Oz banks need extra capital

Former Commonwealth Bank head David Murray's report is the first Government-commissioned inquiry into the financial system since 1997. Photo / AFP

Report on financial system says they must have bigger capital buffers.

Commonwealth Bank of Australia and its three main rivals may need as much as A$30 billion ($32.4 billion) in fresh capital after a government inquiry said lenders should have "unquestionably strong" reserves.

Australian banks' capital buffers should be in the top quartile of global lenders and they should set aside extra funds against potential losses on mortgages, according to the Financial System Inquiry report released on Sunday by Treasurer Joe Hockey.

Analysts said banks would need extra capital as the inquiry recommended lenders should be strong enough to withstand shocks, particularly given their reliance on overseas investors for funding.

Australia's major lenders hold about 10 per cent to 11.6 per cent of their assets as Tier 1 capital compared with at least 12.2 per cent at the world's safest banks.

"Although no system can ever be bulletproof, Australia should aim to cultivate financial institutions with the strength to not only withstand plausible shocks, but also continue to provide critical economic functions," said the inquiry, led by former Commonwealth Bank head David Murray. "Australia also needs a system that minimises the costs to individuals, the economy and taxpayer."

David Ellis, a Sydney-based analyst at Morningstar, said the banks were in a strong position to increase their capital. "The additional capital requirement isn't a big ask."

He estimated the four biggest lenders would add A$10.5 billion ($11.36 billion) in common equity Tier 1 capital through retained earnings and dividend reinvestment plans in fiscal 2015 and A$12 billion the following year.

CIMB Group Holdings analyst John Buonaccorsi said the biggest four banks might need to raise a total of A$25 billion to A$30 billion in extra capital. "Australia has to fall in line" with global changes, he said.

Omkar Joshi of Watermark Funds Management thought banks would need A$15 billion to A$20 billion extra.

The predictions were based on the inquiry's recommendation of an average mortgage risk weight of 25 to 30 per cent and a systemically important bank buffer of 2 per cent.

Murray's report is the first Government-commissioned inquiry into the financial system since 1997. It said policies must reduce the cost of failure by ensuring lenders could absorb losses.

Standards tight in NZ
New Zealand consumers are unlikely to feel the impact of tighter capital adequacy standards for the Australian banking sector proposed by an industry report, say banking analysts.

The Financial System Inquiry report (FSI), which is headed by a former chief executive of the Commonwealth Bank of Australia, David Murray, has recommended Australia's banks lift their already high capital ratios.

Sam Shuttleworth, banking and capital markets team leader at PwC in Auckland, said banks in New Zealand already operated under tight capital standards.

"In the New Zealand context, there are already additional supervisory overlays placed on various asset classes.

"We are already operating in an environment similar to the one contemplated by the FSI report," he said. "I can't foresee any major change to the New Zealand banks as a result."

- additional reporting Jamie Gray

- Bloomberg