Are Australian banks really sound?

Business Spectator reports:

In a statement APRA chairman John Laker said that, in implementing the Basel III liquidity reforms, the authority’s objectives were to improve its ability to assess and monitor ADIs’ liquidity risk and strengthen the resilience of the Australian banking system.

“APRA believes ADIs are well-placed to meet the new liquidity requirements on the original timetable and doing so will send a strong message about the soundness of the Australian banking system,” he said.

If you repeat misinformation often enough, people will believe it is true. Australian banks face two risks: liquidity risk and solvency risk. Addressing liquidity risk does not address solvency risk. Australian banks report risk-weighted capital ratios which are misleading if not downright dangerous. Risk-weighting encourages banks to concentrate exposure in areas historically perceived as low risk, such as residential mortgages. When all banks are over-weight the same asset, the risk profile changes — as Eurozone banks discovered with government bonds.

If we remove risk-weighting, as proposed in the US Brown-Vitter bill, the four majors in Australia would have capital ratios of 3 to 4 percent. Not much of a capital buffer in these uncertain times.