Today is the last day for the second round of submissions to be lodged with David Murray’s Financial System Inquiry and it is clear from their public utterances that the majors – via the Australian Bankers Association – are uncomfortable with where the final recommendations might settle.
The SMH reports this morning that Steven Munchenberg, ABA CEO, said that Australia should not import foreign concerns and fears about banking into an Australian context.
“There’s a clear sense that the panel, having been overseas, and having talked to a whole lot of people, have come back with a view that Australia is in danger of being complacent about the challenges it faces because we did so well during the GFC,” Munchenberg said.
At issue is the banks’ fear that Murray, and the rest of his panel, will recommend to the Government that the banks need to hold more capital. More capital will impact leverage and profitability at the banks, which is what they don’t want.
But from the viewpoint of the entire Australian economy – not just bank management – more capital would also insulate the banks and Australian taxpayers, via an implied government guarantee as a result of their too-big-too-fail status, from a downturn in housing or the economy.
That’s what capital is for – loss absorption.
More capital also implies lower return on equity for any given level of profit. But the CBA full year results (released last week) showed an 18.7% ROE versus Wesfarmers’ 9.4% ROE, which suggests that there is room for more capital to be held by Australian majors and they can still earn excellent returns on equity.
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Disclaimer: Greg McKenna is a director of Police Bank – a customer owned bank. He doesn’t want the majors or any other financial institutions dragged down but he supports any push for competitive neutrality and a more stable system.
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