Commonwealth FP inquiry could cost all majors

The CBA financial planning inquiry could see each major lender hold up to $2 billion in additional capital with increased operational risk charges.

While domestic litigation has been relatively muted, the Senate inquiry into CBA's financial planning practices highlights the potential for litigation and issues going forward – for all major banks.

Released yesterday, the Credit Suisse Operational Risk report found that the Australian banking sector has largely avoided these substantial litigation costs; however the current CBA financial planning inquiry highlights the possibility for operational risk charges to increase.

“Whilst the losses incurred by CBA are not likely to be significant, we seek to address the possibility that this may result in systemic charges and further attention paid to operational risks by the regulator, likely culminating in higher operational risk charges that are seen in overseas banking markets,” the report said.

Credit Suisse tested the sensitivity of the major banks to increased operational risk charges and found that major bank operational risk weights of 9 per cent are below the global average of 12.4 per cent, with an expectation that this could grow beyond 15 per cent over the next few years.

The report found that the operational risk weightings of Australian major banks have been steadily rising – from 7.5 per cent of total RWAs (risk weighted assets) in March 2012 to 9 per cent in March 2014.

A move towards operational risk weightings/total RWA of 15 per cent is estimated to result in the requirement to hold an additional $2 billion of capital for each of the major banks, equating to a 50 basis point charge on their respective CET1 ratios, the report found.

While credit risk has historically been the most substantial component of RWAs held by the majors – currently 84 per cent of total RWAs – operational RWAs as a percentage of total RWAs have been trending upwards, particularly in the aftermath of the financial crises with the emergence of significant litigation exposure, according to the report.

 

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