Apra Not Going To Make It Easy For Funds To Move To A Banking Structure

The Age

Thursday October 30, 2008

ERIC JOHNSTON

APPLYING for a bank licence is a touch more complex than filling out a stack of forms at the local APRA branch.

The process takes at least nine months, is costly, highly demanding and stands to fundamentally change the way a business operates.

The fundamental rules about operating as a bank or an authorised deposit-taking institution have been designed to protect deposits.

The move to a banking structure would immediately require an injection of capital, given the managed fund would have to set aside more capital to back the investments it holds. This means the fund will operate at a lower level of leverage, which is likely to reduce return to investors as risks are lowered.

Banks need to have a minimum of $50 million in so-called tier-one capital but this changes according to the level and type of loans on the balance sheet.

Generally, big banks operate under a tier-one ratio of about 6%, although most are in the process of lifting this to 8%.

While the minimum tier-one ratio is 4%, newly established banks are often subject to a higher minimum capital ratio in their formative years, depending on the risk profile.

Managed funds would have to spend millions updating risk and internal controls, and comply with tough reporting standards set down by APRA.

Meanwhile, complications may arise over ownership, with no one entity usually permitted to own more than 15% of a bank. Any substantial shareholders would have to prove they are "fit and proper" to hold the stake - that is, whether they are well-funded and financially sound.

Last month, the last remaining Wall Street investment banks, Goldman Sachs and Morgan Stanley, were forced to protect themselves from the devastating financial storm by converting into bank holding companies. While this required a promise to lower the amount of leverage, the immediate benefit allows them to start taking the stable funding of deposits while escaping the rigours of mark-to-market accounting.

"The fundamental issue (in becoming a bank) is around capital," St George Bank chief executive Paul Fegan said. "APRA is very prescriptive about capital to be held, given levels of risk. Depending on the nature of investment funds and the supervisory and liquidity, it becomes very different (business)."

APRA aggressively polices use of the word "bank", launching several legal actions in recent years to either shut down operations or freeze funds.

The most famous was when receivers took control of about $1million raised by David Siminton after the Federal Court found he set up an unregistered bank in his self-proclaimed "principality of Camside".