Good news if you bank with one of Australia’s mutual banks, credit unions, building societies or regional banks such as Bank of Queensland or Suncorp – the Murray Inquiry into the financial system might be about to level the playing field.
According to The Australian this morning, a growing chorus of brokers are agreeing that the free kick the majors get to hold less capital than their smaller rivals needs to be addressed in the name of competition and “leveling the playing field”.
Key here is that because the four majors – and Macquarie Bank – are allowed to use complex internal models (what APRA calls the “internal ratings based approach”), they have to hold less capital as reserves for losses than do all other ADIs in the Australian banking system.
This gives a large competitive advantage to the majors in terms of allowable leverage for any capital position. And, as a consequence, the return on equity capital that they can then earn, because they need less for every dollar of assets than their rivals.
Smaller ADIs, on the other hand, are ruled by what APRA and global regulators call the “standardised approach”.
This means that for a “standard loan” held by Suncorp, or police bank (Disclosure: where I am a director), has to have a risk weight of 35% on the loan against as little as 15% for a major bank. Put simply, non-majors have to hold more capital on home loans than the majors.
This situation exists, regardless of the reality, that across Australian banking there are similar arrears and delinquency rates throughout history between the majors and rest of the industry.
This is particularly acute for the customer-owned sector which includes mutual banks, building societies and credit unions and which historically has extremely low loan losses and arrears.
All of that means there is a move toward leveling the playing field, with a number of prominent stockbroking firms now of the view that this mismatch in capital allocations is a constraint on competition and a situation that needs to be addressed.
Mike Wiblin, a banking analyst at Macquarie, told the The Australian:
Some form of narrowing of the gap between the majors and regionals would address competition concerns as well as address the issue of system concentration risk, particularly in loans for investment properties.
The push from Macquarie and Credit Suisse, the regional banks and others is that the majors should have to hold more capital as a way to even up the sector is a “logical step”.
Naturally, the majors rally against such an increased capital charge, which would lower returns to shareholders, with the ANZ saying in its submission to the Murray Inquiry:
Changes to this framework should not be made to achieve policy objectives such as support for a particular sector.
We’ll know more when the Murray Inquiry releases it preliminary findings in July. But the chorus is growing for a change in banking’s competitive structure.
Disclaimer: Greg McKenna is a director of Police Bank. The views expressed are his own.
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