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Asia Markets
Australian Banks Could Face Higher Capital Requirements
From the Wall Street Journal of Sat, 06 Dec 2014 21:33:18 EST

MELBOURNE, Australia—Australia’s big banks could face additional capital requirements to buffer against potential financial crises and new challenges to their dominance in mortgage lending from regional lenders, following the first comprehensive review of the country’s financial industry in 17 years.

A government-backed inquiry has recommended that capital ratios of Australian banks should be in the top quartile of global banks. It concluded that Australian banks currently have capital ratios ranging from around 10.0%-to-11.6%, compared with a top quartile ratio of 12.2% at the end of December last year.

In a 320-page report released Sunday by Treasurer Joe Hockey, the inquiry’s panel also called for the banks to assign higher “risk-weightings” to mortgages that would force them to set aside more capital against home loans. The move would even the playing field for smaller regional lenders that currently have to set aside more capital than their larger rivals.

“Unquestionably strong capital positions would deliver benefits by providing greater insurance against future financial crises and the associated harm to individuals, the economy, government and taxpayers,” the report said.

The big lenders— Commonwealth Bank of Australia Ltd. , Westpac Banking Corp. , Australia & New Zealand Banking Group Ltd. and National Australia Bank Ltd. —have warned that additional regulatory burdens could stifle investment and put them at a disadvantage to rivals overseas. Some analysts have suggested the banks would seek to absorb the cost by passing it to borrowers through higher rates and to shareholders through lower dividends.

The report, however, said the banks may be reluctant to pass on the cost and risk losing market share. “Competition may limit the extent to which the bank decides to increase prices for customers,” it said.

The report estimated that a one-percentage-point increase in capital ratios, not including any benefits from competition, would increase lending interest rates by less than 10 basis points, which would reduce Australia’s gross domestic product by 0.01% to 0.1%.

The inquiry, led by former Commonwealth Bank Chief Executive David Murray, was tasked by the conservative government with recommending policies to ensure the financial system is stable, efficient and can meet future challenges. It is the first thorough review of the financial sector since a 1997 report that led to a streamlined regulatory system, including the creation of the banking watchdog. A previous review in 1981 led to the floating of the Australian dollar.

In submissions to Mr. Murray and his panel, the big banks opposed the imposition of tougher capital buffers and argued against the need to separate investment-banking operations. They also advised caution over introducing any system that would impose losses on creditors, known as a “bail-in.”

PricewaterhouseCoopers, in a report commissioned by the Australian Bankers’ Association, found the country’s Big Four banks have an average common equity Tier 1 capital ratio at or above the 75th percentile internationally. It estimated the capital ratio of Commonwealth Bank, Australia’s biggest bank by market value, is second only to Sweden’s Nordea Bank AB.

The prudential regulator has already called for the Big Four to lift their Tier 1 capital ratio by one percentage point from 2016 to an average 8%, based on the implementation of international capital rules known as Basel III.

Westpac last month said its common equity Tier 1 ratio, a measure of high-quality capital meeting Basel III standards, had risen to 9%, in line with the trend for the other big banks. On an internationally comparable basis, the banks say the ratio is even higher.

The inquiry’s report comes as regulators in Australia and around the world increase their scrutiny of lenders. Australia’s central bank and prudential regulator separately are talking about curbing speculative lending in the country’s hot property market, potentially putting a brake on an increasingly important market segment for banks.

The market values of Australia’s four largest lenders rank them among the world’s biggest, with Commonwealth Bank and Westpac both worth more than 100 billion Australian dollars.

They also are among the most profitable in the developed world. A review in June by the Bank for International Settlements put them ahead of banks in Canada and other countries.

Australia weathered the recession of 2007-09 thanks in large part to its balance of trade and booming investment in the mining industry. A strong domestic focus allowed the big lenders to emerge largely unscathed, although the government at the height of the crisis in 2008 leaned on its triple-A credit rating to guarantee lending to the banks after world funding markets effectively closed.

Write to Robb M. Stewart at robb.stewart@wsj.com and Ross Kelly at ross.kelly@wsj.com



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