29 March 2023
PATRICIA KARVELAS: With banking turmoil, collapsing lenders in the United States, and sinking institutions in Switzerland questions are being raised about whether Australian banks could be next. Well, yesterday Australia’s prudential regulator, John Lonsdale said Australia was among the best in the world to handle a crisis. So why is that the case? Anna Bligh is the CEO of the Australian Banking Association and our guest this morning. Anna Bligh, welcome.
ANNA BLIGH: Good morning PK.
PATRICIA KARVELAS: What makes Australia’s banking sector so resilient from global shocks? We keep hearing we’re the most resilient, we’re fine, it’ll all be okay. But what’s that actually based on?
ANNA BLIGH: Well, it’s always a comfort when the prudential regulator is saying that Australia’s banks remain very strong and very well equipped. There are some very important differences between how banks are regulated in Australia versus how they regulated in the United States. The United States has about 4,500 banks. Many, many customers bank with very, very small local banks. Those smaller banks in the US are less regulated than the smaller banks in Australia. It doesn’t matter what size the financial institution that you bank with is if it has a banking license. So it could be a credit union, a building society, and it could be our largest bank, or our smallest bank, they are regulated to the same level. That means they are whilst they’re supervised, the regulator knows exactly how much money they’ve got set aside as capital provisions in the event of any kind of difficulty. They are required to have certain liquidity coverage ratios, that just means they have to have a certain amount of cash at hand if customers want to draw on the savings or their deposit. So it is much more tightly regulated, and APRA, our prudential regulator, is what’s known as a supervisory regulator. That is, they don’t just go in when there’s a problem. They have supervisory teams attached to our banks, who are sitting in our banks are literally on a daily basis. They oversight, how the bank has been run, they know what’s in any particular mortgage book. They can see where particular banks have got perhaps overexposure to one sector, they can see what the capital provisions are. I think that the head of the regulator yesterday said ‘Australian banks are boring, scrutinised and safe’. And I think that’s pretty much how we’d want them to be.
“Australian banks are certainly better equipped now than they were in the GFC. They’ve got 2 to 2.5 times the capital reserves put aside for a rainy day than they had in the GFC. And that’s, that’s been 10 years of just gradual build up, required by the regulator put aside by banks. It’s an incredibly strong buffer if things do go rocky”ABA CEO, Anna Bligh
PATRICIA KARVELAS: Okay. Should the financial troubles in the United States and Switzerland give us any cause for concern though?
ANNA BLIGH: Well, as I said yesterday, I think we all saw during the GFC, even though it’s more than a decade ago, just how connected the financial institutions around the world are these days. So I don’t think there’s any room for complacency. And the regulator is certainly on alert and keeping a very strong eye on what’s happening in banks. But just as importantly, in regular contact, literally on a daily basis – although in their case it’s nightly, because they’re doing the phone calls on northern hemisphere time – but regulators around the world are literally contacting each other every single day at the moment to make sure that all understand what is happening. So I don’t think you can never say never, because there are always things that none of us have seen before. But it is I think, important to know that we are t among the best equipped banking systems in the world to withstand a crisis. We withstood the GFC. Australian banks did not need taxpayer bailouts. We withstood COVID, who knows what might come down the pipeline next. But to the extent that you can prepare for a crisis, Australian banks are certainly better equipped now than they were in the GFC. So, they’ve got 2 to 2.5 times the capital reserves put aside for a rainy day than they had in the GFC. And that’s, that’s been 10 years of just gradual build up, required by the regulator put aside by banks. It’s an incredibly strong buffer if things do go rocky.
PATRICIA KARVELAS: The boss of Westpac says the number of repossessed homes on its books is nearly back at the level seen during the global financial crisis. But the proportion of customers falling behind on mortgage repayments remained low. Take me through this.
ANNA BLIGH: Well, I think there’s been a slight misunderstanding of what the CEO of Westpac actually said yesterday. The point he was trying to make is that housing repossessions in Australia are incredibly low. They haven’t changed much for the last 12 years. So his point was simply, around the GFC time, there were about 200 a year. And there’s been about 200 a year ever since sometimes it might be 180, sometimes it might be 210. People get into trouble, whether there’s a crisis or not, people lose jobs, relationships break up…
PATRICIA KARVELAS: Sure, but I mean more people getting into trouble.
ANNA BLIGH: There’s certainly no more repossessions happening at the moment. And I should say, anyone who’s facing a repossession now is because of trouble that started for them about two years ago. So it’s quite a long process. Before you get to that point, what we are seeing across all of the banks is a very slight, very slight uptick in people wanting to apply for hardship arrangements. And that’s people going to their bank doing the sensible thing and saying ‘I’m getting into trouble, I think I need you to help me and put in place some other arrangements to get me through this’. It’s very small at the moment, but we’ve yet to see the full impact of the interest rate rises that have been announced to date. So there’s been 10 announced, but for most people, they’re only paying seven or eight, because there is a two to three month lag between the announcement and when it hits your pocket. So most people are paying up to about, as I said, seven interest rates at the moment. So there’s still a lot to play out. And if it did peak at 10 or 11, most people will probably be very stretched. But what banks are worried about is if they’re paying that peak level, whatever it ends up stopping at is how long can you do that for. Most people can stretch for a month, they can stretch for another month. But once they’re stretching for 6, 7, 8 months, sometimes the elastic band gets very, very thin. So banks are really watching for the second half of this year. We’ll obviously be very keen to see where the Reserve Bank lands next month and the month after that, but the banks are ready with a very practical toolkit for people who get into trouble. They use that toolkit during COVID. They got people through and they’re ready to do it again.
PATRICIA KARVELAS: If the RBA though, does raise rates, as you say, you’re watching closely for 11th consecutive time. Are you expecting things like repossessions? I know you say it takes a couple of years, but is this the tipping point we’re getting to?
ANNA BLIGH: Well, certainly people who borrowed in the last 2 – 2.5 years PK would have been assessed with what’s called a serviceability buffer. That is, they look at your income, they look at your expenditure and then they say, well, whatever the interest rate is that we’re offering you, could you pay 3% more than that if interest rates went up. It’s called a serviceability test. The March increase would have taken most people now over that serviceability buffer. So yes, banks are, they know that there’s going to be some of their customers who get into trouble. They’re not expecting it at massive scale, but they are ready for more customers to be needing the kind of practical help that they can provide to get them through what might be a limited period of those very, very high rates or those significantly higher rates. Most economists are expecting that they will come down again maybe sometime in 2024. So banks consider it – you might be in trouble, now – how do we get you from here to the other side of that trouble. You can defer payments, they can put you on an interest only period, they can restructure your loan, they can offer you a lower interest rate. All of those things can help people get through. But the best thing that customers can do is if they think they’re going to be in trouble, even if they’re still up to date with their mortgage, and they’re worried they might be finding it difficult next month or the month after. Now is the time to talk to your bank. The customers that banks find it hardest to help those that leave it for months and months and don’t answer the phone calls from the bank, don’t answer the letters, because then it gets very, very hard to help people. I think it’s pretty normal to not want to ring your bank when you’re in trouble. But actually, it’s the smartest thing to do.
PATRICIA KARVELAS: Thank you so much for joining us this morning.
Anna Bligh: Thank you.
Patricia Karvelas: Anna Bligh is the CEO of the Australian Banking Association and you’re listening to RN breakfast
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