Equity capital market too fickle for banks
Planning for emergency capital raisings - based in faith in the stock market - are becoming increasingly misplaced, at least as far as Australia's banking sector is concerned.In a speech yesterday, APRA chair Wayne Byres surveyed the recent history of the Australian banking sector's muddles with stress testing, along with the regulator's own.In a stress testing exercise in 2016, "one bank assumed that it was last to market and couldn't get an equity raising away, challenging a long-held belief that this cornerstone recovery action will always be available," Byres said.This is an updated version of the industry's belated discovery, during last decade's crisis, that the evergreen thinking "we'll just securitise our mortgages in a liquidity crisis" is a crock.Turning to the sector's work on recovery plans, Byres said he was now reading "expanded menus of potential recovery actions that extend beyond a narrow reliance on equity raisings."Still, however deeply discounted mooted share placements may be, Byres reprised his scepticism around the reliability of the equity capital market."Across the industry, there still remains a wide variation in banks' assumptions, including on the share price discounts that would be required to raise significant equity in very adverse conditions. It is obviously important that banks don't over-estimate the extent of market appetite in stress," he said.Byres also reflected on thinking around the need for "well-calibrated trigger points, set high enough to provide decision-makers with a sufficient lead time to implement actions. "While the level of triggers is for individual banks to configure, they obviously need to be set with sufficient buffer above regulatory minimum levels to ensure actions can be taken well before limits are challenged."In prudential terms, this means that capital triggers should be set at a credible distance above minimum prudential requirements. Similarly, while a bank's Liquidity Coverage Ratio may dip below 100 per cent during a severe funding crisis, banks shouldn't be waiting until this point to activate their plans."The "more sophisticated trigger frameworks," Byres said, "have moved beyond simple balance sheet metrics, to ensure signals from financial markets and the operating environment are also picked up and listened to systematically."They also set triggers at different points on the financial barometer, with links drawn to different actions to prompt a staged approach to launching the plan: from monitoring, to escalating, to full activation."For the time being APRA and Byres are sanguine about the state of play in banking in Australia."Alongside the gradual improvement in lending standards has been a significant increase in capital within the banking industry," he said.