By guest contributor, Damien Wood, principal, Spectrum Asset Management
It is not often you will get this writer singing the praises of our bank regulator. But the recent discussion paper1 released by APRA on how to increase capital to meet global standards for our major Australian banks, in our view, is not only spot on but could not come at a better time. Dialing up capital as the banks remain highly profitable is akin to taking out flood insurance during a drought. Easy to do and at a reasonable price. That said, the residential property storm clouds are slowly building. If they get worse, bank bond investors may start getting twitchy. This could expose our major banks’ Achilles heel – the high dependency on offshore finance – and risk a liquidity squeeze. That said, the more capital the less likely Australian banks and the overall economic risk capital flight.
More capital, Australian style
Collectively ANZ, CBA, NAB, and Westpac will need to raise their minimum capital ratios by around a third. To get to this level rather than adopt what some foreign regulators have done, we believe APRA’s suggestion best suits Australia’s banking system. It is simply more of the same types of capital that are presently issued. As a result, our major banks will be safer and our investors less confused and more comforted by the straightforward solution.
