The bank capital conundrum

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:

  1. Globally Significantly Banks (GSIBs) likely to need to hold more capital, and this will likely flow down to other banks also.
  2. Latest BIS recommendations on floors and ratios
  3. APRA changing the liquidity coverage ratio
  4. FIS on capital ratios
  5. 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

  1. 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.
  2. Smaller banks will be helped by the FIS changes to advanced IRB, if they translate, but will still be at a funding disadvantage
  3. Deposit rates will be cutthey 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
  4. Mortgage rates will lift a little, and discounting will be even more selective – Murray’s estimates on the costs are about right.
  5. Lending rates for small business will rise further
  6. Competition won’t be that impacted, and the four big banks will remain super profitable
  7. 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.

Leith van Onselen

Leith van Onselen is Chief Economist at the MB Fund and MB Super. Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.


  1. “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”

    Pensioners who receive a govt pension have it reduced proportionality based on the expected amount of income they will receive from bank interest based on the determined deeming rate. This deeming rate is adjusted as required.

    No one seems to be discussing that the lower interest rates goes the more in pension payments the govt will have to make, as the amount of interest earned from banks declines.

    • Diogenes the CynicMEMBER

      Good catch there Angry Man another of those feedback loops that never get mentioned.

      Mind you it will only affect the seniors whose pensions are shaped by the income test part not the means test.

  2. “”

    this is the sale reported the other day.

    “Despite SOPA’s assurances, the 12 families on the block were sent tenancy termination notices in November by Strathfield Partners, which gave them 30 days to move out.

    Seven families relocated but five remain. Representatives from each attended the auction on Saturday, which dissolved into a shouting match to which the police were called.

    Some of the remaining families, including the Begnells and the Donnellys, have launched legal action contesting the sale.”

    Told ya the new owners would not accept the tenants staying despite all the so called assurances by the agents. Hope they all get sued. Hope all those foreign buyers get told to get lost.