Banks bet on Basel IV-lite

Local banks are eyeing an end to capital raisings, as Basel IV appears set to limit higher capital requirements.

The building of the Bank for International Settlements, BIS, in Basel. (AP Photo/ KEYSTONE/Georgios Kefalas)

The line from the global standard-setters in Basel is clear — the so-called Basel IV round of even higher capital requirements for banks is a fiction, with the heavy lifting on capital already done.

Basel IV, in fact, is a term that’s frowned upon in official circles because it suggests a change-weary industry should brace itself for another wave of stability-enhancing reforms.

Instead of Basel IV, the mantra from regulators is that the remaining reforms will only address “excessive variability” in capital ratios arising from the sophisticated internal models used by large banks to calculate their risk-weighted assets.

The guardians of two big-four balance sheets presented their interpretation of what this means at a recent Citi conference.

The view of ANZ treasurer Rick Moscati and his Westpac counterpart Curt Zuber was that the risk-weight “floor” for banks using the advanced IRB (internal risk-based) approach would settle in the range of 70-80 per cent of the standardised approach.

This put the required increase in major-bank capital levels in the range of “negligible to manageable”; in other words, no more capital raisings.

That’s good news for the banks, if Moscati and Zuber turn out to be right.

There are still sceptics, but it’s a view largely endorsed by APRA chief Wayne Byres.

The framework for the whole discussion is the recommendation from the financial system inquiry that Australian banks should be unquestionably strong — in the top quartile for capital strength.

Our banks already meet that standard, and the global benchmark has not shifted higher in the last six months.

Basel IV, however, will change that, with Byres saying in April that APRA’s consideration of what constitutes unquestionably strong will have to wait until the end of this year.

That means 2016 will see the finalisation of the international framework, with 2017 the year for consultation on its domestic application.

Implementation will occur in 2018.

Hopefully, a new crisis won’t intervene to start the whole process over again.

Richard Gluyas’ next Four Pillars column will appear in Thursday’s paper