The Australian Prudential Regulation Authority (APRA) has increased its supervision of banks in the country after Silicon Valley Bank (SVB) collapsed and Credit Suisse experienced outflows from its customers.
The regulator has begun asking banks to declare their exposures to start-ups and crypto-focused ventures, with some banks required to provide daily updates. The move is aimed at gaining insight into vulnerabilities in the system and improving reporting around crypto assets.
Concerns have been raised about the impact of increased oversight on the ability of start-ups to access banking services, potentially freezing the sector.
While Australian banks are well-capitalized and profitable, there are fears that compliance activity relating to start-ups could threaten the growth of digital economy businesses.
The situation has put into question productivity gains driven by financial innovation, said Peter Cook, chief executive of payments services company Novatti.
He added that the growth of digital economy businesses is at risk if start-ups can’t get banking services, which could affect efficiencies, productivity, and job growth.
Stable situation for Australian banks
The APRA has declined to comment on the increased supervision, but an agency spokesman pointed to a recent statement which noted that the regulator had “increased supervision” of the banking sector. Although there is no suggestion that Australian banks have or will suffer deposit flight, there are fears that confidence could be quickly eroded and bank margins will be pressured.
According to Barrenjoey analyst Jonathan Mott, the situation remains stable for Australian banks, but credit spreads and the cost of capital will continue to rise. At a minimum, this will add to the margin pressure the banks are facing, while credit quality will continue to deteriorate.
APRA does not mandate banks’ risk weightings, which are set by each bank individually. It is also not publishing any of the information it collects publicly and is using it solely to determine Australian banks’ risk profile.
Risks of de-banking for start-ups
Start-ups have already experienced banks becoming more cautious about where they allocate lending due to pressure on their margins. The increased scrutiny could lead banks to deem the sector riskier, resulting in heavier risk weightings as an excuse not to service the sector. This could make it harder for start-ups to continue their banking relationships and operations like payroll.
Last October, the Council of Financial Regulators, the Australian Competition and Consumer Commission, and AUSTRAC responded to complaints from the crypto and fintech sectors about being “de-banked” because they sit outside of banks’ risk appetites.
Regulators said the banks should collect and share data about de-banking activities, make their processes transparent and fair, advise the government of their risk tolerance and consider investing to improve their capability to bank these sectors.
The fallout from Credit Suisse’s additional tier-one bonds being wiped by the Swiss regulator will put even more pressure on local banks. They have to raise an extra $70 billion of total loss-absorbing capital by 2026.
However, the major banks have stressed that the local crypto industry remains small and largely banked offshore because of existing concerns around anti-money laundering compliance.
