New liquidity standards proposed by the prudential watchdog to prevent bank collapses will inadvertently threaten the profitability of mutual banks, credit unions and customer-owned banks and place further stress on a regional banking sector already at crisis point.
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The claims made by Queensland Federal Liberal-National MP Garth Hamilton relate to targeted changes put forward by the Australian Prudential Regulation Authority designed to "strengthen authorised deposit-taking institutions' liquidity and capital requirements".
Mr Hamilton warned Treasurer Jim Chalmers in a May 31 letter seen by ACM-Agri that he believes the reforms will heap pressure on the smaller institutions, predominately based in regional areas, by increasing the lending dominance of the big four banks.
The deputy chair of the parliamentary standing committee on economics found support after raising what he believes to be a potential erasure of the nation's proportional risk approach to capital and liquidity requirements at the Coalition's joint party room meeting last Tuesday.
Nationals leader David Littleproud, a former agribusiness banker with NAB and Suncorp, which included a stint as its south west Queensland business and agribusiness executive manager, has also joined the fray.
"The Nationals vehemently oppose the proposal by APRA because it will advantage big banks over regional banks and small mutuals, that will kill competition," he said.
"We need policy that responsibly creates more competition in the banking sector, not less, and the Parliament should be prepared to work together to ensure this is achieved if required."
APRA, who does not agree with the assessment, said in a letter to ADIs last November that the new rules were designed to fortify financial frameworks to lessen the danger of a major bank collapse in Australia by improving how banks manage liquidity.
The regulator recommended the reforms after a targeted review of its liquidity requirements ordered following "bank crisis events" in the US, including the Silicon Valley Bank collapse, and Europe with Credit Suisse during 2023 that highlighted "new complexities and challenges" that could create future risks to financial stability.
The overarching goal is to prevent the contagion effect of stress in one bank from disproportionately impacting the entire system.
Mutual banks, credit unions and the nation's 55 customer owned banks currently form two thirds of the number of domestic ADI's and are used by around five million Australians.
In the letter to Mr Chalmers, Mr Hamilton expressed concerned that the APRA proposal presented a risk to smaller ADI's and this threatened competition "by impacting profitability, earnings and funding sources".
"This anti-competitive impact will place smaller ADI's at a disadvantage, forcing them to seek alternative funding options and higher cost products, which will adversely impact customers, and leading to consolidation at the upper end of the banking sector," he wrote.
The proposed revisions to liquidity standards relate to smaller and less complex ADI's which under current liquidity arrangements are subject to a simpler and more proportionate liquidity regime called the Minimum Liquidity Holdings regime.
In contrast, major and mid-tier banks are subject to the more complex and intricate Liquidity Coverage Ratio which is more burdensome to calculate.
The Member for Groom also suggested to Mr Chalmers that the changes were in contrast to a recent House Standing Committee on Economics report calling for more proportionate regulatory approaches and the development of a regulatory grid to support competition in the banking sector.
Financial Services Minister Stephen Jones also said in March that the government would introduce a financial sector regulatory grid to ensure the standard business of regulation was delivered in a coordinated way.
Meanwhile, a federal inquiry delivered a final report last month after investigating the impact of bank closures in regional Australia, among its eight recommendations was the establishment of a community bank and guaranteeing access to cash.
It also said a banking regulator should have veto power over branch closures, otherwise country communities will continue to pay the price of losing essential services.
The year-long inquiry was set up to examine the increasing closure of banks across rural Australia, where 798 branches have shut in the six years to June 2023.
The rapid shift has left an estimated 600 towns without a bank and, with cash still king in the country Australian Competition and Consumer Commission stepped in late last month to keep the pipeline of cash flowing.
Mr Hamilton said the proposed rules were an "overreach" that could price small banks out of the financial services market and lead to "closures and mergers and less branches in regional communities" and increase the dominance of the big four.
"I'll fight this one all the way," he said.
Under the changes, intended to become operational on January 1 next year, APRA said it is not proposing to increase the amount of liquidity that banks must hold.
"Australian banks' liquidity positions remain strong (and) APRA's review found that most banks have prudent practices for managing risks; however, there are some gaps which need to be addressed," it said .
"These gaps relate to valuation practices, processes for accessing emergency liquidity assistance and the composition of liquidity portfolios.
The boiled down APRA stance is believed to be that the proposal is not to remove the MLH and LCR distinction but uplift some MLH requirements and that the proposed changes do not introduce further complexity and retain proportionality.
However, Mr Hamilton said it was "wrong" to suggest that the Australian banking system was not different from "the concentrated, corporate drive, and unprotected system that underpinned the Silicon Valley Bank".
Customer Owned Banking Association chief executive Michael Lawrence has previously said that the lobby group was "concerned the proposed changes will erode vital competition in a market dominated by a handful of major players, noting APRA's consultation proposal acknowledges the adverse impacts on some smaller banks".
Submissions on the draft proposals closed on February 16 while APRA's website said the watchdog "intends" to finalise the consultation by July 31.
