Forced mergers between the banks are more likely than a bank bail out according to experts raising new questions about the value of the implicit government guarantee and its attempts to raise $6.2 billion from the sector via the new bank levy.
The value of the guarantee is also being queried in an environment where banks are moving towards an “unquestionably strong” capital position, with the banking regulator due to release new guidance designed to meet the aim in the next two months.
Monash Business School professor and former Australian Competition and Consumer Commission chairman Graeme Samuel said that the history of forced mergers between troubled banks was a guide to what might happen in a crisis.
Mr Samuel pointed to past mergers and takeovers that saw the troubled Adelaide Bank and the collapsed State Bank of Victoria paired up with the stronger Bendigo Bank and Commonwealth Bank as evidence of the most likely way to resolve problems.
He said that the regulators would not allow a bank collapse to tarnish the reputation of Australia’s financial system.
“Past practises have shown that steps are taken to ensure that under no circumstances will a liquidator ever be appointed to an entity which has the word ‘bank’ in its name,” Mr Samuel said.
Mr Samuel was the head of the ACCC between 2003 and 2011 and green-lighted Commonwealth Bank’s takeover of BankWest during the global financial crisis. He later said he regretted the decision, however he was instructed not to hold up the merger.
The prospect of forced mergers undermines the argument that the government’s surprise 6 basis point levy on the liabilities of the big four banks and Macquarie is designed to make them repay the government and the taxpayer for its implicit support.
Melbourne University professor and Financial Services Inquiry panel member Kevin Davis said that if the local banks were well capitalised enough then there would be no need for a guarantee and it if did exist the value would be nill.
“If the risk of a bank failing and needing to be bailed out by the government [or the taxpayer] is close to zero then the argument for a bank levy based on the value of an implicit guarantee would also cease to exist,” Professor Davis said.
Professor Davis, however, believes that Australia’s banks are not nearly well capitalised as they should be. He believes that bank capital levels should be almost twice as high as they are today in order to effectively mitigate risk.
“If you go back to the 1800s and early 1900s banks had a ratio of common equity capital to total assets in the order of 15 to 20 per cent. Today that ratio is closer to 5 per cent.
“I would have thought a leverage ratio of closer to 8 per cent or 9 per cent would be a good thing for the stability of the financial sector, notwithstanding the corresponding increase in costs the ratio would lead to.”
Australia’s big four banks have common equity tier one or CET1 ratios of 10 per cent and average risk weights on residential mortgages of at least 25 per cent. The banking regulator is expected to ask the banks to lift the ratios again as part of a recommendation from the Financial Services Inquiry to make the banks “unquestionably strong”.