendations of the Financial System Inquiry (FSI) will lead to a strengthening of the banking system with improved resiliency to shocks, says Fitch Ratings. The decision to back the recommendations reinforces Fitch’s view that bank capital requirements will rise in line with regulatory changes over the medium term.
The Australian government released its response to the FSI on 20 October, agreeing with all of the inquiry’s recommendations pertaining to banking system resilience and regulation. The government stated that the Australian Prudential Regulation Authority (APRA) would implement key recommendations related to banking system stability.
This reinforces earlier policy announcements and bank capital issuance trends since the original announcement of the FSI recommendations in December 2014. Since then, APRA announced an increase in minimum mortgage risk-weights for internal ratings-based (IRB) banks in July, while each of the “Big 4” Australian banks have undertaken multi-billion dollar capital raises totaling an aggregate AUD17bn this year.
The government has also committed to APRA ensuring banks have an “appropriate” total loss-absorbing capacity (TLAC) in place at some point beyond 2016. A TLAC framework has been proposed by the Financial Stability Board for global systemically important banks, but this does not apply directly to Australia. Australia’s commitment to implementing a TLAC requirement would be credit positive for bank Viability Ratings, and is likely to reinforce the trends towards higher capital levels.
Implementation of the FSI recommendations will include reducing implicit government guarantees and implementing a bank resolution regime in line with evolving international practice. Fitch maintains that developing a stronger resolution framework would be likely to result in the removal of the sovereign Support Rating Floor for the banking system. Support Ratings for the largest Australian banks are at ‘1’, indicating a high level of government support. But, as a resolution regime is implemented, Fitch would expect Support Ratings and Support Rating Floors to migrate to ‘5’ and ‘No Floor’, respectively.
It is important to note that this should not have an effect on Australian banks’ Issuer Default Ratings (IDRs), as none of the banks’ ratings are at their Support Rating Floors.
