The Australian Financial System enquiry has been published. We were expecting it this weekend.

David Murray’s (Murray is former head of CBA) report made 44 recommendations (summary, in brief – headlines via Reuters):

  • Recommendations aimed at making system stronger & more resilient
  • Recommends raising capital levels for banks to reduce the possibility of failure
  • Recommends introducing leverage ratio as backstop to banks’ risk weighted capital positions
  • Recommends reducing disclosure requirements for large listed companies issuing ‘simple bonds’ to boost retail corporate debt market
  • Superannuation system not efficient due to lack of strong competition, benefits offset by high costs

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Note:

  • The report said Australia’s financial system is susceptible to shocks in the economy
  • The report did not specify how much extra capital should be held by the banks

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I’ll have more on this over the course of the weekend.

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MORE (via the Australian Financial Review):

  • The higher levels of capital should come from higher levels of common equity tier 1 (CET1) capital
  • Up to the Australian Prudential Regulation Authority to decide on the form of the higher capital
  • Report suggests Australia’s big banks will need to lift CET1 capital by 1.4% – transition periods will apply
  • As a backstop, it said banks should also introduce a leverage ratio

Says the Australian Financial Review (bolding is mine):

  • The recommendations on risk weighted assets and capital will provide a big boost for the regional banks by evening up the playing field
  • Large banks currently use an average “risk weight” against mortgages of 18 per cent compared to 39 per cent for the regional banks
  • The report said a range of between 25 per cent and 30 per cent was appropriate for the majors
  • This would be roughly equivalent to a one percentage point increase in the major banks CET1 levels
  • Big bank CEOs pre-empted the findings on capital by suggesting banks would need to raise interest rates or cut dividends. But the report said “overall the expected cost of increasing capital requirements is small”
  • A 1 per cent increase in CET1 would increase the cost of a loan by less than 0.1 per cent the report said and would reduce GDP by 0.01 to 0.1 per cent
  • Credit ratings agencies “may reconsider” the two notch ratings upgrade assigned to the big banks on the basis of expected government report in a crisis, the report said