As David Murray’s Financial Systems Inquiry strives for efficiency, resilience and fairness in Australia’s financial services sector, the recommendation that major banks hold more capital to protect against economic shocks has been touted as unfair.
Speaking at a business lunch on Monday about the final report of Inquiry, David Murray claimed that Australian banks are “not unquestionably strong”. In relation to capital, the Inquiry believes the capital ratios of Australian banks should be ranked in the top 25% of global banks. Currently, the major banks are somewhere between the global median and the 75th percentile.
As a part of the crackdown on strengthening our major banks in the event of a downturn, the Inquiry has proposed that a floor of between 25% and 30% should be placed on the internally generated risk weights used against housing loans. According to the report, this will cause a small funding cost increase for the major banks.
The Inquiry estimates the cost will be roughly equivalent to a 1% increase in major banks’ capital ratios from current levels – which would in turn increase the average interest rate on a loan by less than 0.1%. According to the report, competition in the mortgage market will limit the extent to which this cost is passed onto consumers, and shareholders will likely bear some of the cost in the form of lower ROE.
However, the Real Estate Institute of Australia says any increase to the cost for borrowers will only further price out struggling first home buyers.
“The recommendations around capital holding could result in further costs to borrowers and we are particularly concerned about first home buyers who are already at record low numbers as well as adding pressure to the establishment of new housing,” REIA CEO Amanda Lynch said.
“With first home buyers finding it increasingly difficult to enter the housing market and home ownership in Australia declining after four decades of stable levels, housing affordability is an issue that is at the forefront of our priorities.”