Australia's largest banks have warned the Financial System Inquiry that forcing their creditors to wear losses in a crisis could see the banking sector downgraded by ratings agencies, face increasing funding costs across the economy and potentially exacerbate a downturn.
The inquiry, led by former Commonwealth Bank of Australia chief executive David Murray, closed its consultation phase this week and submissions were released on Friday.
Even though no Australian bank required a bail-out during the global financial crisis the inquiry is considering ways to minimise the risk that taxpayers are put on the hook during a future shock.
The issue of bank stability is a controversial topic for the inquiry, generating more than 700 submissions in the second round of consultation.
Options include imposing losses on bank creditors, like bondholders, via a "bail-in" regime; forcing banks to hold higher levels of capital; and "ring-fencing" retail banking from more speculative lending or business activity.
ANZ Banking Group warned on Friday that "bail-in" of senior unsecured debt "will likely result in a review of the Australian banks credit ratings by the rating agencies". That could increase funding costs for the system by up to $1 billion each year and restrict the availability of credit.
"Our analysis highlights that additional measures to strengthen the financial system would come at material cost to the economy while providing little in the way of additional benefits to financial system stability," said ANZ chief executive Mike Smith.
National Australia Bank used its second submission to warn that a bail-in regime may force creditors to withdraw support for banks during a crisis.
"Unless creditors have confidence that their funds will be repaid in full and on time, they will withdraw support," NAB said.
Macquarie Group said that "despite considerable discussion and debate, bail-in regimes as contemplated remain untested, and so the effectiveness or workability of bail-in instruments as a resolution mechanism cannot be measured".
Commonwealth Bank of Australia said it was concerned about any "bail-in" regime impacting on ratings and pointed to the alternative of issuing new "Tier 3" capital securities which, like hybrid debt, would have loss absorbency features.
Last month, Moody's said in a report that Australian banks' reliance on wholesale funding, and the importance of foreign capital to finance Australia's structural current account deficit, meant the "risks of contagion from implementation of bail-in provisions may be especially high".
In its second submission to the Murray inquiry, Standard & Poor's said a bail-in scheme "could have implications for our ratings" of the big four banks and Macquarie.
The credit ratings agency said Australia had different features to European countries' currently existing bail-in laws, including lower reliance on senior unsecured wholesale funding and equity injections by their governments to support banks during the crisis.
"We note that Australia's banking sector and economy are reliant on the ongoing support of domestic and foreign wholesale investors, and we believe that a shift in these investors' perceptions of Australia's risk profile, stemming from a view that the government is potentially less supportive towards the banking system, could lead to – or exacerbate in a downside scenario – a range of disorderly adjustments in the Australian economy," S&P said.
"In particular, we believe Australia could find it challenging to effect an economic recovery in circumstances whereby a key source of funding upon which the recovery would likely depend – senior unsecured creditors – had been "bailed in" during the downturn."
The RBA urged a cautious approach to bail-in, noting it carries the risks "of deepening the institution's financial distress and spurring contagion to the broader financial system".
The risks were laid bare in Canada earlier this month, when Standard & Poor's and Moody's revised their outlook on Canadian banks to "negative" after the Canadian government revealed plans to implement a bail-in regime.
The issue of bail-ins is already on the agenda for discussion at the G20 leaders' summit in Brisbane in November when the Financial Stability Board, which co-ordinates global banking regulation, will put forward a regime for the world's largest banks. Those rules won't apply in Australia – instead it will be left to local regulators to work out how bail-in laws apply domestically.
