The Australian Prudential Regulation Authority (APRA) has issued Australia's major banks with a warning that it will be examining how they go about cost-cutting to ensure they do not expose themselves to undue risk.
The message was delivered by APRA chairman John Laker, who said that while the regulator did not have an issue with the major banks cutting costs via measures such as cutting staff, it was closely monitoring the situation.
"Since staff expenses typically account for around half or more of total operating costs, it is not surprising that many Authorised Deposit-taking Institutions (ADIs) – large and small – are targeting staff reductions as part of efficiency programs; in some cases, this may involve outsourcing or offshoring operations," he said.
"APRA does not have an issue with cost-cutting per se; the level of staff expenses is quite properly a matter for boards and senior management," Laker said.
"APRA's concern is how cost-cutting might be achieved.
"Risks arise when efficiencies are sought through reductions in critical support functions and underinvestment in risk management capabilities," he said.
"This would leave ADIs more exposed in the event of any future deterioration in economic conditions, with weaker risk control frameworks at a time when they are most required.
"Cutbacks to risk management staffing because they seem an easy cost centre target, not because the ADI has reined in its risk appetite or exited certain activities, is a short-sighted approach that we would want to strongly challenge," the APRA chairman said.
Laker also issued a warning about the need for banks to take a closer look at the costs and benefits of outsourcing and offshoring as a means of cutting costs.
"Let me be clear — APRA is not opposed to outsourcing," he said.
"However, ADIs need to recognise that while outsourcing may reduce costs, it always reduces control — control over resourcing, timelines and communication.
"While outsourcing can also reduce risks where functions are taken over by well-trained specialist providers, core expertise leaves the ADI, possibly never to return. And poor control over outsourced service providers can actually lead to higher costs in the long run," the APRA chairman warned.
"As a result, we are increasingly convinced that major outsourcing projects require close involvement of ADI boards to ensure that the trade-offs involved are well understood and that the risks are being considered in a transparent manner," he said.
