The prudential regulator released the results of its international capital comparison study yesterday, which was conducted in response to recommendation one of the Financial System Inquiry (FSI).
The final FSI report, released in December 2014, recommended that APRA should “set capital standards such that Australian authorised deposit-taking institution [ADI] capital ratios are unquestionably strong”.
Specifically, the FSI recommended Australian banks should have capital ratios that position them in the top quartile of internationally active banks.
While APRA’s study found Australian banks are well capitalised, it did not find they were in the top quartile of international peers.
The prudential regulator’s report found that the big four Australian banks would need to increase their common equity tier one (CET1) capital by “around 70 basis points” to be positioned at the bottom of the fourth quartile internationally.
But in order for the Australian banks to simultaneously achieve a position in the fourth quartile for all four measures of capital adequacy, the increase in their capital rations would have to be “significantly larger” (along the lines of 200 basis points), said APRA.
“International peer banks are continuing to build their capital levels,” said the report.
“Over the past couple of years, the major banks have seen a deterioration in their relative position, despite an increasing trend in their reported capital ratios.”
ANZ released a statement in response to the regulator’s report, with the bank’s chief financial officer Shayne Elliott saying ANZ has been “planning for an increase in capital levels for some time”.
“In this regard our CET1 position has been further strengthened from the 8.3 per cent reported as at June 2014,” Mr Elliott said.
“APRA’s indication of an increase in CET1 from June 2014 is within the range we have been planning for. As we have said previously, we have a number of options for managing our capital including organic capital generation, balance sheet management and the disposal of non-core assets.
“ANZ will continue to work with APRA on the detail of these changes and our capital management plans,” he said.
The Customer Owned Banking Association (COBA), which represents credit unions and mutual banks, released a statement saying higher capital requirements would “promote competition and reduce the unfair funding cost advantage the major banks enjoy”.
COBA acting head of public affairs Luke Lawler noted the capital requirements of customer-owned banks are “almost twice” the level of CET1 than the big banks.
“Major banks get a free benefit from taxpayers in the form of reduced funding costs because rating agencies factor in an implicit government guarantee when setting major bank credit ratings,” Mr Lawler said.
“The majors also enjoy a funding cost advantage due to a distortion in the regulatory capital settings that allows them to hold much less capital against home loans.”
