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Some interesting news has reached us from Australia lately, as the Treasury department of Australia has released a big working paper investigating whether or not the capital ratios of its banks are sufficient. This 320 page paper is the outcome of an investigation ordered by Australia’s conservative government which was commissioned to generate potential policies to safeguard the Australian banks from a meltdown.
The main purpose was to decide whether or not the Australian financial sector could survive any large economic shocks and to gain the confidence of its citizens that its financial system is sound and stable. This is actually quite an interesting development as the capital ratios of  10 to 11.6% are already very decent and in most other countries in the world the banking regulator wouldn’t lose a single minute of sleep over it if their banks would all have a double digit capital ratio.
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However, Australia seems to be wanting to becoming one of the top banking destinations in the world and recently announced plans/thoughts have indicated Australia would like all of its banks to have capital ratios in the top quartile of the banks in the world (which would require Australia’s four main financial institutions to bump their capital ratio’s by 0.6 – 2.2%). This isn’t too difficult as this could easily be managed by keeping earnings inside the bank instead of paying it out as a dividend. This would be a temporary measure solely aimed at increasing the capital ratios.
That’s not the only measure which Australia wants to implement as it’s also trying to reduce the banks’ exposure to speculative mortgages. One can’t deny the real estate market in Australia is booming and it’s not unthinkable the banks are extending loans to people who aren’t as credit-worthy as assumed. This seems to be confirmed in the following chart which visualizes the loans being made to the private sector in Australia. If a reduction in speculative lending would be organized, the power of the banks to generate earnings will go down as well, making it more difficult to meet the expected capital ratios within a certain timeframe.
