Big banks are facing a de-rating threat from the Murray inquiry

Big banks are facing a de-rating threat from the Murray inquiry. Watch the big bank's spin doctors frantically wave their magic wands in a desperate attempt to dissuade the government (through public opinion) from adopting Murray's recommendation on forcing these giants to hold more capital. The banks are already warning of falling shareholder returns, an assertion flatly rejected by the report's author and former chief executive of CBA, David Murray. He says Australian bank returns are still relatively high by global standards and the higher capital ratio will make them more attractive in this risk-adverse investment world. Who's right? Murray has a good point but big banks will lose some of their price premium in the nearer-term as the higher capital ratios will reduce their return-on-equity (ROE). There's strong correlation between the price investors are willing to pay and bank's ROE, as the chart shows. If ROE trends lower, so should share price (assuming little change to book value). Regional banks also in spotlight because the proposed changes will level playing field. The large gap in ROEs between the big and small could narrow significantly.