David Murray, the Chair of the Financial System Inquiry, talks about APRA adopting one of his inquiry’s recommendations to add 150 basis points to the banks minimum capital requirement to meet the “unquestionably strong” benchmark
Introduction: APRA lifts bank capital requirements
Ross Greenwood: Let’s start the program with the reason for that big jump in the share market and that was a strong rise by our major banks today. This is as a result of them having to have T1 capital increasing from 9.5 to 10.5% but not before 2020. The markets took this as a strong sign for the banks that they will not have to now tap their shareholders for more capital. But this is really all about the financial resilience of Australia and also about the fact that our banks, the government wants them to be unquestionably strong.
As I said, we’ll speak with the treasurer, Scott Morrison, a little later in the program. But in the meantime let’s go to the Chair of the Financial System Inquiry, the former chairman also or rather the former Chief Executive of the Commonwealth Bank, David Murray, who’s online. Many thanks for your time David.
Interview: David Murray, former Chief Executive, Commonwealth Bank
David Murray: Thanks, Ross, how are you doing?
Ross Greenwood: Good thank you, very well. Was this one of the recommendations your financial system inquiry made to the government?
David Murray: Indeed it was because Aaron Quarry looked very specifically not only at the national interest, but how you connect the financial system to the special characteristics of the Australian economy. And because we remain a capital importer, we remain vulnerable to events outside Australia and in the event of a systemic failure, it’s important that the taxpayer who inevitably gets drawn in in some way can get back out at no cost [crosstalk]-
Ross Greenwood: Okay, so what this is about, is if there’s a global financial crisis as I said, that what would happen is maybe banks or central banks or even big superannuation funds, pension funds, could effectively go on strike keep the money at home, and not wish to send it around the world. Australia relies on that capital, banks rely on that capital, so this is making certain that in the event of a capital drop as it were that our banks would remain resilient?
David Murray: Yes, and if they need to be bailed out by the government which – we don’t want to happen, but historically does happen – we have to ensure that the taxpayer can get back out of that situation at no cost. And the only way of doing that is to make sure that the capital position of the banks going in there is strong enough so that they’ll not be liquid but they don’t become insolvent.
Ross Greenwood: Okay, the other side of this is, is there much difference really between 9.5% capital and 10.5% capital? In the event of a significant global meltdown, really, does that one percentage point of capital make much difference in the whole scheme of things?
David Murray: It does make a difference because, as you know, all leverage is very sensitive so it makes a difference. It’s also important that the structure of the Australian banks is strong relative to other banks in the world because when trouble happens people with capital at the time start to select out for higher quality. If we’re a capital importer then we’ve got to stay high quality. So we’ve set the benchmark at that top quarter.
APRA has made a determination space that I can see, that’s within that. They’ve done a good job and now we have more certainty in the structure going forward. The only issue for us now is that we also need the government to have a strong balance sheet because of the structure of the Australian economy. And that needs some resolution and some certainty of our future credit rating.
Ross Greenwood: We do know, and you and I have talked about it before, the household sector has significant amounts of debt to the banking sector and so, as a result, it’s taking on obligations. The government has added to the total debt of this country, you and I have talked many times about the vulnerability of Australia if there is a capital strike or a strike whereby money is not flowing in to financing our debts in this country or in fact if they are called upon. But the government is the key here because it continues to rack up debt, it simply adds to that vulnerability. Would that be a reasonable thing to say?
David Murray: Well, that’s right because the banks have actually raised a lot of capital since the crisis now and we’ve already strengthened the system, they can raise capital. But if the Commonwealth government gets downgraded, the bank customers will because the cost of the capital the bank goes up when they get downgraded. What we need now is for the Commonwealth to sort out its financial position and add another layer of firm certainty and security over that which APRA has done with its move today.
Ross Greenwood: So, these words are unquestionably strong, can an ordinary citizen read those words as saying that banks could never under any circumstances fail?
David Murray: No, unfortunately, Ross that can never happen. But it’s the best that we can do, the alternative to doing it that way was to dream up a number, that is if the international standards is one rate, we had two or three percentage points to it and hope that that’s enough. But we chose to do a layout effort, to do all the research, to taste how things work in different jurisdictions around the world and form a judgment. And I think we have done a pretty good job with that.
Ross Greenwood: The Chair of the Financial System Inquiry and also the former Chief Executive of the Commonwealth Bank, David Murray, always great to have you on the program.
David Murray: Thanks, Ross.