RBA Governor Backs APRA's Push For Australian Banks To Hold More Capital

Getty/Chris Ware

RBA governor Glenn Stevens has given the best indication yet that he stands shoulder to shoulder with APRA in its desire to increase capital held by Australia’s banking sector and that he sees the pre-GFC build-up in debt and growth associated with banking expansion as a mirage.

Stevens says that the banks’ cry that more capital means more cost to the community – or implies that they will be less profitable – is overstated.

Can banks with more capital support growth as well as those with less capital? Equity is more expensive than debt for banks, and so a financial structure with more equity does mean, other things equal, that the cost of intermediation to the community is higher. Even without appealing to propositions of a Modigliani-Miller kind, which would dispute this assumption, the question is whether this apparently higher cost is a serious impediment to growth. Bankers often claim it is. The empirical estimates published by the FSB and BCBS suggest the effect is small, particularly when compared with the costs of large financial crises.

Stevens also says pre-GFC growth was not a result of banks adding to growth:

We might reflect on the following question: did the highly leveraged expansion of some parts of the financial sector in the period prior to the crisis really add much, sustainably, to growth?

It is far from obvious that it did. It seems more likely, to me, that it was the other way around: a period of good global growth and, in particular, unusually stable growth, led to a rise in leverage.

Hyman Minsky would agree.

Interestingly, and crucially for local institutions, Stevens strongly supports banks getting to the new Basel III capital rules prior to their implementation in 2019, asking what the chances are of getting through to 2019 without another economic downturn or at best that the current expansion would be very “mature”?

So he concludes that “one would hope that by 2019 major financial institutions would not only have reached new international minima for capital, but would have risen above them.”

In a clear message to Australia’s banks, Stevens says:

One would hope that balance sheets by that time would be at their strongest position for the cycle. This is a reason to go faster, rather than slower, in accumulating capital to higher minima, while one can. This point is of some relevance to the discussion in my own country at present.

All of which supports APRA in its push to have Australia’s majors hold more capital.

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