The world's top bank regulator quoted BHP's CEO to explain why banks need to change

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Australian banks came under pressure yesterday after ASIC chairman Greg Medcraft’s warning that Sydney and Melbourne property prices might be in a bubble.

That saw the ANZ and Westpac down around 2.5%, the Commonwealth down 2% and the NAB a less aggressive 1.5%.

Key to the price action is that Medcraft’s warning highlights the earnings pressure the banks are now under if home lending slows at a time when the banks are also likely to come under intense pressure to retain capital (i.e. lower dividends) as they seek to adhere with as yet unfinalised guidelines around the risk they need to allocate to home loan lending.

While the overnight moves in US stocks is likely to help the banks today, shareholders should be under no illusion that the world’s most senior bank regulator has bank complexity and capital levels in his sights.

In a remarkable speech yesterday, Stefan Ingves, chairman of the Basel Committee on Banking Supervision and governor of the Sveriges Riksbank, quoted BHP CEO Andrew Mackenzie to explain the end game of the Basel committee – simplicity.

Ingves said:

Mr Mackenzie notes:

“Generally, if things are simple they can often be more appealing – more beautiful, actually. More artistic, if you like.”

He adds:

“If you want to solve a problem, you make it simpler; it becomes soluble. Simplicity,” he says at one point, “equals truth.”

And finally:

“There are so many forces in favour of complexity. If you have introduced complexity that employs 10 more people to nurture that complexity, then they will defend it to the death.

“I am somewhat heartened that other industries face the same challenges as we do in trying to reduce complexity.

Sound familiar?

That’s what is currently going on in Australian banking as the majors, and Macquarie, argue to keep their special status as internal ratings based institutions (that is, self-assessed) when it comes to calculating how much capital they need to hold against their mortgages.

But Ingves is clearly signalling that a complex approach is no longer acceptable – to APRA, or its global regulatory siblings.

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