Why is the Morrison government using the Australian Prudential Regulation Authority as its surrogate to attack bank dividends? APRA is misusing its prudential role for a clearly non-prudential purpose aimed at protecting the government from a political backlash from those investors who depend on bank dividends for a considerable slice of their income. Comprising the same self-funded retirees and superannuation funds that the government ‘protected’ from Labor’s imputation credit theft at last year’s election, they are in the firing line of last week’s dividend threat to Australian banks — the full import of which has not received appropriate media attention.
APRA may be a willing surrogate in this deceptive attempt to place the dividend threat as a key element in the economic response to coronavirus. It seeks redemption after being scarified (wrongly) in the Banking Royal Commission for failing to prevent the illegal behaviour that left the banks as national pariahs.
Last week, despite a remarkable testimonial from the Reserve Bank about the ability of Australian banks to withstand the crisis, APRA told them that, until the coronavirus pandemic was over, not only should they defer dividends but that if their boards insisted on paying dividends these should be ‘materially reduced’. And in an unreported section of its announcement, it brazenly stressed that this should happen no matter how strong a bank’s financial situation would be and no matter what the outcome of its APRA-approved ‘robust stress testing’. So APRA’s intervention last week was unquestionably political, not prudential, with APRA admitting its motive was for the money saved from non-dividends to be used as a ‘buffer’ to help maintain the banks’ capacity to lend and support the economy — a social/political objective that, no matter how worthy, is properly the responsibility of government, not of the prudential regulator whose duty is to ensure banks are financially sound.
APRA’s demand came just four days after PM Morrison gave the assurance (when NZ followed some overseas leads by banning bank dividends on 2 April) that ‘The Australian government through our financial regulators have not received advice to move to that level’, and with APRA telling the AFR that ‘Bank dividends are an issue for the banks’. Concurrently, the Reserve Bank was going further by insisting that ‘Australian banks are well placed to withstand this current period of stress’. APRA’s ‘cut dividend’ demand was in total conflict with the whole tenor of the Reserve Bank’s largely ignored April Financial Stability Review. This listed bank liquidity positions as ‘strong’, with the RBA’s Term Funding Facility and strong deposit growth providing enough funding. ‘Major banks’ capital ratios are sufficient to withstand historical bank crises’ while healthy bank profitability and historically low bad debt charges mean banks can absorb a large increase in bad debts. ‘Stress tests suggest that Australian banks’ strong capital positions and profitability should enable them to withstand a reasonably prolonged period of economic contraction without breaching their prudential minimums’.
What happened over that weekend to make APRA suddenly decide to ignore all this? The Australian Council of Financial Regulators which is the conduit to the government, met on Friday 3 April, so the following Tuesday’s policy change clearly has the government’s hands all over it.
APRA’s boss Wayne Byres knew of the political implications, noting that he recognised the important role the multi-billions of bank dividend dollars play in the incomes of many Australians, with mum and dad shareholders accounting for almost half of bank share registers. As the Australian’s James Kirby pointed out last weekend, ‘Bank dividends are the backbone of shareholder portfolios in Australia, with a third of all dividends issued on the ASX 200 coming from the big four banks.’ Millions of investors, including the majority of the nation’s self-funded retirees, already badly hit by rock-bottom interest rates, rely on franked dividends as a key component of retirement income. During the GFC our big banks reduced dividends in the worst cases by only 25 per cent. But now, with the banks far stronger than then, we are entitled to know what the real reasons are for the government’s much tougher dividend threat.
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