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...

What returns should you expect from markets?
01/12/2016  As market risks rise, investors must adjust their profit expectations--gone are the days of 8 per cent returns. But there are still growth opportunities out there if you know where to look.
Why healthcare stocks got a bump from Trump
28/11/2016  Australian healthcare and pharmaceutical companies continue to enjoy a purple patch, and for various reasons including the recent US election result, explains Morningstar's healthcare equities analyst Chris Kallos.
Equity and hybrid investors react as bond prices tumble
24/11/2016  The negative correlation between bonds and equities is reasserting itself following the US election of Donald Trump, according to John Likos, Morningstar's senior credit analyst.
2 global themes that are finding favour among ETF investors
15/11/2016  Australian retail investors are increasingly turning to ETFs for specific tactical exposures to global themes, particularly in the context of large-scale market events such as US election 2016.
Maintain discipline and stick to fundamentals when selecting stocks
14/11/2016  Steer clear of fads, maintain a disciplined approach and focus on company fundamentals in building and maintaining your investment portfolio, says Anton Tagliaferro, investment director, Investors Mutual
How Trump could impact economic growth
10/11/2016  Slowdowns in trade and immigration could hold back the US, and infrastructure spending could boost GDP, but it's too early to make any major changes to our economic forecast, says Morningstar's Bob Johnson.
President Trump: What should you do?
10/11/2016  Donald Trump has beaten Hillary Clinton to become the 45th US president. What should investors do?
Software companies worth watching amid tech deployment phase
08/11/2016  Kate Howitt, portfolio manager at Fidelity International discusses some of the core phases in technological disruption and identifies software companies among those currently presenting opportunities.
Kerr Neilson hot, cold and tepid on Europe, US and China
07/11/2016  Platinum co-founder and CEO Kerr Neilson explains his views on the major global markets and outlines where he sees opportunities--and where he doesn't.
Is Inghams a moat-worthy investment?
02/11/2016  Morningstar's Ravi Reddy discusses the upcoming float of poultry product producer Inghams, and whether it's in investors' interests to subscribe for shares in the IPO.
3 best ideas in healthcare
26/10/2016  Morningstar's Chris Kallos looks at some of the most compelling ideas in Australian healthcare, while also reaffirming the importance of the uncertainty rating and how it pertains to the sector.
Exercise caution and let some cash build
24/10/2016  Morningstar's Peter Warnes provides a near-term outlook for equities markets, while also sharing his thoughts on the upcoming Ingham's IPO.
Bogle forecasts low stock and bond market returns
21/10/2016  Warning of "much lower market returns" ahead, Vanguard founder Jack Bogle urges investors to seek low-cost investment products. From Morningstar US.
Finding the right flavour ETF amid expanding ETP menu
13/10/2016  From a relatively vanilla selection of exchange-traded funds (ETFs) on offer in the early 2000s, Australian investors can now choose from a wide range of exchange-traded products to suit various tastes.
Bright outlook for Aussie banks despite parliamentary committee and looming Basel IV regulations
12/10/2016  Australia’s ‘big four’ banks’ share prices have held up after their CEOs recently fronted a parliamentary committee, and have already absorbed the potential impact of more stringent capital requirements
Dividend, cashflow challenges hit investors but yield opportunities remain
06/10/2016  Technology, healthcare and telecoms hold opportunities for global equity investors even as utilities and energy stocks disappoint, says Jane Shoemake, director for global equity, Henderson
No place for set-and-forget asset allocation
04/10/2016  A 2016 company reporting season overview and explanation of why dynamic asset allocation is so important, from Dr Shane Oliver, chief economist and director of investment strategy, AMP Capital.
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.