CBA and other banks wrong on capital comparisons

An independent review of Commonwealth Bank's analysis of its capital base finds that there is too little data disclosed to repeat the calculations and thus rely on the bank's interpretation.

John Watson of Margate Financial Research Solutions and Graham Andersen of Morgij Analytics, in their study of bank capital, reported: "We are unable to replicate the CBA's stated 1.1 percentage point capital comparison uplift for residential mortgages as a result of very little available information."

"This uplift appears to be, on the face of it, implausibly large."
 
Watson and Andersen said that CBA's pillar 3 disclosures for the year ending June 2013 show that the weighting for residential mortgages is 17.6 per cent which, when multiplied by the standard eight per cent capital requirement, gives a minimum capital requirement of 1.4 per cent against the actual balance of the mortgage book used in the IRB models.

"To get to an end point where the CBA is able to assert that there is a comparison pick up of 1.1 per cent, then there must be an assumption that [foreign] regulators … weight residential mortgages at four per cent … providing a minimum capital requirements of just a 0.32 per cent."

"This seems to be an unrealistic result.

"As an example, is it realistic to assume that the Prudential Regulatory Authority in the UK would be happy to present the UK's banks to the world as having such miniscule RWAs for residential mortgages (four per cent) and gearing of almost 300:1?" they asked.

"Without further transparency from the CBA and other majors, to accurately determine the accuracy or indeed to ascertain a quantifiable justification for CBA's assertion that a 1.1 per cent capital uplift is warranted when comparing its' APRA compliant capital ratio to international capital standards."


Watson and Andersen take the view that CBA needs to report a lower, not higher, capital ratio.

"Given such a high concentration of residential mortgages on the majors' books it would also seem prudent for an allocation for sectorial credit risk under Basel II requirements, resulting in a decrease in capital ratios not an increase?

"Comparing CBA to banks operating on the standardised approach in jurisdictions that set risk weights of 150 per cent or even higher, then there is a prima facie case that a downward adjustment to CBA's capital would be more appropriate rather than an upward adjustment," they said.


The researchers reach a similar conclusion for ANZ, where they say: "A minor downward adjustment of approximately 0.5 per cent could be more appropriate in any calculation for the harmonisation of capital allocation for mortgages, rather than an upward movement of 0.6 per cent."

In an emailed response, a CBA spokesperson wrote: "CBA Group disclosures are factual and developed by an experienced capital team, with the assistance of specialists including PwC and Morgan Stanley.

"It is important to note that all discussions are premised on the need for Australian banks to have a reportable calculation that is in line with international peers, in order to effectively compete for funding in offshore debt markets."