Markets will demand more bank capital: Stevens

More capital to underscore the resilience of the banking system is "likely to be demanded by the market", while "there's generally not much doubt about which way the world is moving," Glenn Stevens, governor of the Reserve Bank of Australia, said yesterday.

Speaking at the Financial Review Banking and Wealth Summit, Stevens conceded there was "a lot of debate about just where current capital ratios for Australian banks stand in the international rankings."

The reason there is so much debate, he said, "is because such comparisons are difficult to make.

"There seems little doubt, though, that most supervisory authorities (and for that matter most banks) around the world have, since the crisis, revised their thinking on how much capital is needed and none of those revisions has been downward.

"So wherever we stood at a point in time, just to hold that place requires more capital."

There is a cost-benefit calculation to be done, or a trade-off to be struck, Stevens said, in the form of "higher-cost intermediation, perhaps slightly reduced average economic growth in normal times, in return for the reduced probability, and impact, of deep downturns associated with financial crises."

 The Financial System Inquiry, he said, "weighing the costs and benefits, concluded that the benefits of moving further in the direction of resilience outweigh the rather small estimated costs."

Stevens also considered issues surrounding "too-big-to-fail" institutions and their resolution.

"Ending 'too-big-to-fail' is an ambitious and demanding objective. To achieve it, not only must systemic institutions hold higher equity capital buffers, but more tools to absorb losses are needed in the event the equity is depleted."

He said there needed to be "a market for the relevant securities that is genuinely independent of the deposit-taking sector - we can't have banks hold one another's bail-in debt."