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BFCSA: David Murray Report smacks down banks: Consumer Trust and Confidence blown

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Financial system inquiry: David Murray smacks down banks’ ‘wild’ capital claims


Jonathan Shapiro

David Murray may have spent most of his career in banking but that hasn’t prevented him – or the financial system inquiry he has led – lambasting the lobbying efforts of the big four banks.

He has emphatically rejected claims by the banks that they are among the best capitalised in the world and that efforts to force them to hold more capital will cause harm by increasing rates to customers and reducing returns to shareholders.

What has become immediately apparent in the FSI report’s opening chapter is that Murray and his panel have taken exception to the banks’ claims that they are among the best capitalised in the world.

The Australian Bankers Association had commissioned a report from accountants PwC to back up their claims that the banks’ capital was among the top quartile of banks, claiming a common equity tier one ratio could be adjusted up to 12.7 per cent, higher than the 11.6 per cent assessed by international banking body in Basel.

But the analysis was rejected by the Murray panel, which picked apart the ABA capital study noting it restricted the number countries used in the study, didn’t adjust for foreign bank capital items and adjusted certain items to “international best practice” without sufficient justification.

The FSI deferred to rating agency Standard & Poor’s assessment that the banks’ capital level was “adequate” rather than strong or very strong.

Murray also rejected the claims by the big banks that higher capital charges would impose exorbitant costs on the system. The inquiry estimated that a one percentage point increase in capital would only result in loans increasing by 10 basis points – or 0.10 of a per cent.

Furthermore, any increase in equity only impacted only 0.5 per cent of the cost of funding of any given loan. The impact on the economy would be minimal – a reduction of less than 0.1 percentage point of GDP

Mr Murray went on the attack in the press conference, branding comments by bank chief executives about the impact of higher capital changes “wild” and “exaggerated”.

“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,” he said.

Costs borne by customers and shareholders

But Mr Murray did acknowledge that the cost of making the system will need to be borne in part by the bank’s customers and shareholders.

“The impact could be on bank returns. One, bank returns could be lower and still be attractive investments, and secondly they could be lower and still have enough internal capital generation to support economic growth.”

Australian Bankers Association chief executive Steve Munchenburg provided an immediate defence of the banks’ calculations on capital.  “We did a thorough piece of work and used PwC globally to look at an analysis of where banks sit relative other banks in other jurisdictions.”

“We stand by that piece of work. Obviously there are differences of opinions because there is a lot of judgement that goes into reports but we stand by our current levels of capital and individual banks are free to comment on what they think the implications are of higher capital for their businesses”

For Mr Murray there was no debate.   “Even a modest crisis costs 900,000 jobs, so the recommendations are designed to look after the taxpayer and may have an insurance cost to the system. But we think the trade off is a fantastic one.”

And the Treasurer’s advice to the banks was to give up the fight.   “I think it would be unwise for the banks to respond with that sort of campaign. This is about the security of the financial system,” Treasurer Joe Hockey told the Australian Financial Review.

“When David Murray was first appointed there was a criticism David Murray would be the voice of the big banks. Now he has made these recommendations. If APRA – as the body that determines [ultimate capital levels] – takes a similar view, that is up to them, as they are an independent prudential regulator,” he said.

“The banks would serve themselves best by working closely with APRA and having a considered path to manage this – I don’t think creating any public alarm or angst is going to help the banks."

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Guest Saturday, 04 July 2020