JAKARTA: There are no immediate credit implications for rated banks and building societies from the Australian government's "Competitive and Sustainable Banking System" proposals, which were announced over the weekend, Moody's Investors Service says. "The proposed package is fairly balanced, combining measures to increase competition in retail banking products with initiatives to diversify banks' wholesale funding", says Patrick Winsbury, a Senior Vice President at Moody's Sydney office, as quoted in a press release at the website.He also said that the initiatives to increase competition are likely to have an impact only over an extended period and therefore create limited near-term pressure on the credit profiles of Australia's major banks, which are the principal targets of the government's proposals.He analyzes that the major banks stand to benefit from the ability to issue covered bonds. "But the proposals provide only a foundation upon which to tackle the structural dependence of the major banks on offshore wholesale funding, which is the most significant negative credit issue that the Australian financial system faces.The proposed package includes measures to increase public confidence in, and the visibility of, smaller financial institutions, and in particular the mutual sector. But in practice, limited distribution capacity and operational constraints are likely to impede smaller lenders from rapidly realizing significant gains in market share.Access to funding is likely to continue to act as a constraint on smaller institutions until such time as the RMBS market recovers meaningfully, or some other aggregated funding solution is developed. Credit Impact -- Regional BanksAustralia's regional banks may find relatively little immediate advantage in the proposed package. Their funding needs are relatively higher.Being lower-rated, the benefits which the regional banks may derive from covered bond issuance are also less certain, as there is a degree of linkage between covered bond ratings and originator ratings. At the same time, the proposed measures are designed to create more powerful competitors in the second and third tiers of the banking sector.The abolishment of early termination fees in 2011 may in fact impede price competition because such fees are more common among non-bank lenders to compensate for their lower advertized interest rates. Furthermore, unless funding costs decrease, lenders may be reluctant to compete hard on price in light of impending and increasing regulatory costs, such as Basel III's liquidity/stable funding requirements. (NOM)
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