ANZ is wrong on bank capital

By Leith van Onselen

ANZ Chief, Mike Smith, has warned that Australia’s Big Four banks risk becoming “globally uncompetitive” if they are required to raise capital levels to withstand external shocks. From The Canberra Times:

Mr Smith said despite concerns around the housing market, there was no need to raise the amount of capital banks were required to hold as has been suggested through the Murray Financial System Inquiry.

“The Aussie banks are now holding twice as much capital as they did [in 2007] courtesy of regulation that has been implemented since the crisis.

“The question is, when is enough enough? Capital has become the answer to all questions, and it is not,” he said.

“Banking is a globally competitive business, and there is no point making Australian banks globally uncompetitive.”

Smith’s contention that Australia’s banks are holding twice as much capital as they did pre-GFC does not stand up to scrutiny.

As noted at the beginning of this month, Chris Joye (along with MB’s own Deep T: here, here and here) has well and truly debunked the myth that Australia’s banks are well capitalised, finding that the actual level of capital held against their gross loans has fallen over the past decade. From The AFR:

The defining question Murray must focus on is this: “Why are the majors holding less equity capital and more leverage than they were a decade ago, which runs contrary to the universal belief the banks are better capitalised than they were before the global financial crisis?”.

…thanks to the crazy reduction in the major banks’ risk weightings on home loans from 50 per cent before 2008 to 18 per cent today, it looks like equity capital has increased when it really has not…

Chris Joye has also calculated that the Big Four banks hold only around $1.50 of capital for every $100 of mortgages on their books – hardly what any objective person would call “well-capitalised”.

Let’s hope the final report of the Murray Financial System Inquiry ignores the banks’ special pleading and does what is best for the safety and stability of the financial system and taxpayers: raise minimum capital levels.

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