Banking on reason
APRA has struck a reasonable- to- exceptional balance between the different things that deliver and the different things Australians want out of them.
We want banks to lend us money easily and at the lowest possible interest rate. We also want them to be a safe – indeed, a very safe “put and forget” – place to put our money as deposits and to get the highest possible interest rate.
We also – although many if not most of us don’t appreciate this quite so keenly, because it’s mostly indirect through our super funds – want banks to earn strong and sustainable profits.
In determining that banks will have to raise more, but not that much more, capital from their shareholders – or, just keep more of future profits inside the bank and not pay quite so much in future dividends – APRA strikes an effective balance between all that.
The banks will only have to add around $ 8- 10 billion to their capital over the next three years.
An interesting comparison could be with the $ 6 billion in net terms the big five will pay in the new bank tax over the next four years. And keep paying that sum, and rising, every four years after that, forever. Let me make two big points. First, if our banks ever got hit by a real thumping crisis like all the other banks in Europe and the US got hit by through the GFC, this extra $ 8 billion and then some would go in a flash.
Indeed, even twice as much wouldn’t be enough.
That said, it’s important for me to stress that the prospect of such an event hitting our banks is unlikely.
They are not like the Barclays, Deutches and Citicorps of this world. Our bank vulnerability is to a 1890type collapse in the domestic property market.
The $ 8 billion or so is to better provision the banks to ride through what might best be described as any “normal” economic slowdown or property market correction.
And not just ride through in the functioning business sense, but so they can still operate more or less normally in raising fresh equity ( and debt) as needed at that point from shareholders and the market more broadly.
Bank shares rose sharply yester- day. In part this was a correction of the excess gloom of investors running into the APRA announcement. In part it was a response to the positivity of the APRA announcement.
Both the announcement and the actual raising of the extra capital when it happens is not in itself a reason to buy bank shares. But it should work to make bank shares a more attractive and more stable investment going forward.
Indeed, it should do so for precisely the entirely appropriate reason that Treasurer Scott Morrison was painting as a no- no – any attempt to reclaim their lower profitability ( not profit) from customers.
To the extent that these future stronger and safer banks should be able to raise their debt funding more cheaply – that’s to say by paying either depositors or international capital market lenders, or both, a relatively lower interest rate, that’s entirely appropriate.
There would be less justification for the banks to put up their lending rates. But that’s also ultimately essentially a judgment for individual bank management on how to operate in a competitive marketplace.
A far bigger threat to what banks charge their borrowers is Morrison himself – and indeed his shadow Chris Bowen. It is the prospect of Australia losing its Triple- A credit rating.
If that were to happen – and it all hangs on what happens to the budget deficit – the banks would be automatically downgraded and they would have to pay a higher interest rate for the 40 per cent or so of their money they get in the international marketplace.
The bottom line is that APRA’s move will make for better banks individually and for a better operating and safer banking system.
But ultimately it can’t substitute for good bank management and sensible and effective operating procedures.
BALANCED: Treasurer Scott Morrison.