By Martin North, cross-posted from the Digital Finance Analytics Blog:
A series of separate but connected events will see capital requirements of banks continue to steadily increase from 2015 onwards. You can read about the capital issues in the earlier post. This is consistent with the outcomes from the G20. The international environment is driving capital requirements higher (on the back of the northern hemisphere government bailouts post the GFC). Locally the regulators are also making moves, and the recommendations from the Murray Financial Systems Inquiry are also in play. Overall, some of the most significant elements are:
- Globally Significantly Banks (GSIBs) likely to need to hold more capital, and this will likely flow down to other banks also.
- Latest BIS recommendations on floors and ratios
- APRA changing the liquidity coverage ratio
- FIS on capital ratios
- FIS on advanced IRB banks
There are other steps in the works also. The net effect is that capital requirements will be lifting in 2015, irrespective of the FIS (and the capital changes recommended do not need parliamentary approvals).
Here is DFA’s view of how these outcomes will translate in the Australian context
- Banks need to raise $20-40 bn over next couple of years, – that is doable – and they will access the now functioning global markets. It will be ratings positive.
- Smaller banks will be helped by the FIS changes to advanced IRB, if they translate, but will still be at a funding disadvantage
- Deposit rates will be cut, they have been falling already despite RBA rate being static, this has not received enough commentary, there are millions of households reliant on income from deposits
- Mortgage rates will lift a little, and discounting will be even more selective – Murray’s estimates on the costs are about right.
- Lending rates for small business will rise further
- Competition won’t be that impacted, and the four big banks will remain super profitable
- We will still have four banks too big to fail, and the tax payer would have to bail them out in the event of a failure (highly unlikely but not impossible given the slowing economic environment here, and uncertainly overseas). The implicit government guarantee is the real issue.