Capital battalions take their positions

Australian policy makers lined themselves up late last week to coordinate an assault on the myth of a sufficiency of capital for the banking industry.

Wayne Byres, chair of the Australian Prudential Regulation Authority, used the AB+F Randstad Leaders Lecture Series in Sydney on Friday to outline the regulator's latest thinking on the topic.

At the end of June 2014, the common equity tier one ratio of the Australian banking system was 9.1 per cent, well above the APRA minimum requirement of 4.5 per cent currently in place and also comfortably above the  seven per cent that will be required under the capital conservation buffer coming into force in 2016.

Byres said: "In APRA's view, after adjusting for differences in national application of the Basel standards, the largest Australian banks appear to be in the upper half of their global peers in terms of their capital strength. But the question remains: is that adequate?"

In a footnote, Byres took a more nuanced and, for the sector, less favourable view. "International comparisons are fraught with difficulty as data is not always available to properly compare 'apples with apples'," he said (a point championed in Banking Day over recent months via the work of industry researcher John Watson).

Byres pointed out: "there are a multitude of ratios - CET1, total capital and leverage."

"However, APRA's assessment, which incorporates the Basel Committee's monitoring data and our own estimates of the necessary adjustments to risk-weighted assets, is that the largest Australian banks are broadly in the middle of third quartile (ie above the median) of their peers when it comes to the all-important CET1 ratio," he said.

"These banks would, however, rank lower on other measures."

This final point is at odds with the view ventilated by the Australian Bankers Association, based on a study by PwC.

The PwC report concluded: "Based on the data provided to us by the Australian banks, our best judgment is that, on average, the four Australian banks are at or above the 75th percentile of bank capital relative to the most appropriate comparator set of global banks.

"Some Australian major banks are unambiguously in the top quartile in terms of capital, others are closer to the 75th percentile but are still well above the median. Our overall summary calculation gives a weighted average common equity tier one ratio in the range of 11.5 per cent to 12.5 per cent."

PwC said that "as best as we can judge this is at or above the 75th percentile" but noted: "the estimates of risk weighted assets have a judgemental component and this explains our conclusion that a range is appropriate."