Surprise jolt could bring down big four banks,

says regulator APRA

Jeff Whalley, Herald Sun
June 24, 2016 12:00am
Subscriber exclusive

AUSTRALIAS banking sector is now so concentrated that the four major lenders could topple if there
were one seismic external shock, the regulator says.

The banking watchdogs head of supervision says that as a consequence of the major banks dominance,
they are hugely exposed to each other.

Speaking at a banking industry forum yesterday, Australian Prudential Regulation Authority supervision
general manager Charles Littrell said it was a significant vulnerability.

All four lenders were in the same business model theyre all hugely exposed to each other, Mr
Littrell said.

Inevitably if you bet 80 per cent of the market, any trading market, youre 80 per cent of each others
books.

We dont quite know what would happen if that business model gets whacked by external stress all at
once.

Mr Littrell has previously warned there is a perpetual concern about the dominance of the major
banks in property lending, where they have a combined market share of about 80 per cent. That
compares with 40 per cent in 1990.

His warning comes despite the fact Australian banks emerged from the global financial crisis almost
unscathed.

The big four the Commonwealth Bank, Westpac, ANZ and National Australia Bank chalked up a
combined $14.8 billion in earnings across the first half of their respective financial years.

They have a combined market value of $367 billion.

Speaking at the Centre for International Finance and Regulation Showcase in Banking yesterday, in
Sydney, Mr Littrell noted there had been a crackdown on lending in the commercial real estate sector.

The regulator had been working with Treasury, the Reserve Bank and the Australian Securities and
Investments Commission, he said.

Behind the scenes, theres a lot of work ... on well if the fundamental assumptions we have made
about how the economy works dont turn out to be right, what do we do, he said. The answer is,
were off in a space in terms of asset valuations, and interest rates, and wealth, and leverage that weve
never been in as a country before, and that tends to make us think more conservatively than usual
about what our settings should be.

Mr Littrell has also previously cautioned the nation might be relying too heavily on China for growth. In
April, he said Australia had taken a big national bet on the development of Asian countries.

Mr Littrell has characterised the banking regulators push for the banks to bolster their books with more
capital as an insurance policy against that bet.

In the past year, the major lenders have been forced to set aside more than $20 billion in extra funding
to act as a buffer against future financial shocks. Some analysts have said they might need to set aside a
further $25 billion.

Last year, the head of the Federal Governments Financial System Inquiry former CBA chief David
Murray said banks needed to be unquestionably strong, partly due to their heavy reliance on
funding from international markets.

jeff.whalley@news.com.au