The Treasury has recently released an exposure draft of the proposed reforms for Australia’s banking regulator APRA. This bill significantly alters the legal framework and grants APRA a raft of new powers to operate effectively as a dictatorial bureaucracy over the financial system in the event of a financial crisis.
Named the Financial Sector Legislation Amendment (Crisis Resolution Powers and Other Measures) Bill 2017, the proposed bill itself is over 300 pages long, and the memorandum explaining what is in the bill is over 150 pages long. I have tried my best to go through it and find out what is inside, but there are definitely lots of things I will have missed.
The bill contains amendments to the Banking Act 1959, the Insurance Act 1973, the Life Insurance Act 1995, the Financial Sector Act 1995, the Payment Systems and Netting Act 1998, the APRA Act 1998, and other acts.
The most significant changes I have found include:
THE FINANCIAL CLAIMS SCHEME
The Financial Claims scheme was brought in after the 2008 GFC as a government guarantee on all bank deposits held by ADIs (Authorised deposit-taking institution) in the event of bank insolvency. The claim has a limit of $250,000 per person per institution, or $5000 for insurance claims, but serves as a guarantee on Australian deposits.
Currently the FCS is completely unfunded and if the government was actually forced to pay out even a small percentage of deposits it would need to result to massive deficit spending. It serves more as a confidence booster than an actual guarantee.
Now there are many changes in the new bill to the FCS.
It creates an additional mechanism that allows FCS claims to be satisfied if a person’s deposits are transferred to another ADI (i.e. in a crash they may transfer deposits over to other banks)(8.9 – 8.29).
Under this new transfer mechanism APRA is allowed to calculate an equivalent “payment amount” in lieu of the full deposit amount. (8.20) This amount is can not be more than the FCS amount “and could be less than this amount which may provide a better financial outcome for the Commonwealth.” (8.22) This means they are planning to reduce the payouts of the FCS for the benefit of the government.
What is worse is that APRA is seeking to remove clauses which require it provide the details of the amounts paid under payment amounts to the ATO. (8.57) This means that they will be shorting customer deposits through this transfer scheme and won’t have to report the differentiation between the actual FCS amounts and the payment amounts. It definitely appears that they plan on short changing the FCS under this bill.
It also gives the Treasurer the power to enact the FCS before APRA appoints a statutory manager, the purpose of this I am not yet sure (8.53).
WRITE OFF AND CONVERSION POWERS
In this memorandum APRA claims it has the prudential authority to enact bail-in practices (1.31, 5.6). Its two mechanisms through which AT1 and AT2 capital can absorb losses are conversion into shares, or a write off the instruments.
The changes in the bill enable bail-in to occur without interference from previous legal impediments. It also creates the new term “conversion and write-off provisions” to indicate whether capital instruments can be utilized to absorb losses of the ADI. So check through the updated terms and conditions policy of any financial product looking for these words to see whether they will be convertible if the institution faces a crisis.
Bail-Ins allow banks to transfer losses onto what they term “unsecured creditors.” In Cyprus in 2013 bail in measures enabled banks to confiscate deposits of ordinary citizens, the most visible example of bail-ins in recent history.
TRANSFER AND DIRECTION POWERS
APRA gains a broad new set of direction powers over the prudential system. APRA gains the ability to dictate a compulsory transfer shares from failing entities to other existing body corporates. In effect it can merge banks together to ensure financial stability.
APRA also gains the ability to issue statutory managers of the Non-Operating Holding Companies of the ADIs enabling them to take over the control of the banks, and also gains the ability to appoint statutory managers to insurers.
These statutory managers are also given almost complete civil and criminal immunity for any action taken under in their duties for APRA regardless of other legal claims.
Also APRA is able to conduct these statutory takeovers in secret as it gains strong secrecy powers with harsh penalties for anyone who violates the non disclosure laws.
Ultimately APRA gains dictatorial powers over the financial system, and with APRA’s tight connections with the banking system already making its integrity questionable, it strongly appears like it will be a case of the fox guarding the hen house.
SO WHAT IS THE SOLUTION?
The next financial crisis is not far away. What matters is that people and parliamentarians are willing to implement a regulatory framework that prioritizes the wellbeing of citizens over the interests of international finance. The same methods of bail-outs used to solve the 2008 GFC will not be enough to repair the system again, new strategies are required.
One idea is memorandum on bank foreclosures. This basically means banks cannot repossess homes or assets of anyone who defaults on their repayments for a certain period of time. This prevents a mass eviction which would occur when the mass defaults arise.
Another potential idea is Glass Steagall legislation. Brought in after the great depression in America, the legislation separated banks into retail and commercial banks, dividing regular deposits and home loans from the speculative gambling of the investment banks. By putting a divide between the two it enabled deposits to be protected whilst the speculative activities were allowed to fail. I personally asked APRA chairman Wayne Byres what his position on Glass Steagall was. It appears that there are no plans within APRA for such an idea.
Talks of a global currency reset and a potential new Bretton Woods conference mean that Australia should be thinking towards the future and preparing for the next stage of the financial system. Australia is one of the largest gold producing nations in the world, maybe a gold backed currency is in our national interest.
APRA has long had a questionable relationship with the big banks it is supposed to be regulating. APRA has also shown strong commitment to adopting the international framework (1.11). Wayne Byres himself was Secretary General for the Basel Committee of Banking Supervision for the BIS in Switzerland, and as such there is strong support for adopting the international Basel 4 reforms here in Australia.
Ultimately another financial crisis is on the way, and unless a regulatory framework is put in place which prioritizes national wellbeing of its citizens over the interests of international finance, then we are facing a very dark future.
The Draft Financial Sector Legislation Amendment (Crisis Resolution Powers and Other Measures) Bill