Joye: Banks will need more capital yet

From Chris Joye:

While APRA’s decision to set the CCCB at 0 per cent might seem generous in light of Australia’s record house price-to-income and housing debt-to-income ratios, its macro-prudential constraints have cooled conditions.

It also likely expects that the publication of the Basel 3 capital standards in the first quarter of 2016 will compel the majors into more capital raising.

On the question of whether the majors are done and dusted on capital raising, investors need go no further than CBA’s chief credit strategist, Scott Rundell, and CBA’s head of fixed-income strategy, Adam Donaldson, who on Thursday published a report arguing the big four are short $32 billion of CET1 capital.

“Capitalisation [is] likely to be a source of credit strength for banks as they build toward meeting APRA’s expected ‘unquestionably strong’ capital requirements,” Rundell and Donaldson said. The authors reiterated previous analysis that suggested the majors’ target CET1 ratios will settle at “around 10 per cent to 10.5 per cent”, which “would put the majors at the bottom of the top quartile” of global competitors.

Let’s hope so.

David Llewellyn-Smith
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  1. If the capital is based on equity in mortgages based on ridiculously high house prices, then the comparison to global peers is useless.

    Unless they compare it to global peers based on more rational house prices, this capital is nothing more than back patting for a job well done before the tide goes out.

    • Base the capital requirements on a notional price that is say 3x average incomes. Also, just put prudential requirements, like foreign insurance companies, on foreign banks.

      It’s all easy, but our regulatory agencies are completely captured, and good policy is not what bankers executive bonuses are made of.