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...

The search for bond yields
27/09/2016  Morningstar's Hybrid Handbook: Navigating the Australian Hybrid Market pulls back the curtain on corporate and bank hybrids, as John Likos, Morningstar's senior credit analyst, explains.
Here's which stocks will be the real winners in FY17
15/09/2016  Morningstar's Peter Warnes reflects upon the most recent corporate earnings season and shares his thoughts on which stocks could deliver strong performances in the near term.
Resolution Capital Global Property Securities
13/09/2016  Morningstar's Ross Macmillan examines a number of outstanding qualities that sets Resolution Capital apart from other managers.
India: Economy slows but stock market outlook is bright
07/09/2016  Despite poor recent performance, India remains a key investment for emerging market investors. Fidelity's Medha Samant explains the position.
China rally will continue but prepare for volatility
07/09/2016  Last year, volatility in the Chinese stock market spilled over into global stocks. This year, the market has been more encouraging--will the rally last?
VIDEO | Helping SMSF trustees negotiate super complexities
19/08/2016  Peter Hogan, head of technical at the SMSF Association, shares his insights on the changing super environment and how it will affect SMSF trustees.

Peter Hogan will be a guest speaker at the Morningstar Individual Investor Conference 2016, which will be held in Sydney on 14 October, 2016.

/video/transcript/2636 mailto: ?subject=VIDEO | Helping SMSF trustees negotiate super complexities&body=http://www.morningstar.com.au/video/story/2636 Chasing income in a low return world
10/08/2016  Paul Reisz, Pimco's executive vice president and income product manager head, gives his insights on where bond investors may find yield in the difficult global market environment.
US stocks offer most attractive income, says Investec
03/08/2016  Investec's UK-based global equity income investor Blake Hutchins says despite the stock-market rally raising valuations, the US offers the most attractive options for income investors.
US stocks which will continue to rally
28/07/2016  The US stock market looks fairly valued as a whole, admits JP Morgan's Dennis Ruhl--but there are some sectors which will deliver further growth.
Xero underlines returning popularity of technology stocks
19/07/2016  The success of accounting software company Xero is part of a broader resurgence of technology companies, contrasting with the shifting fortunes of Australia's resources sector.
Zurich Investments Global Thematic
18/07/2016  Morningstar's Kathryn Young explains what sets Zurich Investments Global Thematic apart from rival global equities strategies.
Gold Managers: Platinum International Fund
15/07/2016  Morningstar's Kathryn Young explains what makes Platinum International a standout strategy and the rationale behind the fund's Gold rating.
Gold Managers: Magellan Global Fund
15/07/2016  Morningstar's Tim Wong explains why the Magellan Global Equities was upgraded to Gold and why there is more to the strategy than Hamish Douglass.
Is this graph to blame for Brexit?
13/07/2016  Britain's vote to leave the European Union seems to tie in with a feeling across the Western world--a rebellion against globalisation and those in power.
Global equities versus Aussie equities
11/07/2016  While global equities may be attractive on a relative valuation basis, it's important not to blindly follow a benchmark, Morningstar Investment Management's Brad Bugg says.
Forecast 2016-17: Exercise caution
08/07/2016  Morningstar's Peter Warnes shares his thoughts on the past year, his expectations for the year ahead, as well as a few important recommendations.
Breaking from the pack in asset allocation
04/07/2016  Morningstar Investment Management's Andrew Lill explains the benefits of long-term, valuation-driven asset allocation, while also elaborating on his team's definition of "risk".
A permanent state of distorted reality
30/06/2016  Hamish Douglass, chief executive officer, Magellan Financial Group, explains why he believes we are at an odd point in history with the Brexit vote, ineffectual central bank policies and volatile currencies.
How should investors react to Brexit result?
28/06/2016  Dan Kemp of Morningstar UK says investors need to keep cool, calm heads amid political and financial uncertainty as to what happens next, following the Brexit vote.
Behavioural finance and how it hits your bottom line
28/06/2016  Understanding how your thought patterns drive investment decisions could amount to hundreds of thousands of dollars over your lifetime, explains behavioural finance expert Simon Russell.