Chris Joye: It’s time to act on bank capital

By Leith van Onselen

The AFR’s Chris Joye has written a ripper article this afternoon, slamming the major banks’ tiny capital buffers and demanding action from APRA:

…the majors carry real, or non-risk-weighted, equity capital of just 3.7 per cent of assets. Perversely, you cannot get a home loan from the same banks providing that little equity, with most capping loan-to-property value ratios at 95 per cent…

In comparison, APRA has “all other banks” relying on a much lower leverage of 20.7 times given their substantially higher real equity capital of 4.8 per cent…

Westpac is leveraging its wafer-thin equity 77 times when extending half a trillion dollars of finance to home owners… Imagine how Westpac would react if you told them you could only provide a 1.3 per cent deposit for your home…

Westpac only needs to suffer an increase in its residential mortgage default rates to 3.3 per cent before it wipes out all the equity it holds against these assets. That default rate, by the way, is less than levels experienced by British banks during the global financial crisis, and a fraction of the rates recorded in the US…

On Wednesday, I wrote a detailed post arguing that APRA can’t act soon enough on bank capital.

Chris Joye’s analysis obviously adds further weight to this view.

[email protected]