Better than average

Australia joins global race to top on bank capital

Australia did not suffer in the global financial crisis. Yet it continues to behave as if it did. In the latest example of the country's state of mind, a government-backed inquiry has recommended that banks' capital ratios should be "unquestionably strong" when compared with international peers. It's a conclusion that commits Australia to joining a worldwide race to the top when it comes to financial safety.

The commission headed by former Commonwealth Bank chief executive David Murray is a rare example of a country trying to mend its financial stable door before, rather than after, a catastrophe. Its final report contains 44 mostly sensible recommendations for improving Australian banks and markets. The most far-reaching is the suggestion that banks' capital ratios should be in the top 25 per cent of international peers.

The target is fuzzier than it sounds. The report draws on year-old data from the Basel Committee on Banking Supervision to conclude that any bank with capital in excess of 12.2 per cent of its risk-weighted assets would be in the top quartile. A "plausible range" for Australian banks is between 10 and 11.6 per cent. But cross-border comparisons are tricky because countries still have different rules for measuring assets or counting capital. That makes it hard to reconcile the figures with those published by Australia's big lenders.

Either way, the gap does not appear too onerous. Deutsche Bank analysts calculate that the country's four biggest institutions - ANZ, Commonwealth Bank, National Australia Bank and Westpac - would need a combined A$16 billion ($13 billion) in additional capital to reach the bottom of the range, or A$23 billion to be comfortably inside it. Given four years to get there, they could meet the target from retained earnings and through some investors reinvesting dividends in new shares. Big bank shares rose by 1.5-2 per cent on the morning of December 8, reflecting relief that the conclusions were not tougher.

Australia is aiming at a moving target, however. The minimum capital requirement for international banks is rising as regulators devise and implement tougher standards, and banks compete to show they are stronger than rivals. By committing its lenders to being better than average, the commission is ensuring that Australia's bank standards will in part be determined by those countries for whom the financial crisis was a much more painful experience.