Big four banks protest against higher capital

“The big four banks are trying to convince the prudential regulator to reconsider its proposal to force them to raise an additional $75 billion of so-called Tier II bonds to meet “too big to fail” capital requirements.” ~ Jonathan Shapiro, Australian Financial Review

What is APRA thinking? They are deluding themselves if they think that Tier II bonds will shore up capital.

Imagine the panic in financial markets if bond-holders take a haircut. It could lead to a Lehman-style meltdown.

The same applies to Tier I hybrids which banks are happily flogging to retiree investors. Convert their investments into near worthless bank scrip after a financial meltdown and nan and pops will turn up in Melbourne Docklands and Darling Harbour, demanding their money back. I suspect regulators would rather face Ned Kelly.

The only true capital is Common Equity (CET1). Anything else is simply putting lipstick on the pig.

Aussie taxpayers are being duped if they believe that they are covered if there is a financial meltdown and that banks carry enough capital to absorb potential losses.

I would rather see legislation that calls it like it is and provides for government to backstop the banks in the event of a crisis. But at a price that makes their eyes water, as the Swedes did in 1992. It’s the best way to keep the banks honest.

CBA, ANZ, NAB and Westpac: The incredible shrinking big four banks | afr.com

Great article by Chris Joye:

Welcome to the world of that beautiful $140 billion behemoth, the Commonwealth Bank, which has inverted the axiom that there is a trade-off between risk and return. Years ago I highlighted a perversion embedded at the heart of our financial system: the supposedly lowest (highest) risk banks were producing the highest (lowest) returns. Normally it works the other way around.

…..contrary to some optimistic reports, the capital-raising game has only just begun.

The terrific news for shareholders is that this belated deleveraging will transform the majors into some of the safest banks in the world, which will be able to comfortably withstand a 1991-style recession, exacerbated by a 20 per cent decline in house prices.

In the past I have been critical of APRA’s failure to properly police Australia’s vastly-undercapitalized banking system but must now give them credit for their leadership towards creating a world-class system that will be able to withstand serious endogenous or exogenous economic shocks.

Shareholders face lower returns from reduced leverage but will benefit from improved valuations due to lower risk premiums and stronger, more stable, long-term growth.

Read more at CBA, ANZ, NAB and Westpac: The incredible shrinking big four banks | afr.com.

Basel takes aim at Mega Bank – MacroBusiness

Deep T: On the one side we have an Australian housing market which is close to the most unaffordable in the world with mortgage debt at 100% of GDP also close to the highest of any country, yet Mega Bank [the Big Four banks] calculates its minimum capital requirements at 1.6% on residential mortgages which undoubtedly would be close to the lowest of any bank in the world….. Surely, the result the Basel Committee assessment is a foregone conclusion?

Sadly, no. On the other side, however, we have an equally formidable opponent. Do not underestimate the politico-housing complex. The smoke screens will be built and a whitewash is on the cards. Australia has a history of painting a very rosy picture of our financial system and housing market in the face of significant known risk factors.

via Basel takes aim at Mega Bank – MacroBusiness.