The Reserve Bank’s Financial Stability Review (FSR) has been released today.
While it presents a clean bill of health for the Australian Financial System, it also shows the country’s four Major Banks aren’t holding enough capital for the changed regulatory environment.
The reason for this is that the Majors are deemed too big to fail, and because of that they have been categorised as Domestically Systemically Important Banks (D-Sib).
This status means the Australian Banking regulator, APRA, is increasing the amount of capital that they need to carry on their balance sheet.
The RBA says in the FSR:
The major banks’ public disclosures indicate that their capital ratios are already close to, or above, the regulatory minimum CET1 ratio of 8 percent that they will be required to meet from 2016 (this incorporates the CET1 minimum of 4½ per cent of RWAs, the capital conservation buffer of 2½ percent of RWAs and the D-SIB add-on of 1 percent of RWAs). That said, the major banks’ capital targets will need to be somewhat higher than 8 percent to take account of any capital add-ons that APRA may impose because of their risk profile, and to ensure that they have sufficient ‘management capital buffers’ to withstand stress conditions without breaching their minimum regulatory requirements
So it seems the Majors are going to continually need to raise capital. And just like APRA, the RBA suggests this capital buffer could be built from retained earnings and lower dividend payouts. Australian bank shareholders might need to take note.