A win for the opposition Labor Party in Australia’s July 2 election may spur an inquiry into the banking sector and increase the powers of regulators over local financial institutions.
A royal commission looking into the financial sector may further increase required capital and loss absorbency ratios for Australian banks.
Whichever party wins, banks will be subject to tougher rules this year and exposed to slowing regional economies, especially New Zealand and China.
Australia’s big four banks — Commonwealth Bank of Australia, National Australia Bank, Westpac and Australia and New Zealand Banking Group — may be hit harder than global and local peers by total-loss absorbency requirements, even though none is a global systemically important bank.
The big four may face higher costs compared with local banks such as Macquarie and global banks such as HSBC, Standard Chartered and JPMorgan.
Extra TLAC (total loss-absorbing capacity) may be needed if it’s calculated on top of higher local Basel III funding requirements as long as banks have big, capital-intensive mortgage portfolios.
Australian banks also have relatively high dependence on overseas funding, so they may compete in debt markets at the same time as global peers.
This may hinder their ability to raise the full amount of TLAC.
Australia’s banks are more exposed to New Zealand’s economy, including its slowing housing and dairy sectors, than to China, according to the Reserve Bank of Australia.
Loans in New Zealand comprised 36 percent of Australian banks’ international exposure versus 4 percent for China.
Conversely, China’s market volatility, capital outflows and regulatory changes pose little significant, direct risk to the stability of Australia’s banks.
The views expressed in the article are of Alex Gardner, an analyst at Bloomberg Intelligence
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