Australia's big four banks along with AMP Limited, Suncorp, Macquarie Bank and Challenger have been warned by the Australian Prudential Regulation Authority (APRA) that their conglomerate status will now allow them the luxury of avoiding losses incurred by separate elements of their operations.
The regulator has told the big eight conglomerates that the markets will expect them to cover "losses sustained by group members, even if the affected members are operationally separated or separable".
The point has been made in draft guidance issued by APRA which the regulator has said it will not move to make effective until after the Government proceeds on the basis of the Financial Systems Inquiry (FSI).
However the draft guidance makes clear that the regulator is looking for a group-wide approach.
Commenting on the draft guidance, APRA chairman, Wayne Byres made the point that the eight conglomerate groups to which APRA intended applying the planned "Level 3 framework" controlled approximately 80 per cent of the assets of all APRA-regulated institutions.
"The importance of strong group-wide governance, risk management and capital adequacy is therefore critical not just to these groups, but to the stability of the financial system more broadly," he said.
The draft guidance document states from the outset that, "Level 3 groups must develop and maintain group-wide policies that establish consistent business practices for governance, fitness and propriety of key staff, business continuity management and outsourcing".
"APRA's cross-industry behavioural prudential standards on these aspects of corporate governance are required to be applied across Level 3 groups, including to non-APRA-regulated institutions engaging in business activities that may have a material financial or operational impact on the group," it said.
Elsewhere in its draft guidance, APRA said it remained of the view that groups containing systemically important banks "cannot restructure to address contagion risk arising from the group's non-APRA-regulated institutions".
"APRA considers that there is a serious risk that financial markets will expect an Authorised Deposit-taking Institution (ADI) that dominates its group to cover losses sustained by group members, even if the affected members are operationally separated or separable from the ADI," it said.
"If this market expectation is not met, markets could form the view that the ADI is unable rather than unwilling to cover these losses. This loss in market confidence could adversely affect the ADI's liquidity position and, ultimately, its viability."
