Banks persist with questionable capital comparisons

Bank CEOs have been striding the stage these last few days to make a case for caution on lifting the capital hurdle for the industry.

ANZ CEO Mike Smith provocatively put a number on the level of interest rate rises if one version of the speculation is followed.

Westpac CEO Gail Kelly asked for "a debate on the linkage of growth and stability," in an appeal to forget any new capital impost (an idea set sail by the interim report of the Financial System Inquiry).

But the debate leads out from sodden ground, with industry self-interest the only landmark.

John Watson from Margate Financial Research, working with Morgij Analytics, points out that in its full year report to September, National Australia Bank, for one, reported that its APRA-approved common equity tier one capital ratio was 8.63 per cent.

NAB also reported its internationally harmonised capital ratio as 11.58 per cent, up 11 basis points.

Interestingly, NAB lifted this ratio even after dipping into retained earnings.

Similarly, ANZ reported that its tier one capital ratio was 8.79 per cent and that its "internationally comparable capital" level was 12.7 per cent.

Graham Andersen, CEO of Morgij Analytics, challenged the banks' interpretations.

Andersen and Watson noted that the PWC report to the Financial System Inquiry, made on behalf of the Australian Bankers Association, "stated its inability to produce results on harmonisation with any certainty, and highlighted that the calculation and valuation of capital ratios of banks 'requires judgment about risk, and so often a high degree of subjectivity is also involved'."

"Sticking with [the banks'] claims and challenging those that question their capital harmonisation ratios is a serious issue," they wrote.

It "goes to the heart of financial stability and taxpayer support of 'too big to fail' institutions and therefore is one worthy of continuing to question."

Andersen and Watson also pointed to APRA's second round submission to the FSI, which said: "As a result of these additional requirements imposed by national authorities, computing a precise internationally harmonised capital ratio is not practically possible. A recent study commissioned by the Australian Bankers Association, which attempts to provide truly comparable capital ratios, only serves to emphasis the point."

And in a speech in September this year, APRA Chairman Wayne Byers stated that "capital ratios are the cornerstone of any analysis of bank financial health, for investors as much as regulators."

Andersen and Watson wrote that "while Basel III has done much to ensure the numerator of the capital ratio is a genuine measure of a bank's capacity to absorb loss, doubts about the reliability of risk measurement in the denominator mean that the resulting ratios lack credibility as a reliable measure of financial strength.

"So as it stands, the future of internal models in the regulatory framework is somewhat in the balance."