Basel lights Australian banks’s heart of darkness

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From Banking Day:

Quarterly “pillar 3” disclosures by banks may become more complex and also have to be produced on a more timely basis, if proposals from the Basel Committee on Banking Supervision come into force in Australia.

The BCBS said this week that “in the wake of the 2007-2009 financial crisis, it became apparent that the existing pillar 3 framework failed to promote the early identification of a bank’s material risks.”

The committee also said the framework “did not provide sufficient information to enable market participants to assess a bank’s overall capital adequacy.”

The proposals for revisions to existing disclosure requirements are set out in this week’s consultative document.

They include greater use of templates to achieve consistency and comparability.

One theme of the reform would be requiring banks disclose more details on the calculation of risk weighted assets.

The proposed disclosure regime introduces a “‘hierarchy’ of disclosures,” with some “prescriptive templates for quantitative information that is considered essential for the analysis of a bank’s regulatory capital requirements.”

Templates with a more flexible format are proposed “for information which is considered meaningful to the market but not central to the analysis of a bank’s regulatory capital adequacy,” the BCBS said.

That aims straight at the big four, all of whom use opaque internal risk  models to generate capital discounts. Recall from the AFR a one month ago:

…in a research report released on Monday, first reported in industry newsletter Banking Day, by Graham Anderson, executive director of Morgij Analytics, and consultant John Watson, casts a shadow on arguments made by the major banks that the market should give them a capital uplift of between 182 basis points and 290 basis points when comparing them with international peers. This was “unsupported by evidence”, the report said, because it is impossible to determine how a foreign jurisdiction would calculate the capital level of an Australian bank given the limited information available on how overseas regulators approach the calculations. “We believe that the capital portrayal by the majors of the comparison of APRA regulated capital to offshore capital offers nothing to the debate of the true level of capital that the majors hold compared to offshore counterparts,” it said.

CBA has claimed 1.1 per cent of the uplift between its local and international capital level was a result of APRA being twice as strict as global regulators about the rate of default for residential mortgages. But the Morgij report said only adjusting a single parameter was “unreliable” given the complexity of the internal ratings based models the banks use to calculate risk, and CBA’s uplift was “implausibly large”. It also said it is wrong for CBA assert that APRA’s harsher treatment of bank equity investments would increase its capital by 1 per cent on an international basis.

Slowly but surely the world is catching up to our own Deep T.

David Llewellyn-Smith

David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal.

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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Comments

  1. banks’ – plural e.g. Australian banks’ borrowings

    banks’s – singular e.g. Westpac banks’s loan book