Dear Mr Hartzer, Please Explain

In the lead up to the Government's response to the Murray Inquiry, I pen an open letter to the Westpac CEO, in which I draw attention to two puzzling aspects of last week's announcement of the $3.5 billion rights issue. The first is a myth commonly propagated by bankers; the notion that a bank must ‘hold’ capital, the implication being that it sets capital aside that burns a hole in a bank’s balance sheet while it sits idly in a vault. Second, was the decision to link the lift in its variable mortgage rates to APRA's more stringent capital requirements. It is highly unusual for a company to link price hikes to the need to use more loss absorbing capital in its liability mix. I suggest that WBC's greater reliance on equity finance in its capital structure should lower its expected cost of equity by making the bank safer and more resilient. An analysis of large global banks confirms that those banks which use more loss absorbing capital tend to have lower volatility of stock returns. (VIEW LINK)