Banks are told to report on crypto risk, startup risk

The increased oversight comes after start-ups withdrew funds deposited with SVB, triggering the collapse, and after Credit Suisse suffered outflows from clients worried about profitability as it attempted a complicated and lengthy restructuring process.

Barrenjoey analyst Jonathan Mott told clients in a note that “the situation remains stable” for Australian banks, but warned that confidence could quickly erode and bank margins would be squeezed.

“Our channel checks indicate that deposits are not being pulled from smaller institutions of any size, and capital and liquidity buffers are strong,” Mott said.

“But this is a crisis of confidence and credit spreads and the cost of capital will continue to rise. This will at the very least add to the margin pressure banks face, while credit quality will continue to deteriorate.”

Banks are already believed to have become more cautious about where they allocate lending given the pressure on their margins, which will intensify in line with global market turmoil.

The fallout from the $17 billion worth of Credit Suisse’s extra tier-one bonds being written off by the Swiss regulator will put even more pressure on local banks, given that they need to raise an extra $70 billion in total loss-absorbing capital by 2026.

The major banks have privately stressed that the local crypto industry remains small and largely banked offshore due to existing concerns about anti-money laundering compliance.

An APRA spokesman declined to comment, pointing to a recent statement which noted the regulator had “increased oversight” of the banking sector.

“It is already difficult for start-ups to access banking services in Australia. It is hard to escape the suspicion that it is not about to get much tougher because of a banking crisis that has absolutely nothing to do with us, said one start-up entrepreneur.

“No one is arguing that banks should be forced to extend services to an extravagantly risky client. But they should be required to make transparent, explainable decisions on a case-by-case basis. If you apply an arbitrary high-risk weighting to an entire sector, where is the incentive for banks to offer their services? All you’re going to achieve is the concentration of risk in a smaller and smaller group of banking service providers to the startup community.”

APRA does not mandate the banks’ risk weights, which are determined by each bank individually. It also does not publish any of the information it collects publicly and uses it solely to determine the risk profile of Australian banks.

One source said APRA “wasn’t the sticking point” and that banks have increasingly removed banks with recent start-ups against the advice of regulators including AUSTRAC, the Australian Competition and Consumer Commission and the Council for Financial Regulation.

Another source said startups were also starting to worry about their apps being offered through third parties, given the risk that funds stored in digital wallets could be frozen if banking services were suddenly withdrawn.

The source pointed to the funds trapped in Unhedged, an algorithmic investment platform that decided to shut down its investment services. Account holders have not been able to access their money while they wait for auditors to wind up the company’s consumer arm.

“As a young company, Unhedged is not yet profitable and is raising capital to finance its operations. Due to funding constraints in the current market environment, we have decided to pivot our company to a more capital efficient business model,” the company said in a statement.

On Tuesday, Unhedged founder Peter Bakker said there is “no risk other than timing” for customers waiting to access their money.

Crypto players said the increased scrutiny could lead banks to consider the sector riskier, meaning they would cite heavier risk weights as an excuse for not servicing the sector. These start-ups fear that this could make it more difficult to continue their banking relationships and operations as a salary.

In October last year, the Council of Financial Regulators, the ACCC and AUSTRAC responded to complaints from the crypto and fintech sectors that they were being “beaten down” because they sit outside the risk appetite of banks.

Regulators said banks should collect and share data on so-called de-banking activities, make processes transparent and fair, inform the government of their risk tolerance and consider investing to improve their ability to bank these sectors.

ANZ, Commonwealth Bank, National Australia Bank and Westpac all declined to comment on Tuesday.