OPINION: Australian banks have world-leading capital strength and that allows them to compete more vigorously for customers. They can survive an economic crisis.
which assumed a recession, GDP falling by 4 per cent, house prices plunging 43 per cent over three years, and offshore funding markets closed temporarily.“Under the scenario, all incurred significant credit losses as borrowers missed repayments and many fell into negative equity,” Lonsdale said.
Westpac CEO Peter King and Commonwealth Bank of Australia CEO Matt Comyn provided the Summit with detailed data on the financial strength of the big four banks. They stressed how much stronger their balance sheets were compared to systemically important banks overseas.King said that following the Westpac merger with St George Bank at the height of the global financial crisis in 2008, the combined group had a Tier 1 capital ratio of 4 per cent. Today, its Tier 1 capital ratio is 11 per cent.
“So, APRA and the industry might have a bit of a debate every so often about whether we’re too conservative or not. But when you get into times like this, you want to show that you are conservative, you have a system that’s conservative, and a system that’s trusted – and that’s where we’re sitting at the moment.”
When asked about concentration of risk in Westpac’s loan book, King was quick to talk about the bank’s dramatic reduction in interest only lending. He said over the past few years, Westpac had slashed its interest-only lending, from 50 per cent of its mortgage book to 15 per cent. He said Australian banks had to hedge their interest rate risk or be subject to a capital charge, something which did not happen at Silicon Valley Bank.Advertisement
Of course, banks are highly leveraged institutions which need to deploy capital against loans, and that explains why there is intense competition for mortgage borrowers.but this was not a reason to think that the loans being written would end up in defaults or loan arrears.
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