Australia's Big Banks Want To Hold Less Capital. Here's Why The Regulator Says No

Getty/Clive Brunskill

Outgoing APRA chief John Laker has poured cold water on major bank claims that they have difficulty explaining their capital positions to offshore investors because of APRA’s more conservative approach to what is and isn’t capital.

Capital is that part of a bank’s balance sheet that is there to take losses when they occur. Things like shareholder funds, retained earnings and some specific financial instruments that have been issued on the market for the express purpose of absorbing losses.

Think GFC, US housing bust or the Irish banking system.

According to Laker, APRA is not the toughest global regulator nor did it set capital targets “well above” Basel requirements: “We focus on the loss absorbing quality of capital, not just on the quantum.”

Laker said it was hard to reconcile the claims of the majors on the explanation of capital noting that this is difficult to reconcile with their performance.

He noted that the majors were:

earning return on equity in the mid to high teens, are among only a small number of listed global banks with AA ratings and have moved into the top tier of global banks by market capitalisation.

Clearly astute investors know a good bank when they see one.

At issue is changes to APRA’s approach to capital and a recent call for the majors to increase their capital buffers by 1% recently. A bank that can hold less capital can be more profitable while a bank that can have its capital reclassified can leverage its balance sheet by lending more, which also makes it more profitable.

Which seems to be Laker’s point – Australia’s major banks are among the strongest and most profitable in the world. APRA’s job is not to facilitate further profits but to ensure the strength and stability of the financial system.

You can read more here

Disclaimer: Greg McKenna is a director of member-owned Police Bank and has worked at both Westpac and NAB.

NOW WATCH: Money & Markets videos

Want to read a more in-depth view on the trends influencing Australian business and the global economy? BI / Research is designed to help executives and industry leaders understand the major challenges and opportunities for industry, technology, strategy and the economy in the future. Sign up for free at research.businessinsider.com.au.