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.

Our top dividend stock

If you are looking for some stock ideas to add to your portfolio today, look no further than our #1 dividend-paying stock. Discover The Motley Fool's favourite income idea for 2013-2014 in our brand-new, FREE research report, including a full investment analysis! Simply click here for your FREE copy of "The Motley Fool's Top Dividend Stock for 2013-2014."

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

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss a very important event! Chief Investment Advisor Scott Phillips and his team at Motley Fool Share Advisor are about to reveal their latest official stock recommendation. The premium “buy alert” will be unveiled to members and you can be among the first to act on the tip.

Don’t let this opportunity pass you by – this is your chance to get in early!

Simply enter your email now to find out how you can get instant access.

By clicking this button, you agree to our Terms of Service and Privacy Policy. We will use your email address only to keep you informed about updates to our website and about other products and services we think might interest you. You can unsubscribe from Take Stock at anytime. Please refer to our Financial Services Guide (FSG) for more information.