I was fortunate enough to have short work stints in Australia (both Sydney and Melbourne), a beautiful country with its free spirited fun loving sporty population.
I continue to be amazed at the sophistication and depth of their financial markets. There is also a lot of cross pollination of global markets expertise, ideas and world class talent between London and Sydney.
Their regulators RBA, ASIC, APRA and ACCC are amongst the most proactive and knowledgeable in the world. Australia’s top 4 financial groups – commonwealth Bank of Australia(CBA), WestPac, Macquarie, National Australia Bank(NAB) rank amongst the top banks globally. Despite the crisis all round in banks globally, all of these Australian institutions remain profitable, well capitalized and well managed. The Australian banking sectors’ profit margin is robust. At 1.3% of assets, Australian banks’ profit ratio sits in the middle-to-upper range on the international league table.
So what is Australia’s secret sauce?
Some of the key ingredients are:
- Mortgage Discipline: Securitization in lending is an Australian practice too. But banks in Australia did not adopt the US banking mortgage business model of originate to distribute. They are more of an intermediaries with a balanced risk and reward equation. Also Australian financial institutions had relatively less or little exposure to complex structured instruments collateralised by US sub-prime mortgages.
- Too Strong to Fail & 4 Pillar Policy: The small number of Australian banks are extremely large relative to the size of its economy. There is a 4 pillars legislative policy that maintains the separation of the four largest banks in Australia by disallowing their merger or acquisition by any of the other four banks. This is both a handicap and an asset. But as a result the banks have also been able to withstand the takeover pressures that other banks around the world face. And all these banks have adopted a fairly robust risk management cultures, prompted by tight regulations. Australia was one of the first countries to adopt and achieve Basel II compliance for its banks. With higher capital adequacy norms, healthy capital buffers have also been an critical confidence factor for the banks.
- Credit Assessment Standards for 3rd Party Loan Origination: For example banks can use third party loan originators. But banks must ensure that the originator applies the same credit assessment standards as the bank’s own. Also banks must monitor and audit loans being originated via third party for on-going compliance with its lending criteria. Additionally banks can also include a best practice of a risk-based component in the fees it pays for broker-originated loans.
- Higher Capital Charges for Sub-prime Lending: There are significantly higher capital charges for “low-documentation” loans since 2004. APRA has adopted a higher capital adequacy norms than most countries.
- APRA’s Meta Regulation Approach: APRA adopts a ‘risk-based’ approach to regulation. Its focus is to empower and ensure that banks embed sound Risk management practices deeply across their organizational DNA’s. Some academics refer to this method as “meta-regulation”.
This is backed up by risk assessments of the bank to check internal risk management processes; and direct intervention for improvements. Australia has four government agencies overseeing the financial system, namely the ACCC(Australian Competition and Consumer Commission), ASIC (Austrlian Securities & Investments Commission), APRA(Australian Prudential Regulatory Auth.) and the RBA. There are “twin peaks” model with APRA as the prudential regulator and ASIC as the market conduct regulator.
(a popular cheering cry in activities, sports etc.)
Sources: My own personal experiences; APRA speeches 2009: David Lewis, GM, March 2009; John Laker, Chairman, Aug 2009;
Sai Sireesh is Director of Risk Management & Compliance Strategy & Solutions, Worldwide Financial Services for the Microsoft Corporation. Mr. Sireesh has over 18 years of global experience across Risk and Compliance Consulting, Financial sector Strategy and blueprints execution. He has worked in North America, Australia, Singapore, Malaysia, Philippines, Thailand, Indonesia and India, is a regular contributor to the Journal of Regulation & Risk, and has authored several global research studies and articles.