Australian banks must aim for "higher capital levels" to increase resilience, says the final report of the Financial System Inquiry, released yesterday.The industry will have to build capital by around A$20 billion on one estimate circulated yesterday by Boston Consulting Group. This is lower than feared by some over recent months."The report implies that this would require common equity tier one capital to rise by 1.4 percentage points of assets," Paul Bloxham, chief economist for HSBC calculated.David Murray's inquiry panel wrote: "The inquiry's judgement is that, although Australian ADIs are generally well capitalised, further strengthening the banking sector would deliver significant benefits to the economy at a small cost."The principal rationale is one of "resilience" (to adopt the title of the report's opening chapter) for both banks operating in an international capital market and for governments aiming to minimise the cost to taxpayers from a future financial crisis."Disruption to the functioning of one major bank could be expected to impose significant costs on the economy, particularly if it resulted in contagion to other Australian financial institutions," the report warned."Maintaining foreign investor confidence in the strength of the Australian banking system is paramount for maintaining the banks' access to foreign funding," it said."This goes beyond the strength of any individual bank, as Australia is a small part of the global financial system and investors may view Australian banks as a group. "Many jurisdictions are still increasing capital levels to implement Basel III, a process largely complete in Australia. Over time, the relative strength of Australian ADI capital ratios may therefore decline as banks in other jurisdictions continue to increase capital."The FSI panel thus stuck to a central thesis of its interim report in July, that Australia's banking sector was not as well capitalised as sometimes made out."Evidence available to the inquiry suggests that the largest Australian banks are not currently in the top quartile of internationally active banks," the panel said in the final report. "The inquiry believes that top-quartile positioning is the right setting for Australian ADIs.""In the inquiry's judgement, capital levels at Australia's major banks — as measured by CET1 capital — are likely to be above the global median but below the top quartile."It noted that measuring capital was "a very complex area, given the varied national discretions taken by different countries, including Australia."The inquiry did, however, produce "a plausible range for the current capital ratios of Australian banks for comparison."The inquiry said that "based on the evidence available for the purposes of comparing with the global distribution, a plausible range for current Australian major bank CET1 capital ratios is 10.0 per cent to 11.6 per cent."In an intriguing footnote, it emerged that the lower estimate was the work of a "non-public BCBS report provided to the inquiry by APRA."