The regulators have changed their tunes in recent weeks, and are now singing off a decidedly different song-sheet than they used in the past.

He added: “We should not be complacent about the rebuild, but there are also risks from rushing it.”
Although it makes eminent sense for APRA to remind banks that the whole reason they’re forced to hold such large capital buffers is so these reserves can be used during emergencies, it still makes a stark contrast from the banking regulator’s previous insistence that Australian banks be “unquestionably strong”.
What’s more, local bankers have not shown the slightest interest in following Byres’ advice and dipping into their capital reserves.
National Australia Bank this week announced that it had more than doubled the size of its share purchase plan from $500 million to $1.25 billion. Including the $3 billion raised from institutional investors, which took the bank’s total capital raising which was launched in late April to $4.25 billion.
Capital reserves
Meanwhile, Westpac and ANZ Bank took a different tack. Faced with a steep jump in provisions due to the deteriorating economy, they preserved their precious capital reserves by scrapping their half-yearly dividends.
As a result, Westpac’s common equity tier one (CET1) capital ratio stood at 10.81 per cent as at March 2020, while ANZ’s was 10.8 per cent.
APRA had previously ruled that the big four Australian banks needed to have CET1 capital ratios of at least 10.5 per cent to meet the “unquestionably strong” benchmark.
It’s not surprising that the bosses of the country’s major banks have largely ignored APRA’s message. They understand the huge importance of being able to control the timing of capital raisings.
NAB boss Ross McEwan told The Australian Financial Review this week that, although he agreed that capital buffers were there to be used, “the problem is that if you get down too low, right into the capital buffer, at some point regulators will turn around quite rightly and say, ‘now what are you going to do to get back to 10.5 per cent?’
“Then you’ve got to work it up at a time when you want to be coming out of this crisis with pace. You end up looking over your shoulder. So I had no intention of this bank being put in that position.”
But APRA isn’t the only regulator changing its message. James Shipton, who chairs the corporate regulator, the Australian Securities and Investments Commission (ASIC), is now singing a different tune on the contentious subject of “responsible lending” rules.
Commercial decision
Last week Shipton declared that responsible lending rules allowed bankers to use plenty of judgment in making credit decisions.
“Because that correct decision will ultimately be a credit one, and that is a credit and commercial decision by the bank which, of course, is theirs to make,” he said.
Shipton’s comments come even though ASIC has launched an appeal against a responsible lending case it lost against Westpac.
The corporate regulator had alleged that Westpac breached responsible lending laws by relying on a household spending benchmark, rather than reviewing borrowers’ expenses individually.
But Justice Nye Perram highlighted the flaw in ASIC’s logic that borrowers can and do reduce their living expenses to repay their home loans.
“I may eat wagyu beef every day, washed down with the finest shiraz, but if I really want my new home, I can make do on much more modest fare,” he memorably declared.
ASIC’s decision to appeal the “wagyu and shiraz case” means that bankers are unlikely to take the slightest notice of ASIC’s more flexible stance on responsible lending.
Confidence shattered
But there are also other reasons why bankers are sceptical of Shipton’s comments.
Their confidence has been badly shattered by the Hayne royal commission. Bank bosses in particular know that if they breach standards in any way, they’ll be subjected to public humiliation and probably end up losing their jobs.
And even if ASIC genuinely intends to give the banks a break on responsible lending, bankers quite rightly question how long the corporate cop will maintain its more easy-going approach.
They rightly question whether ASIC will remember its assurances in 18 months when the economic recovery is under way.
And they’re also conscious that loans typically last for many years. So while ASIC might not castigate them for approving the loan in the first place, it’s entirely possible that in a couple of years they could find themselves in trouble for the way they’ve handled the loan, particularly if the borrower falls behind on repayment.
Among the more intelligent members of the banking community, there’s intense speculation as to what has prompted both ASIC and APRA to simultaneously embrace a decidedly more “chill” approach to regulation.
And the consensus is that Canberra has been urging both regulators to do what they can to support lending to business and particularly to fragile small businesses.
Resources stretched
The Morrison government is understandably worried that lending to small business will collapse as the coronavirus pandemic sends the economy reeling. And any future economic recovery will be crippled if small businesses are starved of credit.
Canberra’s concerns are well grounded. Lending to small business is always difficult, because the quality of financial information is usually poor. What’s more, relatively small loan sizes mean that it’s not economic for the bank to devote time and resources into getting a better picture of the firm’s cashflows.
And, of course, the shock to the economy caused by the coronavirus shutdown means the risks of lending to small businesses are much, much higher than usual.
It’s likely that resources will be stretched in coping with their existing small business base, and restructuring the loans of customers in financial difficulties. It’s unlikely that the country’s big banks are going to be trying to write new small business loans aggressively.
On top of that, many bankers are working from home. This is a formidable challenge when it comes to making new loans to small business customers, because face-to-face meetings are so important to bankers in deciding whether to take the risk of backing particular individuals.
That’s why it’s likely business lending particularly to small business is likely to contract sharply, despite all the efforts APRA or ASIC are making to convince bankers that they’re now taking a more chill approach to their duties.
The author owns shares in the major banks.