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08-11-2014, 08:14 AM
Treasurer puts big banks on notice
James Eyers
946 words
8 Nov 2014
The Australian Financial Review
AFNR
English
Copyright 2014. Fairfax Media Management Pty Limited.
Treasurer Joe Hockey has told Australia's big banks he stands ready to raise their capital levels and warned them to back down from mounting a public campaign against the change even though it will lower their profits.
Australian Prudential Regulation Authority chairman Wayne Byres on Friday effectively backed suggestions from the financial system inquiry being chaired by former Commonwealth Bank of Australia chief executive David Murray that the banks needed to hold more equity capital to help them withstand a severe economic downturn in which housing prices crashed and the jobless rate soared.
Mr Byres said APRA's stress testing of the banks suggested that, even though they had enough capital to withstand such a shock, "there remains more to do to be able to confidently deliver strength in adversity".
Big bank chiefs have ramped up their campaign against being required to hold more capital by publicly arguing it would hit the hip pocket of borrowers through higher interest rates and bank shareholders through lower dividends.
But AFR Weekend has learned that Mr Hockey has rejected the banks' campaign, saying that the decision had been made for him. Instead, Mr Hockey wants the banks to engage with the Murray review on how best to boost their capital buffers.
"If Murray says the banks need more capital and APRA says the banks need more capital, then they are going to have more capital," said one well-placed government source.
Under one scenario modelled by UBS, Mr Murray's changes could force banks to hold $23 billion more in capital, which would hit their profits.
While not rejecting the banks' claims that being required to hold more capital would put pressure on interest rates or dividends, Mr Hockey is understood to argue that it also would reduce the exposure of taxpayers to any bank failure. The government was open to phasing in the increased capital requirements, "but there is just no issue about getting there''.
On Friday, APRA's Mr Byres cautioned that the banks' stronger capital positions over the past decade were "less the product of substantial growth in capital and more the product of the increasing proportion of housing loans within loan portfolios".
That was because banks were able to carry small amounts of capital against housing loans, which are considered safe assets and so receive a relatively low "risk weight".
The Australian Financial Review has previously revealed the financial system report that Mr Murray is due to hand to Mr Hockey within weeks is expected to impose a floor on mortgage risk weights to force the big banks to carry more capital against home loans.
It is also expected to lift the equity buffer the big banks hold to more accurately reflect the fund cost advantages that come from an implicit guarantee that the federal government would support them in a crisis.
On Monday, Westpac Banking Corp chief executive Gail Kelly said bank shareholders might be forced to wear the costs of higher capital through lower dividends if banks were required to hold significantly more capital.
Ms Kelly's warning followed suggestions from ANZ Banking Group chief executive Mike Smith that higher capital costs could be passed on to borrowers through higher interest rates.
The Australian Bankers' Association has criticised the Murray inquiry's interim findings that Australian big bank capital ratios were "in the middle of the range" compared to global banks. The ABA attached to its second submission to the inquiry a report by PwC which found Australia's banks had capital ratios that would place them in the top quartile of global banks.
But Mr Byres on Friday sided more with Mr Murray, saying the largest Australian banks "appear to be in the upper half of their global peers in terms of their capital strength". This will bolster Mr Murray's case to build equity levels.
Mr Hockey wants the banks to resolve with the inquiry the dispute as to where Australian banks rank internationally by agreeing to the appropriate definitions. And the Treasurer is understood to argue that higher capital requirements being imposed on so-called systemically important global banks will effectively provide a new benchmark that will inevitably flow to Australia because our banks raise 30 per cent or so of their funds offshore.
In the major speech on Friday, which revealed the results of APRA's industry-wide stress test of Australian banks' mortgage books, Mr Byres said all 13 of the banks tested for a highly stressed economic scenario – which assumed a house price crash of 40 per cent and an unemployment rise to 13 per cent – would retain sufficient capital above the minimum amount.
However, the APRA review also revealed shortcomings in the banks' own stress tests, including their modelling of different economic downturn scenarios. From next year, APRA would require the banks to use a common scenario in their own internal stress tests to ensure they test a severe enough crisis.
Mr Byres warned Australia's top bankers they did not pay enough attention to what actions would be required to help the banking system recover and rebuild confidence following a crisis. "This was an area of the stress test that was not completed, in our view, with entirely convincing answers," he said.
The Treasurer's warning to the banks not to campaign against the issue comes as the ABA seeks a louder policy voice in Canberra. The ABA hired economist Tony Pearson from Mr Hockey's office in September. Mr Pearson was a senior adviser to Mr Hockey for the past five years and joined the ABA as executive director of industry policy.
Fairfax Media Management Pty Limited
Document AFNR000020141107eab800012
James Eyers
946 words
8 Nov 2014
The Australian Financial Review
AFNR
English
Copyright 2014. Fairfax Media Management Pty Limited.
Treasurer Joe Hockey has told Australia's big banks he stands ready to raise their capital levels and warned them to back down from mounting a public campaign against the change even though it will lower their profits.
Australian Prudential Regulation Authority chairman Wayne Byres on Friday effectively backed suggestions from the financial system inquiry being chaired by former Commonwealth Bank of Australia chief executive David Murray that the banks needed to hold more equity capital to help them withstand a severe economic downturn in which housing prices crashed and the jobless rate soared.
Mr Byres said APRA's stress testing of the banks suggested that, even though they had enough capital to withstand such a shock, "there remains more to do to be able to confidently deliver strength in adversity".
Big bank chiefs have ramped up their campaign against being required to hold more capital by publicly arguing it would hit the hip pocket of borrowers through higher interest rates and bank shareholders through lower dividends.
But AFR Weekend has learned that Mr Hockey has rejected the banks' campaign, saying that the decision had been made for him. Instead, Mr Hockey wants the banks to engage with the Murray review on how best to boost their capital buffers.
"If Murray says the banks need more capital and APRA says the banks need more capital, then they are going to have more capital," said one well-placed government source.
Under one scenario modelled by UBS, Mr Murray's changes could force banks to hold $23 billion more in capital, which would hit their profits.
While not rejecting the banks' claims that being required to hold more capital would put pressure on interest rates or dividends, Mr Hockey is understood to argue that it also would reduce the exposure of taxpayers to any bank failure. The government was open to phasing in the increased capital requirements, "but there is just no issue about getting there''.
On Friday, APRA's Mr Byres cautioned that the banks' stronger capital positions over the past decade were "less the product of substantial growth in capital and more the product of the increasing proportion of housing loans within loan portfolios".
That was because banks were able to carry small amounts of capital against housing loans, which are considered safe assets and so receive a relatively low "risk weight".
The Australian Financial Review has previously revealed the financial system report that Mr Murray is due to hand to Mr Hockey within weeks is expected to impose a floor on mortgage risk weights to force the big banks to carry more capital against home loans.
It is also expected to lift the equity buffer the big banks hold to more accurately reflect the fund cost advantages that come from an implicit guarantee that the federal government would support them in a crisis.
On Monday, Westpac Banking Corp chief executive Gail Kelly said bank shareholders might be forced to wear the costs of higher capital through lower dividends if banks were required to hold significantly more capital.
Ms Kelly's warning followed suggestions from ANZ Banking Group chief executive Mike Smith that higher capital costs could be passed on to borrowers through higher interest rates.
The Australian Bankers' Association has criticised the Murray inquiry's interim findings that Australian big bank capital ratios were "in the middle of the range" compared to global banks. The ABA attached to its second submission to the inquiry a report by PwC which found Australia's banks had capital ratios that would place them in the top quartile of global banks.
But Mr Byres on Friday sided more with Mr Murray, saying the largest Australian banks "appear to be in the upper half of their global peers in terms of their capital strength". This will bolster Mr Murray's case to build equity levels.
Mr Hockey wants the banks to resolve with the inquiry the dispute as to where Australian banks rank internationally by agreeing to the appropriate definitions. And the Treasurer is understood to argue that higher capital requirements being imposed on so-called systemically important global banks will effectively provide a new benchmark that will inevitably flow to Australia because our banks raise 30 per cent or so of their funds offshore.
In the major speech on Friday, which revealed the results of APRA's industry-wide stress test of Australian banks' mortgage books, Mr Byres said all 13 of the banks tested for a highly stressed economic scenario – which assumed a house price crash of 40 per cent and an unemployment rise to 13 per cent – would retain sufficient capital above the minimum amount.
However, the APRA review also revealed shortcomings in the banks' own stress tests, including their modelling of different economic downturn scenarios. From next year, APRA would require the banks to use a common scenario in their own internal stress tests to ensure they test a severe enough crisis.
Mr Byres warned Australia's top bankers they did not pay enough attention to what actions would be required to help the banking system recover and rebuild confidence following a crisis. "This was an area of the stress test that was not completed, in our view, with entirely convincing answers," he said.
The Treasurer's warning to the banks not to campaign against the issue comes as the ABA seeks a louder policy voice in Canberra. The ABA hired economist Tony Pearson from Mr Hockey's office in September. Mr Pearson was a senior adviser to Mr Hockey for the past five years and joined the ABA as executive director of industry policy.
Fairfax Media Management Pty Limited
Document AFNR000020141107eab800012