According to today's Australian Financial Review, Australia and New Zealand Banking Group (ASX: ANZ) CEO, Mike Smith, says higher capital requirements are inevitable.
He was quoted on CNBC's Squawk Box program as saying, "Look, I don't think you can buck the trend. I think we have to be realistic to understand the train for Basel IV has left the station and that there will be a requirement for more capital for banks globally, rather than less, and therefore we have to anticipate that as well."
He said, "Things have got better, but I think there is still a concern, particularly in the political environment, that banks are not strong enough to withstand a similar [crisis] that would happen again."
Currently, under APRA's Basel III capital requirements, Australia's big banks must hold a considerable amount of capital, as a buffer for adverse economic conditions.
However, whilst the benefits to the economy are obvious, many CEOs – including Mr Smith – have been opposed to the idea of being compelled to increase their capital because it will have the effect of lowering the banks' return on equity and overall profitability.
In late 2014, Mr Smith said the big banks would be forced to increase interest rates on mortgages if they were required to hold more capital.
However Treasurer Joe Hockey warned bank chiefs not to mount a campaign against the government for requiring them to increase their capital buffers. And rightly so, according to the recent Murray Inquiry, a 1% increase in capital requirements would only increase the average interest rate on a loan by 0.1%.
In addition, the current low interest rate environment has enabled the big banks to grow their loan books considerably and their returns on equity haven't be unduly affected, as the following graph shows.
Big Bank return on equity over five years. Source: Annual Reports.
Of course the big banks' profitability will ebb and flow over time.
Indeed, with the economy expected to cool over coming years, shares of each of the big banks – Commonwealth Bank of Australia (ASX: CBA), Westpac Banking Corp (ASX: WBC), ANZ and National Australia Bank Ltd (ASX: NAB) – are probably best avoided, for now.
In addition to the prospect of higher capital buffers, Mr Smith said, "I think if there is a challenge for banks globally, it is revenue growth – it is going to be harder to find. And of course, as the imposition of increased capital bites, of course returns become more difficult."
