Australian investors and others interested in finance now know more about the financial health of some of the world’s biggest banks than they do about the financial condition of our own banks — including the big four. And it’s the consequence of a deliberate policy of secrecy for local institutions that is contrary to what is happening in the European Union, the eurozone, the United Kingdom and the United States — all far bigger financial markets.
Australian banks escaped the global financial crisis, so they say, but in reality the Australian financial system, and the big four especially, were bailed out by the Reserve Bank of Australia to the tune of close to $100 billion in extra liquidity, billions of dollars in new currency to meet a “silent” run on financial groups, and other mechanisms invented by the RBA to keep the financial system and the economy afloat in the last quarter of 2008 running into the first half of 2009.
The supposed health of the banks didn’t help them one bit when they were cut off from foreign funding for nearly a month, and they lived on the lifeline thrown them by the RBA. So the claim that the financial strength of the banks and the financial system enabled Australia to survive the GFC relatively unscathed doesn’t stack up. In addition, super fund investors large and small helped finance billions of dollars in capital calls by the banks from 2008 through 2010, which enabled them to cover losses and rebuild depleted capital levels.
But regulators, and most especially the Australian Prudential Regulation Authority, have a deliberate policy of choosing not to publicise the results of so-called stress tests on banks. The head of APRA, Wayne Byres, told Senate estimates last week that the regulator had just conducted a stress test for property on the country’s banks — but left us none the wiser as to how the individual banks performed.
“We’re about to finalise guidance on what we see as sound mortgage lending practice, and we’ve conducted a comprehensive stress test of the largest lenders. The sources of risk are different this time around — last time we were focused on low doc and no doc lending — but the response of higher supervisory intensity and regulatory requirements in the face of higher risk activity is not new. It is APRA doing its job,” said Byres, going on to warn “lending standards are being stretched”.
So that’s the position of Australian regulators — in short, “trust us”.
Compare and contrast: the European Central Bank last Sunday released details of how the 130 major banks across the eurozone performed, while the European Banking Authority released details of its tests for all major banks in the EU. Banks were named, capital deficiencies assessed and data provided; the banks needing more capital were told how much and given a deadline. The ECB’s year long analysis of the books of the eurozone’s biggest banks — worth 22 trillion euros — found lenders overvalued their assets by 48 billion euros. The results of this Asset Quality Review will require the 130 lenders that took part in the exercise to adjust the value of their assets in their accounts or prudential requirements. And that process passes without objection, even though shares in some banks inevitably fell. The aim of the tests is to reassure investors, depositors and creditors, not startle them, which seems to be why Australian regulators and banks haven’t released details of the stress tests conducted over the past five years.
And the Bank of England’s Prudential Regulation Authority is in the process of finalising stress testing of all banks and finance groups in the UK for release on December 16, providing investors with a health check on all major UK lenders, including the two owned by the National Australia Bank, the Clydesdale and Yorkshire banks. In fact, we should know more about their health and ability to pass a stress test than we will about how their parent, NAB, passed APRA’s stress test.
But wait, there’s more: the US Federal Reserve last week announced the terms of its latest annual stress tests of America’s biggest banks. According to the parameters for this test, 31 big US and global banks will have to show how they can withstand a spike in oil prices, a rise in the US unemployment rate and an increase in risky corporate loans. Passing the stress tests and related capital planning review will govern how much the banks can pay in additional dividends or in share buybacks. Banks that fail the test can also take a reputational hit, as Citigroup did last year, along with the US arms of the huge HSBC, Bank Santander (Europe’s biggest bank) and The Royal Bank of Scotland. Deutsche Bank, the huge German bank, is included in the 2015 stress test for the first time.
The compliance of banks with these testing processes is helped by having had banks in the US, the EU and eurozone and the UK rescued by governments during the GFC, which helped give regulators a whip hand. But as we have seen, our banks were also rescued by regulators, but in a quiet and confidential way (the results of those rescues are still confidential; they aren’t in the UK or US). But overseas regulators don’t believe that it would damage confidence to reveal publicly details of the financial health of the banks and other institutions they oversee.
The issue is one the Murray report on the financial system should recommend as a no-brainer — making details of the stress tests available, as well as announcing them and the tests’ parameters. But don’t bet on it. The Abbott government has become “tickle me Elmo” for the banks, doing the banks’ bidding on the question of the Future of Financial Advice changes and a royal commission into the Commonwealth Bank financial planning scandal. On previous form, you can bet that if Murray recommends transparency on the question of bank stress tests, Treasurer Joe Hockey, even if he’s tempted to accept it, will roll over after getting a call or a visit from Commonwealth Bank boss Ian Narev.