(8 November 2011 – Australia) Lower profitability has to be addressed and accepted, according to the Australian Prudential Regulation Authority (APRA).Australia’s powerful bank regulator has warned banks against cutting too deeply into their cost base while the lending environment remains subdued, saying such moves could compromise their own safety nets.
The move comes as many of the nation’s biggest banks are cutting back office staff as they adjust for slower credit growth.
APRA chairman John Laker said as long as businesses and households remained cautious towards the economy, bank boards and management might also need to adapt their strategies to the new environment.
Unless this happened, banks ”may be tempted to chase unrealistic expectations by assuming more risk – through lowering credit standards or seeking new and unfamiliar markets where they may have little comparative advantage – or by aggressive cost-cutting that may weaken risk management capacities”, Dr Laker said.
”Those temptations must be resisted in favour of more measured strategic ambitions,” he said in APRA’s annual report, although he did not name any banks.
He said the effects on the Australian economy of the European crisis were not yet clear.
”But what is obvious is that the operating environment for the Australian financial system is, yet again, clouded with uncertainties,” Dr Laker said.
For this reason, APRA would need to maintain supervision at an intense level for at least the next year, he said.