For Christmas 2013 the banks got a gift from APRA. The rest of us enjoy getting Christmas presents but when the banks found new capital reserve rules under the tree, they just yawned.

For Christmas 2013 the banks got a gift from APRA. The rest of us enjoy getting Christmas presents but when the banks found new capital reserve rules under the tree, they just yawned. 

Our story starts in the picturesque city of Basel, which is mostly in Switzerland but spreads into France and Germany as well. This is the home of the Basel Committee on Banking Supervision, a forum that develops recommendations for the world’s banking regulators. In 2010 following the global banking meltdown the Committee issued The Third Basel Accord recommending increased capital requirements in order to make banks safer.

Straight away, commentators on Australian share prices saw this as a threat to the banks’ large dividends that made them such popular investments. When APRA announced in December 2013 its application of these recommendations to our banks, it was good news for all. Although not all of the commentators have caught on.

APRA got it right, the banks got it right and investors look set to reap the benefits.

The banks were not surprised by the announcement. Long gone are the days when a business regulator would introduce reform without first consulting with the target businesses. When the targets are as big and powerful as the Australian banks, you can be assured that if they weren’t happy there would have been a loud media campaign pushing their point of view. Remember the mining tax.

The other reason the banks were underwhelmed by the announcement is that it will have no financial impact on them.

The Basel Committee was calling for much higher capital reserves than it had previously recommended, but we already had well-designed rules in Australia. More importantly, our banks all hold capital well in excess of the minimum required. They have their own criteria for the long-term stability of their businesses and hold the amount of capital that makes sense to them. They do not just aim for the minimum.

The world knows our banking system is one of the safest and that it survived the crisis strongly intact. Just last month Standard & Poor's called us “one of the five least-risky banking systems”.1 

APRA knows this too. They have made only one small change to our capital rules. The four “systemically important banks” will have a 1% increase in their minimum capital starting January 2016.

You will see some commentary that this calculates to “billions of dollars” but this is missing the point. ANZ and CBA specifically announced that they were already above the new level. Westpac did too, but their language was more garbled. NAB weren’t specific but their announcement was that there was nothing to worry about.

There are no changes for the rest of the banks. All banks continue as they are.

This is a good outcome. APRA have signalled to the international investment community that we take banking capital seriously, that we were already taking bank capital seriously and that our banks were succeeding even with strong capital rules already in place.

The demand for Australian bank shares from foreign investors will continue given their oligopoly-like position in an economy that is strong by world standards.

The demand from local investors will also continue. The new capital rules are no threat to the banks’ ability to pay dividends.

At Market Vectors we believe in diversification. Our Market Vectors Australian Banks ETF (ASX: MVB) includes all seven banks whose shares trade at liquid levels. No one can predict which bank will do the best. This ETF is a convenient way to take diversified exposure to the banking sector in a single trade.


Published: 09 August 2018