Saturday, February 18, 2012
AUSTRALIA'S bank regulator has warned the banks against trying to meet ''unrealistic'' profit expectations by aggressive cost-cutting or chasing riskier lending, and urged them to just get used to ''life in the slow lane''.
John Laker, chairman of the Australian Prudential Regulation Authority, who won widespread plaudits for keeping the banks away from risky lending in the noughties boom, said the banks were unlikely to match the profit growth of those years in the post-GFC climate.
APRA figures updated by the Australia Institute show the big four banks have increased their post-tax profits from $16.6 billion in 2006-07 to $24 billion in 2010-11, despite the plunge in new lending.
Dr Laker told the Senate economics committee that banks must not try to retain profit growth by cost-cutting that weakens their ability to manage risks.
''The challenge is coming to terms with life in the slow lane,'' Dr Laker said. ''If the current cautious approach of households and businesses towards taking on additional debt persists, [banks] are very likely to be denied the strong balance sheet growth that supported sustained profit increases before the crisis.
''In these circumstances, boards and management may be tempted to chase unrealistic expectations for returns on equity by assuming more risk - through lowering credit standards or seeking new and unfamiliar markets where they may have little comparative advantage - or by aggressive cost-cutting that may weaken risk management capacities.
''These temptations must be resisted in favour of more measured strategic ambitions.''
Dr Laker told the committee APRA had now begun a third ''and we hope, final'' round of consultations with the insurance industry on its review of capital standards, as well as consulting with the banks on its proposals to implement the Basel III capital and liquidity standards.