Australian banks must bolster capital ratios otherwise the sector cannot withstand dual shocks from residential mortgages and losses on corporate lending, a paper by IMF economists has warned.
Using stress tests calibrated on the Irish crisis experience, the IMF study shows that Australian banks could handle sizeable shocks to their exposure to residential mortgages. But if this is combined with corporate losses expected at the peak of the global financial crisis, it would put too much strain on banks’ capital and force banks’ average total capital ratio below the regulatory minimum, the study said.
“Given high bank concentration and market uncertainty, the merits of higher capital requirements therefore need to be considered for systemically important domestic banks, taking into account the currently evolving international standards,” says the paper, written by economists, Byung Kyoon Jang and Niamh Sheridan.
The study was circulated by the IMF just as Australian banks are moving towards meeting the Basel III higher capital requirements and new liquidity standards.
Despite the warning, the paper praised the Australian banking sector for making “good progress” to fulfil the Basel III standards, given banks’ high quality capital and the improvement in their funding profiles since the global financial crisis.
The sector is dominated by four main banks including Commonwealth Bank, Westpac Banking Corporation, Australia and New Zealand Banking Group and the National Australia Bank which together make up 75 per cent of the market.
But the Australian government said that bank regulators are not likely to change the regulations in light of the IMF’s conclusions.
The country’s treasurer and deputy prime minister, Wayne Swan said in response: “We have one of the best regulators in the world, the Australian Prudential Regulation Authority, they supervise our banking system and they are satisfied with the existing capital abilities of our banks.”
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