Banks should hold higher reserves, say investors

Investors have backed calls that Australia’s big banks should be forced to hold higher capital reserves in case of a major economic downturn, given that bad debts are expected to rise in coming years.

It is believed that under pending rules by the Australian Prudential Regulation Authority (APRA), the nation’s five biggest banks – namely Westpac (ASX: WBC), ANZ (ASX: ANZ), NAB (ASX: NAB), Commonwealth Bank (ASX: CBA) and Macquarie Group (ASX: MQG) – could be required to hold between $14 billion and $15 billion extra in capital.

Whilst this would certainly have a negative impact on the banks’ ability to maintain their high dividend distributions in the short term, many investors have deemed it necessary.

After all, the big improvements in the banks’ profits over the last few years have been realised through falls in bad debt charges due to the low interest rate environment. This is unsustainable however, and the banks need to prepare for the future.

According to The Australian Financial Review, the accounting rules for bad debts could also come under review in the near future. Currently, banks must account for bad debts on an incurred loss basis – that is, when the loss actually occurs. There are discussions however, that they should actually be accounted for when they are expected to happen. This would require the banks to maintain greater levels of capital.

Foolish takeaway

At today’s prices, none of the banks are trading at particularly attractive valuations and remain unlikely to deliver outstanding long-term gains.

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Motley Fool contributor Ryan Newman does not own shares in any of the companies mentioned.

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