Is the IMF wrong on banks?
Christine St Anne  |  22/11/2012Text size  Decrease  Increase  |  
Christine St Anne: The International Monetary Fund, or IMF, has recently called for greater controls on Australian Banks. Today I'm joined by Morningstar's David Ellis to discuss whether the IMF's concerns are justified. David welcome.

David Ellis: It's a pleasure, Christine.

St Anne: David, the IMF has called for banks to hold more capital. What is your view?

Ellis: Christine, I've got a very strong view and I think the IMF is wrong. I don't think the Australian Banks necessarily need to hold more capital for the reasons outlined by the IMF. Over the last three or four years, the four major Australian banks have increased their capital level significantly for a number of reasons, but the most important was getting over the global financial crisis particularly in 2008 and then in 2009.

The capital levels now are about 1.5 times higher than they were going into the GFC. The new capital global capital rules, applied from the 1st of January 2013, these are far stricter rules and the four major Australian banks have already exceeded the new minimum requirements and the bank regulator, the Australian Prudential Regulation Authority (APRA), has required the four major Australian banks to be fully compliant on the 1 January 2013 rather than a staged process or a staged period running out for three or four years.

St Anne: David, do you think that banks should implement greater stress testing as suggested by the IMF?

Ellis: Well, the banks always, have always and continue to undertake stress tests. They have done this in conjunction with Australian Regulator, APRA, and they have the details of the testing as confidential, however, I would estimate that the stress testing has become tougher and tougher and more robust. So by itself I don't see a need to say that stress testing needs to be done by the Australian banks. They have always done stress testing. They will always continue to stress test their business models.

Of course, there is good reason to continue to make it tougher, this stress testing. So I don't disagree with the need to continue, but it's not something new. They've always done it. APRA is heavily involved in that process. I think it's an evolving concept that they will continue to do more sophisticated stress testing and that ultimately leads to better and stronger banks.

St Anne: The IMF has also suggested that banks share the cost of the government’s guarantee. Is that justified?

Ellis: Well, that's a tough one. I struggle with that. I think in the end, unfortunately, the consumer will pay, no matter whether the government forces a fee or a charge on to the Australia banks for providing the deposits or guarantee. If the Australian government does go down that path and does raise it, a fee, I would imagine that the banks would pass it through to consumers one way or the other. It may not be a specific standalone charge or fee, but the banks will recoup it from their consumers.
St Anne: Finally, David, do you think that the banks are well placed if we do have another market crisis?

Ellis: Well, the four major banks have never been in a stronger position. Never been in a stronger position. As I mentioned earlier, the capital levels are 50 per cent higher than they were pre-GFC. The funding and liquidity levels are significantly higher. The reliance on short-term wholesale funding has decreased.

Wholesale funding has become longer maturity term in wholesale funding. The proportion of customer deposits to total funding has increased. It's running now between 50 per cent and 60 per cent. So capital levels are higher. So obviously, there is no guarantee we won't have another global financial crisis, but the Australian banks are in a far stronger position. We say with increasing confidence and increasing certainty that the Australian banks, the four major banks will actually have a surplus of capital in maybe 12 to 18 months' time, and we believe that the four major banks will be returning surplus capital to shareholders in 12 to 18 months’ time, which is far, far, far different to the IMF’s position that the Australian banks need additional capitals also.

St Anne: David thanks so much for your insights today.

Ellis: It's a pleasure Christine.  

Video Archive...

to Morningstar Premium Membership

Building a moat in foreign exchange
03/09/2014  OzForex’s low-cost, online business model could prove to be a meaningful market disruptor, and the shares look like a bargain today.
1 stock that's close to perfection
29/08/2014  Morningstar head of equities research Peter Warnes discusses results from the likes of Ramsay Health Care and Woolworths as the curtains close over the fiscal 2014 earnings season.
Why moats matter
26/08/2014  Morningstar Australasia's co-chief executive Heather Brilliant talks about finding great companies in a new book she co-authored titled Why Moats Matter.
BHP, Wesfarmers and investor returns
22/08/2014  Morningstar's Peter Warnes takes a look at the latest results from BHP Billiton, QBE Insurance, as well as a "shareholder's dream," Wesfarmers.
CBA stands out, Telstra gives back cash
15/08/2014  Morningstar's Peter Warnes takes a look at the latest earnings results from the likes of Commonwealth Bank, CSL, Telstra and ANZ, and gives investors an idea of what to expect from these companies going forward.
2 energy stocks with strong returns
08/08/2014  These two Australian energy companies should see strong returns over the next decade.
This wide-moat stock has been a star performer
05/08/2014  With its record of high profitability and very strong shareholder returns, this banking firm stands out.
How diversified is your portfolio?
31/07/2014  Morningstar’s Tim Murphy talks about an effective investment tool that helps investors achieve a diversified portfolio.
Seeking small-cap opportunities
30/07/2014  Morningstar's Tom Whitelaw shares some insights gained from recent talks with small-cap fund managers and provides some tips for those looking to increase their exposure to the smaller end of the market.
Key insights into quality stock-pickers
31/07/2014  Morningstar’s Julian Robertson talks about recent research into Australian large-cap managers and how some quality managers are approaching the market.
7 reasons why SMSFs outperform
22/07/2014  The key advantages to running a self-managed superannuation funds have also translated into strong performance.
Top investment prospects in 2014
16/07/2014  Morningstar's Peter Warnes explores the key issues, trends, risks and opportunities that lay ahead for investors over the next year.
What the advice reforms mean for SMSFs
09/07/2014  SPAA’s Graeme Colley outlines what SMSF trustees need to do to ensure the advice they are getting complies with the government’s proposed reforms.
Woodside, Santos in solid position
02/07/2014  Morningstar's Mark Taylor shares his views on future global energy demand and explains why Australia's major gas companies are well-positioned to benefit from favourable market dynamics.
Stockland poised for growth
30/06/2014  Stockland’s managing director Mark Steinert outlines the company’s growth strategy and gives his outlook for the housing sector.
Quality emerging-markets investments
25/06/2014  Morningstar fund research analyst Alex Prineas equips investors with what they need to know when it comes to getting quality exposure to emerging markets.
Quality emerging-markets investments
25/06/2014  Morningstar fund research analyst Alex Prineas equips investors with what they need to know when it comes to getting quality exposure to emerging markets.
Giving investors access to the world
19/06/2014  By investing in companies outside the banking and resources sector, investors can get a diversified portfolio that will perform across a variety of market cycles.
Emerging investment opportunities
16/06/2014  Ibbotson’s Daniel Needham talks about the need to confront existing investment thinking in order to improve investment outcomes for investors.
Maximise quality, minimise risk
11/06/2014  Morningstar's Mathew Hodge shares some insights into the portfolio construction process, as well as the role of stewardship in stock selection.