Unquestionably strong: RBA hails bank resilience

The Reserve Bank has declared the big four banks ‘very close’ to being ‘unquestionably strong’.

Reserve Bank assistant governor Michele Bullock. Picture: Getty Images

The Reserve Bank has declared the big four banks “very close” to being “unquestionably strong”, signalling the end of local efforts to make large banks more resilient to financial shocks as part of a near decade-long global push.

Speaking in Sydney yesterday, assistant governor Michele Bullock laid out how the major banks had shifted towards more stable funding sources, including more equity and a higher share of deposits in place of flightier short-term wholesale borrowing.

“[New] measures have resulted in a significant increase in the amount of capital held by the Australian banking system over the past decade,” Ms Bullock said. “The transition to a higher level of capital is now coming to an end,” she added.

The major banks’ aggregate leverage ratio, which measures the share of equity as a proportion of total assets, and hence the size of the buffer before the bank becomes insolvent, has increased from about 4.5 per cent in 2010 to 5.5 per cent this year. “This is high capital in both an absolute and relative sense,” she said.

“One of the lessons of the GFC was that globally, banks held too little capital relative to the risks they were taking,” Ms Bullock said. Higher equity levels reduce the likelihood of taxpayer bailouts, but make it harder for banks to achieve high returns on their equity.

Ms Bullock nevertheless singled out the potential for increasing risks in the non-bank financial sector, where property lending has been growing quickly.

“The measures introduced by APRA over the past few years to address risks in household and banks’ balance sheets could be undermined if the less-regulated sector simply filled the gap,” she said, suggesting risks were contained for now, though, given the non-bank sector’s share of the financial system had not changed from 7 per cent for six years.

When measured on a risk-weighted basis, a popular method that allows banks to ignore ­swathes of their assets when calculating their minimum equity requirements, the major banks’ capital ratio has increased from 8 per cent to 12 per cent since 2013, when the Basel III rollout began.

Bank regulators globally agreed on a final set of prudential rules for banks in 2017, almost a decade after the collapse of Lehman Brothers ushered in a financial crisis.

The previous set of rules, Basel II, allowed banks nearly unlimited scope to leverage their equity by setting their own risk-weights.

The new rules included higher minimum holdings of government debt, greater reliance on deposits to back loans, and higher minimum levels of shareholders’ equity.

The 2014 financial inquiry further recommended the banking regulator APRA ensure the major banks were “unquestionably strong”, defined as being in the top quartile of global banks, ranked by their capital ratio.

“Australian banks’ tier 1 capital ratios are currently around 17 per cent on an internationally comparable basis, at the high end when compared with many advanced economies,” Ms Bullock said.

Ms Bullock noted the fines levied on the major banks since the royal commission into financial services began earlier this year had been “relatively modest” when compared with the major banks’ combined profits of about $30bn per annum.

Basel IV, the fourth iteration of global banking rules that first emerged in 1988, has been criticised for extraordinary complexity, running to thousands of pages.

Former governor of the Bank of England Mervyn King recommended ‘‘risk weights’’, which allow banks to artificially increase their capital ratios by ignoring swathes of the assets based on a priori assessments of risk, be dumped in favour of simple, tougher capital requirements.