Following Friday’s dreadful speech from APRA’s Charles Littrell, APRA Chairman John Laker delivered better in addressing liquidity requirements and any prospect of bank capital return. On the first Laker said:
“We have already been offered advice that APRA should adopt the revisions without demur, although it is not always clear that commentators have fully understood the Basel III rules. There is devil – deliberate devil – in the detail. Take the expansion in the definition of high quality liquid assets. The revised Basel III rules give national authorities the discretion to include certain additional assets in a new Level 2B category, provided they fully comply with the qualifying criteria. These assets are residential mortgage-backed securities with a long-term credit rating of AA or higher; corporate debt securities with a long?term credit rating of between A+ and BBB?; and a selection of listed non?financial equities. But, note the qualifying criteria, which are fundamental and tight: these assets should be liquid in markets during a time of stress and, ideally, be eligible for use in central bank repo operations.
The argument is being put that if APRA were to designate particular types of assets as eligible HQLA this would encourage depth and liquidity in the markets for these assets. The designation would be self-reinforcing, so to speak. That may well be the case over time. However, the Basel III rules do not reward wishful thinking; they require national authorities to acknowledge the facts. Australia has been through the live stress of the global financial crisis – when financial markets were severally disrupted at times – and the behaviour of financial assets during this period will be a critical factor in our assessment of HQLA eligibility….some types of debt securities in the list of potential Level 2 assets are eligible collateral for the Committed Liquidity Facility that will be provided by the Reserve Bank of Australia. These include RMBS rated AAA or higher and some corporate debt securities.”
Right you are. On the second issue, if the banks actually had the chutzpah to return capital to shareholders, the APRA would likely not allow it:
A prudent board will also consider other factors, such as growth expectations, capital volatility, dividend policy and credit ratings, where relevant. Peer comparisons, whether domestic or international, are not sufficient, a lesson learned in the crisis. In short, the appropriate level of capital that an ADI targets and seeks to maintain is a more nuanced and forward-looking assessment than a focus on minimum prudential requirements would suggest. This needs to be kept front of mind when siren calls for share buy-backs, special dividends or higher dividend payout ratios get louder. And they surely will.
Let’s face it, if it’s not going towards stabilising the financial system, any additional capital should be going to tax-payers as fees for the guarantees that generate the additional capital.
He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.
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