Australian banks need to wean themselves off short-term funding
The Australian Prudential Regulation Authority (ARPA) has warned that the banks under its jurisdiction are unlikely to be ready for the 2018 adoption of what is termed the "net stable funding ratio", a key part of the Basel Committee reforms. This will limit the level of dependence that banks can have to short-term, wholesale funding, with a view to reducing the risk of liability term mismatching. "Some further lengthening of Australian bank maturity profiles is therefore likely to be needed over time" said ARPA Chairman Wane Byres; that will invariably push up the banks' funding costs.

Banks will need to fund themselves with more long-term debt over time, the chairman of the banking regulator said on Wednesday, a move that will push up bank funding costs to pay for the reduced risk that the financial system will be exposed in a funding crisis.

Australian Prudential Regulation Authority chairman Wayne Byres warned banks are not ready for the application of the "net stable funding ratio", which will come up for consultation with the industry in the coming months before its introduction in 2018.

Australian Prudential Regulation Authority chairman Wayne Byres said local banks were not ready for the application of the 'net stable funding ratio'. Credit: Michele Mossop

That net stable funding ratio (NSFR), a key reform of the Basel Committee, requires banks to maintain a stable funding profile that reflects the composition of assets and activities. It limits over-reliance on short-term, wholesale funding.

"Given their funding structures, the largest Australian banks don't easily meet the new standard, and as things stand today, international comparisons are not particularly favourable to them," Mr Byres said on Wednesday at an event at the Actuaries Institute in Sydney.