It never ceases to amaze how muddle-headed analysts and investors can get when it comes to understanding our financial system. In this case, the subject is whether the major banks are done-and-dusted with deleveraging their balance-sheets---as most have presumed---or whether there is indeed more capital raising to come. Australia's impressive banking regulator, Wayne Byres, doubtless surprised many when he declared on Friday that APRA would (sensibly) now not wait for the global Basel 3 banking rules to be finalised before determining and implementing its definition of what "unquestionably strong capital ratios" involve with the ensuing prescriptions requiring banks to "steadily accumulate capital" if they want to be able to respond in an "orderly manner". APRA appears to be keen to ensure the banks retain their prized AA- credit ratings even if the nation loses its AAA rating, which will necessitate another ~$15bn or so of extra equity generation to get their S&P risk-adjusted capital ratios comfortably above 10%. This may mean additional hybrid issuance given hybrids count towards Tier 1 capital and S&P's RAC ratio. Free (VIEW LINK)
Christopher Joye is Co-Chief Investment Officer of Coolabah Capital Investments, which is a leading active credit manager that runs over $2.2 billion in short-term fixed-income strategies. He is also a Contributing Editor with The AFR.