Banking shares have recouped some of their losses over recent trading sessions, but some analysts believe they are still too expensive. Photo: Jesse MarlowThe banking industry and the federal government will be set for a showdown if the Financial System Inquiry recommendations that call on banks to bolster expensive capital, in an exercise that could cost the industry several billion dollars, are adopted.
The release of the Murray report on Sunday will cement fears among investors that this takes the gloss off bank earnings and puts at risk the generosity of future dividends.
Treasurer Joe Hockey says he is prepared to take on the banks, suggesting he is open to the most controversial element among the Murray recommendations – that Australian banks could be insufficiently capitalised to weather another global financial crisis.
The inquiry said that safety of the banking system was of paramount importance and he did not believe it should be left to taxpayers to bail out the financial system in the event of a financial shock.
“Evidence available to the inquiry suggests that the largest Australian banks are not currently in the top quartile of internationally active banks. Australian [banks] should therefore be required to have higher capital levels,” the report says.
Analysts have suggested that the Murray reforms combined with other already-announced capital measures would require the big four players, Commonwealth Bank, ANZ, National Australia Bank and Westpac, to set aside another $28 billion in capital .
Among a myriad of changes discussed by the Financial Services Inquiry that included examining the distorting tax influence of negative gearing and dividend imputation, Hockey pinpointed the need to withstand global financing shocks as the centrepiece of the report.
Hockey warned the banks not to engage in advertising-based warfare – as the mining industry did successfully to kill the super mining tax in 2010.
The banks have argued that they are already well capitalised and weathered the 2008 financial crisis well, and commissioned research a few months ago showing they ranked high among international peers. The FSI disagreed, saying Australian banks were in the middle of the pack and and needed to be in the top quartile.
Australian Bankers’ Association chief executive Steven Munchenberg said: “The question we, and the government, must ask on each of these recommendations is simply, does it help or hinder our future economic growth? A careful analysis of each recommendation on this basis is now needed.”
In recent months, individual banks have warned that boosting capital would result in higher interest rates for borrowers or lower dividends for bank shareholders.
The Property Council was more explicit.
“Capital holding recommendations have the effect of adding weight to loans and costs to borrowers, which could hurt already low first-home buyer rates, affect new housing starts and challenge seniors who are looking to downsize.”
But Murray accused the banks of overstating the impacts of holding additional capital. The FSI said it would add 0.01 to 0.1 per cent to the cost of a loan.
“The public statements by the banks are wildly above those numbers. They are exaggerated. Hopefully, other experts will look at those numbers and conclude similar to ours,” said Murray.
But it’s a shot in the arm for smaller regional banks, which will have their risk capital requirements brought more into line with that of their big four rivals.
Four of Australia’s leading regional banks were overjoyed with the final report, which they said “acknowledges the need to level the playing field in banking”.
The inquiry also took aim at the superannuation system, which it found has insufficient focus on retirement income.
Murray suggested the recent super reforms had not introduced the intended competitive improvements and that the price of superannuation was still very high.
The new super system package recommended by the Murray inquiry has the potential to increase an average weekly earning-male by 25-40 per cent in retirement.
The FSI said that subject to a scheduled review of super by 2020, there would be a formal competitive process to allocate new default fund members (those who don’t nominate a super fund) to MySuper products, based on performance.
“This option should stimulate competition in the default market,” the inquiry said.