The arcane world of bank capital, what is held and how it’s measured, has been in the news recently after the Murray inquiry flagged that it believes changes need to be made to how much capital the majors and Macquarie need to hold against their mortgage books.
It’s a theme that new APRA chair, Wayne Byers, picked up on when he said the future of the very method of calculating capital that the majors and Macquarie use, the internal ratings based approach, “is somewhat in the balance“.
The banks have not been idle and have used the Australian Bankers Association (ABA) to push back on such moves but a new front in the battle to define what is capital at Australia’s majors has opened up with AB&F reporting on Friday that the majors efforts to report higher capital levels under “international harmonisation” dealt a blow by a new study commissioned by Morgij Analytics.
The research, conducted by Margate Financial, looked at claims made by PwC on behalf of the ABA in their second round submission to the Murray Inquiry on where Australia’s majors sit relative to global peers when it comes to capital holdings.
This was in response to the assertion by the inquiry’s panel in the interim report that said the majors are only around the middle, not the high end, as they claim.
At issue was the calculation methodology PwC used and its reliance on internal data. Specifically Morgij Analytics said that PwC were “using confidential data from unknown sources obtained by unknown means, PwC has managed to find further capital additions on top of minimum standards and taking into account Pillar 2 supervisory adjustments by local regulators.”
Which makes the claim by the majors that they should be able to only report the higher ratio where they harmonise their capital themselves all the more problematic.
Indeed the research goes further noting that PwC itself says that the whole area is complex noting in its submission that “the fact that the calculation of many elements of bank capital ratios requirements judgement about risk, and so often a high degree of subjectivity is also involved.”
It all reinforces Byers disquiet over the use of IRB model and APRA’s recent issuance of a discussion paper on the imposition of Leverage Ratio reporting by the majors and Macquarie.
You can read more here.
Disclosure: Greg McKenna represents MARQ Services, an affiliated company of Morgij Analytics, and its Mortgage Book Risk Management Services in the mutual banking space.