Banks plea capital case to Murray Inquiry

The Big Four banks have launched a last minute plea to try and persuade the Murray Financial System Inquiry not to raise capital requirements, claiming that they are already well capitalised. From The Australian:

…the banks are sweating after the interim report labelled their capital strength “middle of the pack” globally and suggested even higher common-equity tier-one capital levels may be needed…

To counter the inquiry’s claim, the Australian Bankers’ Association hired PwC to analyse the banks, finding their capital levels were at or above the 75th percentile globally. But the PwC report raised some eyebrows, with UBS analysts criticising the exclusion of US banks and claiming these flaws were “not missed by the Australian Prudential Regulation Authority”…

The banks have argued that more capital was not needed given their significant strengthening since the global financial crisis under the Basel III reforms, warning it would stifle lending and economic growth…

Bankers say banks will simply proportion any additional capital across their operations, with the riskiest areas such as business lending receiving more capital — thus potentially raising prices for businesses to generate returns.

Chris Joye (along with MB’s own Deep T: here, here and here) has done some great work debunking 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…

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 right-minded person would “well-capitalised”.

Hopefully the Murray Inquiry will ignore the banks’ special pleading and do what is best for the safety and stability of the financial system and taxpayers: raise minimum capital levels.

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