Regulatory change is likely to have a major impact on business debt and deposit levels over 2014 at Australia’s ‘Big Four’ banks, according to banking analysts East & Partners.
The firm notes that ANZ, CBA, NAB and Westpac are all considered ‘Domestically Systemically-Important Banks’ (D-SIBs) in line with strict Basel III liquidity requirements. This status is likely to impact on the banks’ appetite to extend credit and lend, and also their need for deposit funding. The changes could also lead to some re-pricing of deposits and lending.
Under the D-SIB regulations, set to be enforced from early 2015, Australia’s Big Four must have an appropriate level of high quality liquidity assets to ensure they can satisfy necessary obligations within a one month timeframe.
East’s deposit funding and debt index (DFDI) monitors the ratio between deposits and lending in the banking system, and DFDI ratios – which have drifted lower as businesses have re-leveraged – could be impacted just as credit demand starts to increase, particularly among smaller businesses.
The need for banks to shore up capital will also impact on their ability to fund share buy backs and special dividends for shareholders.
Under the new regulations, an estimated A$8bn in cumulative reserve capital among the Big Four would be required to absorb losses in the event of a month long crisis. This effectively means that loans and deposits will be priced differently to allow for the provision of more high quality liquid assets (HQLAs).
The Reserve Bank of Australia (RBA) has stated that liquid liabilities, for example deposits with sub three month maturities, would become more expensive for banks to offer. Rates for On Call accounts were suggested by RBA deputy governor Guy Debelle as ‘an inaccurate reflection of the true cost to banks providing this type of liquidity’.
According to the DFDI, Australia’s smaller businesses increasingly prefer term deposits with longer tenors than those of larger corporates. Close to 40% of micro term deposit funds are allocated to six month term deposits, compared to a mere 20% of institutional six month term deposits.
Of Australia’s top 500 institutional-sized businesses, 79.5% prefer term deposits with a three month tenor, compared to 68.8% of small to medium-sized enterprises (SMEs) and 62.2% of micro businesses.
East’s senior markets analyst Martin Smith suggests share buybacks and special dividends will be difficult to distribute to shareholders during the reweighting of capital reserves. “Australian businesses so far appear unfazed by the potential of higher capital costs being passed on, but this may change as the year progresses.
“Regional banks and smaller lenders have a distinct opportunity given they are not required to hold additional capital reserves. Business lending has remained on the sidelines as mortgage lending kicks into overdrive. A more level playing field could see significant changes.
“The way the Big Four react to these changes and defend their hard fought deposit and lending market share will provide an excellent indication of future competitive positioning between the banks”
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