The Australian Prudential Regulatory Authority (APRA) has told Australia’s “too-big-to-fail” banks to limit their dividend payouts to investors to allow them to comply with new rules requiring them to maintain higher capital thresholds.
According to the AFR, APRA sent a letter to banks last week warning them to “maintain adequate capital buffers”. In follow-up telephone conversations between APRA and the banks, it was revealed that APRA was referring explicitly to dividends and that it was preparing to announce its capital requirement for banks known as DSIBs – domestically systemically important banks – likely in the order of 1% to 1.5%, rather than the 0.5% many banks had previously thought.
While it is often argued that Australia’s banks are well capitalised, a quick glance at the below chart, which shows the amount of capital held against credit exposures, clearly demonstrates this is not the case [note: the data is around 6-12 months old, so current values would differ slightly]:
As you can see, Australia’s Big Four banks hold only 2.7% (Westpac) to 4.3% (NAB) of capital against total credit exposures, with capital held against mortgages at around half those levels.
While this low level of capitalisation has dramatically boosted the banks’ profits by raising their return on equity, it also leaves creditors and potentially taxpayers exposed in the event that there is a severe downturn in the economy and asset prices.
The ambiguity surrounding APRA’s warning to the banks, which you and I know about only because it was leaked to the AFR, does also raise questions about why such discussions happen behind close doors? What benefits does such secrecy add?
Surely, investors require continuous disclosure. If there are vulnerabilities in the banks’ capital or dividend payouts are likely to be curbed, surely investors deserve to know about it ASAP so that they can make informed decisions.
More importantly, as noted by Houses & Holes recently, such secrecy adds to moral hazards:
Hand shake deals between regulators and banks removes any public pressure from both to perform to benchmarks understood by the polity. This has the combined effect of weakening their accountability and the societies’ commitment to prudential goals. Indeed, the entire edifice of secret regulation combined with public statements of confidence leads inevitably to overconfidence as banks and customers alike can simply assume that those infallible folks at the RBA and APRA have it all under control. I’ve lost count how many times this simple talisman has been waved in front of me by bulls of all stripe.
While APRA’s secrecy might make its bureaucrats and technocrats feel omnipotent, how is it in the broader national interest?
