Australia’s ‘Big Four’ Banks Told to Improve Funding Mix

Australia’s four biggest banks have been told by credit rating agency (CRA) Fitch that they should improve their funding mix if they are to meet Basel III capital adequacy requirements and retain their coveted AA- credit ratings.

The CRA said that the Big Four needed to scale back their dependency on offshore funding, bolster deposit levels and lengthen the duration of their wholesale funding. It added that the steps are especially necessary after the Australian Prudential Regulation Authority (APRA) announced this week that it was maintaining its position that Australian banks would have to be fully compliant with the so-called liquidity coverage ratio (LCR) rules under Basel III by 2015.

The LCR rules aim to ensure banks maintains an adequate level of high-quality liquid assets that can be converted into cash to meet its needs for 30 days under a severe stress scenario.

From 1 January 2015, the minimum liquidity holdings banks retain will be tied to their ability to pass a 30-day stress test and an APRA liquidity audit, impacting on most authorised deposit taking institutions (ADIs) which calculate liquidity as 9% of liabilities, according to KPMG.

APRA’s decision prompted Fitch to remind Australia’s banks that they will have to meet the LCR targets by 2015 and net stable funding ratio targets by 2018, despite revised Basel rules allowing phased implementation.

“Their reliance on wholesale funding, particularly from offshore markets, is high compared with international peers,” commented Fitch senior director Tim Roche. “We expect further improvements in funding profiles; but structural issues, such as Australia’s compulsory pension scheme, mean wholesale funding is likely to remain important.”

Fitch described APRA’s approach as ‘sensible’ and ‘consistent with APRA’s conservative approach to bank regulation’.


Related reading