The AFR View

Bolstering banks while they are strong

The Financial Review’s take on the principles at stake in major domestic and global stories.

Updated Apr 5, 2016 – 7.20pm, first published at 3.21pm

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Australia's top banking regulator and the chairman of one our largest banks have warned that Australia remains at high risk of the shocks from the global banking system that we escaped during the GFC.

As Bill Coen, secretary-general of the Basel Committee on Banking Supervision rightly told The Australian Financial Review's second Banking & Wealth Summit on Tuesday, our banks are the envy of the world: "safe, sound, and resilient". Bank profits are strong, bad debts are low, and their all-important capital ratios have been bolstered.

But regulators are paid to be pessimistic, Australian Prudential Regulation Authority chair Wayne Byers told the summit. It not hard to find threats to the global financial system in China and Europe, and to local banks from high-priced property markets. While bank capital is now strong and allows us to attract the offshore funding on which Australia depends on as a capital importer, the profile of our bank funding is not ideal. There is still a continued dependence of Australian banks on short-term wholesale funding. Matters have improved since the GFC, but the proportion we rely on would still dramatically reduce the time that Australian banks would have to react to trouble if that funding starts drying up.

Dr Ken Henry chairman of NAB speaking at the AFR Banking and Wealth Summit. Christopher Pearce

But that is not the only issue. As Mr Byers points out, strong banks have helped the Australian economy, but the banks' strength comes from the economy too. They are mutually dependent upon each other. As he says, after 25 years of growth, it would be a surprise if the banking system was not in good shape.

But now the economy has slipped into sub-par levels of growth with commodities prices falling, at the same time as asset prices have been heated up by wild central experiments in monetary policy around the world. As Nouriel Roubini of New York University writes on these pages today, central banks may have no choice but to continue turning to more extreme stimulus in a search for growth. This is all risk for banking which is beyond our control.

The ultimate backstop for our banks remains Australia's credit rating and the taxpayer-funded national balance sheet. Former Treasury secretary Dr Ken Henry, now chairman of NAB and keynote speaker at the summit, had the personal experience of deploying that strength in offering a credible government guarantee to the Australian banks in 2008, in the midst of a global banking meltdown he had thought impossible not long before. But as Dr Henry pointedly noted during the summit, governments have not matched the strength of improvement in private sector bank balance sheets since then. The same credibility may not be there as it once was.

During the GFC, the Rudd government and Dr Henry had the Howard government's surplus to turn to for firepower. That is no longer the case. Since the financial crisis, successive federal governments have proven quite unable to hold back the growth of the deficit as receipts have fallen and spending has risen. Neither have they been able to bring reform to areas like tax and industrial relations that will generate a productivity bonus -- the only silver bullet left now that China's peak industrialisation is passing.

Yes, our banks are to be envied. But the task now, says Mr Byers, is to continue to strengthen the banking system in an orderly way, at a time of relative health, rather than being forced to do it when trouble inevitably strikes again.

There is still much to be done in this regard.

Mr Byers pointed out that there has been a healthy dose of luck involved in the strong performance of our banks and our economy over the past 25 years. But we cannot kid ourselves, he says, that this can carry on forever. It is time to start making our own luck, in the banking sector, and in the economy.