How to rein in big bad banks

In The AFR I argue that regulators should opt for simple, transparent and tough rules when dealing with bankers, who will systematically outsmart them given the opportunity to do so in view of their superior financial incentives and human capital. In the case of Australia's systematically important banks---namely the four majors and Macquarie---I back former Bank of England governor Mervyn King's proposal to place a still-generous ceiling on maximum allowable leverage at 15 times the banks' equity. This translates into a minimum leverage ratio of around 6.6 times, which would also put our banks in the top quartile of global peers in terms of non-risk-weighted capital. King further contends that complex "risk-weighting" regimes are of limited value, and I explain why. Finally, I argue that if APRA is to credibly deliver on the government's instruction that it minimises implicit taxpayer guarantees and the perception some banks are too-big-to-fail (TBTF), it will have little choice but to explicitly communicate that the major banks' senior bonds are loss-absorbing as most regulators overseas have done since the GFC. Free (VIEW LINK)