{"id":5682,"date":"2012-10-05T19:57:06","date_gmt":"2012-10-05T23:57:06","guid":{"rendered":"http:\/\/goldstocksforex.com\/?p=5682"},"modified":"2012-10-05T19:57:06","modified_gmt":"2012-10-05T23:57:06","slug":"are-australian-banks-adequately-capitalized","status":"publish","type":"post","link":"https:\/\/thepatientinvestor.com\/index.php\/2012\/10\/05\/are-australian-banks-adequately-capitalized\/","title":{"rendered":"Are Australian banks adequately capitalized?"},"content":{"rendered":"<p>Basel III Capital Adequacy Ratios (CAR) will require banks to hold a minimum Total Capital of 8% against risk-weighted assets (RWA), the same as under Basel II, but with additional capital buffers of between 2.5% and 5.0% depending on credit market conditions. With an average ratio of 11.5% (September 2011), Australian banks are short of the maximum Basel III requirement of 13.0% for markets in a credit bubble.<\/p>\n<p>The problem, however, lies not only with CAR but with the definition of risk-weighted assets. Under RWA, loans and investments are not taken at face value but adjusted for perceived risk. These adjustments vary widely between banks in different countries. US banks still apply Basel I risk-weightings:<\/p>\n<ul>\n<li>zero for cash and government debt (OECD Sovereigns);<\/li>\n<li>20 percent for (OECD) banks;<\/li>\n<li>50 percent for mortgages;<\/li>\n<li>100 percent for corporates.<\/li>\n<\/ul>\n<p>Their counterparts in Asia and Europe apply Basel II risk-weightings, with more lenient mortgage risk weights, averaging 15 percent and 14 percent respectively.<\/p>\n<p>Australia&#8217;s 4 major banks similarly apply risk-weightings (supervised by APRA) for residential mortgages as low as 15%, with an average of 17%. That means the big four hold less than 2% capital against residential mortgages. Even after mortgage insurance, <a title=\"Macrobusiness: Deep T - Casualties of the externality\" href=\"http:\/\/www.macrobusiness.com.au\/2012\/05\/casualties-of-the-externality\/\" target=\"_blank\">Deep T<\/a> pointed out earlier this year, leverage is close to 50 times capital.<\/p>\n<p>Basel III introduces a minimum 3% leverage ratio which ignores risk-weighting and compares Tier 1 capital to total exposure &#8212; total assets plus derivative exposure and off-balance sheet assets. But this is a catch-all and allows banks with high quality assets to continue leveraging at 33 times capital. Fed guidelines are more conservative, requiring a minimum leverage ratio of 4% (&#8220;<em>adequately capitalized<\/em>&#8220;) with a recommended 5% minimum for <em>well-capitalized<\/em> banks. The ratio, however, excludes off-balance-sheet assets. None of Australia&#8217;s four majors appear to meet the Fed&#8217;s requirement at September 2011 &#8212; ranging between 3.9% and 4.8% of Tier 1 capital to tangible assets.<\/p>\n<p>With household debt at a historic high of 150% of disposable income, 3 times higher than in the early 1990s, Australia shows classic symptoms of a credit bubble and cannot afford to be complacent. There are three areas of the banking system that require attention. Capital adequacy ratios need to be lifted as well as risk-weightings for residential mortgages. Improving these two measures should enable Australia&#8217;s four major banks to achieve a minimum (Basel III) leverage ratio of 5%.<\/p>\n<p>Sources:<\/p>\n<p><a href=\"http:\/\/www.bis.org\/publ\/bcbs189.pdf\" target=\"_blank\" rel=\"noopener noreferrer nofollow\">Click to access bcbs189.pdf<\/a><\/p>\n<p>http:\/\/en.wikipedia.org\/wiki\/Basel_III<br \/>\nhttp:\/\/en.wikipedia.org\/wiki\/Capital_requirement<\/p>\n<p><a href=\"http:\/\/www.imf.org\/external\/pubs\/ft\/wp\/2012\/wp1290.pdf\" target=\"_blank\" rel=\"noopener noreferrer nofollow\">Click to access wp1290.pdf<\/a><\/p>\n<p><a href=\"http:\/\/www.imf.org\/external\/pubs\/ft\/wp\/2012\/wp1225.pdf\" target=\"_blank\" rel=\"noopener noreferrer nofollow\">Click to access wp1225.pdf<\/a><\/p>\n<p>http:\/\/www.macrobusiness.com.au\/2012\/05\/casualties-of-the-externality\/<\/p>\n<p><a href=\"http:\/\/www.ey.com\/Publication\/vwLUAssets\/Financial_Services_regulatory_alert_-_June_2012_-_Basel_III-_a_new_integrated_capital_framework_for_the_US\/$FILE\/EY%20Reg%20Alert%20Basel%20III%20June%202012.pdf\" target=\"_blank\" rel=\"noopener noreferrer nofollow\">Click to access EY%20Reg%20Alert%20Basel%20III%20June%202012.pdf<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"<p>Basel III Capital Adequacy Ratios (CAR) will require banks to hold a minimum Total Capital of 8% against risk-weighted assets (RWA), the same as under Basel II, but with additional capital buffers of between 2.5% and 5.0% depending on credit market conditions. With an average ratio of 11.5% (September 2011), Australian banks are short of &hellip; <\/p>\n<p class=\"link-more\"><a href=\"https:\/\/thepatientinvestor.com\/index.php\/2012\/10\/05\/are-australian-banks-adequately-capitalized\/\" class=\"more-link\">Continue reading<span class=\"screen-reader-text\"> &#8220;Are Australian banks adequately capitalized?&#8221;<\/span><\/a><\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_mo_disable_npp":"","_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[40,31,33,34],"tags":[381,590,2090,2973],"class_list":["post-5682","post","type-post","status-publish","format-standard","hentry","category-australia-nz-countries-regions","category-the-fed-banks-interest-rates","category-uk-europe-countries-regions","category-us-canada-countries-regions","tag-banks","tag-capital-ratios","tag-leverage-ratio","tag-risk-weighted-assets"],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v27.2 - https:\/\/yoast.com\/product\/yoast-seo-wordpress\/ -->\n<title>Are Australian banks adequately capitalized? - the patient investor<\/title>\n<meta name=\"robots\" content=\"noindex, follow\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Are Australian banks adequately capitalized? - the patient investor\" \/>\n<meta property=\"og:description\" content=\"Basel III Capital Adequacy Ratios (CAR) will require banks to hold a minimum Total Capital of 8% against risk-weighted assets (RWA), the same as under Basel II, but with additional capital buffers of between 2.5% and 5.0% depending on credit market conditions. 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He co-founded Incredible Charts and writes the popular Trading Diary and Patient Investor newsletters. Using a top-down approach, Colin identifies key macro trends in the global economy before evaluating selected opportunities using a combination of fundamental and technical analysis. Focusing on interest rates and financial market liquidity as primary drivers of the economic cycle, he warned of the 2008\/2009 and 2020 bear markets well ahead of actual events. He founded PVT Capital (AFSL No. 546090) in May 2023, which offers investment strategy and advice to wholesale clients.","sameAs":["https:\/\/facebook.com\/people\/The-Patient-Investor\/61572934660810\/","https:\/\/www.instagram.com\/colin_thepatientinvestor","https:\/\/au.linkedin.com\/in\/colintwiggs"],"url":"https:\/\/thepatientinvestor.com\/index.php\/author\/investor\/"}]}},"jetpack_featured_media_url":"","jetpack_sharing_enabled":true,"jetpack_shortlink":"https:\/\/wp.me\/p9tQ4n-1tE","jetpack_likes_enabled":false,"jetpack-related-posts":[{"id":6182,"url":"https:\/\/thepatientinvestor.com\/index.php\/2012\/11\/14\/back-to-basics-a-better-alternative-to-basel-capital-rules-thomas-m-hoenig\/","url_meta":{"origin":5682,"position":0},"title":"Back to Basics: A Better Alternative to Basel Capital Rules &#124; Thomas M. Hoenig","author":"Colin Twiggs","date":"November 14, 2012","format":false,"excerpt":"FDIC Director Thomas Hoenig calls for a simple capital ratio of Tangible Equity\/Tangible Assets instead of the complex measures proposed by Basel III. Using Tier 1 capital measured according to Basel III standards overstates tangible equity capital by about 40 percent and using risk-weighted assets makes capital adequacy ratios even\u2026","rel":"","context":"In &quot;Banks &amp; Interest Rates&quot;","block_context":{"text":"Banks &amp; Interest Rates","link":"https:\/\/thepatientinvestor.com\/index.php\/category\/economy\/the-fed-banks-interest-rates\/"},"img":{"alt_text":"","src":"","width":0,"height":0},"classes":[]},{"id":8084,"url":"https:\/\/thepatientinvestor.com\/index.php\/2013\/07\/10\/basel-committee-willing-to-rethink-complex-bank-rules-ft-com\/","url_meta":{"origin":5682,"position":1},"title":"Basel committee willing to rethink complex bank rules | FT.com","author":"ColinTwiggs","date":"July 10, 2013","format":false,"excerpt":"Brooke Masters reports: The Basel Committee on Banking Supervision said in a discussion paper released on Monday that it shares the concern of critics who believe the main measure of bank safety \u2013 the core tier one capital ratio \u2013 is too complicated and makes it difficult to compare banks.\u2026","rel":"","context":"In &quot;Banks &amp; Interest Rates&quot;","block_context":{"text":"Banks &amp; Interest Rates","link":"https:\/\/thepatientinvestor.com\/index.php\/category\/economy\/the-fed-banks-interest-rates\/"},"img":{"alt_text":"","src":"","width":0,"height":0},"classes":[]},{"id":10283,"url":"https:\/\/thepatientinvestor.com\/index.php\/2014\/07\/13\/keep-bank-regulation-as-simple-as-possible-but-no-simpler\/","url_meta":{"origin":5682,"position":2},"title":"Keep bank regulation as simple as possible, but no simpler","author":"ColinTwiggs","date":"July 13, 2014","format":false,"excerpt":"Reading Andrew Bailey's summary of what the Bank of England has learned about bank capital adequacy over the last decade, it strikes me that there are four major issues facing regulators. Firstly, simple capital ratios as applied by Basel I encourage banks to increase the average risk-weighting of their assets\u2026","rel":"","context":"In &quot;Banks &amp; Interest Rates&quot;","block_context":{"text":"Banks &amp; Interest Rates","link":"https:\/\/thepatientinvestor.com\/index.php\/category\/economy\/the-fed-banks-interest-rates\/"},"img":{"alt_text":"","src":"","width":0,"height":0},"classes":[]},{"id":5803,"url":"https:\/\/thepatientinvestor.com\/index.php\/2012\/10\/23\/financial-ecosystems-can-be-vulnerable-too-ft-com\/","url_meta":{"origin":5682,"position":3},"title":"Financial ecosystems can be vulnerable too &#8211; FT.com","author":"Colin Twiggs","date":"October 23, 2012","format":false,"excerpt":"By Robert May [Andy Haldane, Financial Stability Director of the Bank of England] argues that complexity may obscure more than it illuminates. He illustrates this by comparing predictions about the chances of failure for a sample of 100 global banks in 2006, based on simple leverage ratios (assets\/equity) with the\u2026","rel":"","context":"In &quot;Banks &amp; Interest Rates&quot;","block_context":{"text":"Banks &amp; Interest Rates","link":"https:\/\/thepatientinvestor.com\/index.php\/category\/economy\/the-fed-banks-interest-rates\/"},"img":{"alt_text":"","src":"","width":0,"height":0},"classes":[]},{"id":11317,"url":"https:\/\/thepatientinvestor.com\/index.php\/2014\/11\/10\/global-bank-regulator-calls-for-larger-capital-cushions-cfo\/","url_meta":{"origin":5682,"position":4},"title":"Global Bank Regulator Calls for Larger Capital Cushions | CFO","author":"ColinTwiggs","date":"November 10, 2014","format":false,"excerpt":"Matthew Heller reports that the Financial Stability Board, chaired by BOE Governor Mark Carney, is set to table fresh proposals at the upcoming G20 meeting in Brisbane. The world's top 30 \u201csystemically important\u201d banks will be required to substantially increase their capacity to absorb losses without requiring a bailout. The\u2026","rel":"","context":"In &quot;Banks &amp; Interest Rates&quot;","block_context":{"text":"Banks &amp; Interest Rates","link":"https:\/\/thepatientinvestor.com\/index.php\/category\/economy\/the-fed-banks-interest-rates\/"},"img":{"alt_text":"","src":"","width":0,"height":0},"classes":[]},{"id":7715,"url":"https:\/\/thepatientinvestor.com\/index.php\/2013\/05\/06\/are-australian-banks-really-sound\/","url_meta":{"origin":5682,"position":5},"title":"Are Australian banks really sound?","author":"ColinTwiggs","date":"May 6, 2013","format":false,"excerpt":"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\u2019 liquidity risk and strengthen the resilience of the Australian banking system. \"APRA believes ADIs are well-placed to meet\u2026","rel":"","context":"In &quot;Australia &amp; NZ&quot;","block_context":{"text":"Australia &amp; NZ","link":"https:\/\/thepatientinvestor.com\/index.php\/category\/countries-regions\/australia-nz-countries-regions\/"},"img":{"alt_text":"","src":"","width":0,"height":0},"classes":[]}],"_links":{"self":[{"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/posts\/5682","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/comments?post=5682"}],"version-history":[{"count":0,"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/posts\/5682\/revisions"}],"wp:attachment":[{"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/media?parent=5682"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/categories?post=5682"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/tags?post=5682"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}