Major bank boss admits uncertainty over capital levels

The chief executive of one of Australia’s biggest banks has shared his view on what it means for a major bank to be “unquestionably strong”.

Addressing shareholders in Sydney on Friday at the Westpac Bank 2015 Annual General Meeting, Westpac CEO Brian Hartzer said there "remains some uncertainty" about how much capital banks globally will need to hold over the coming years as regulators continue to review the system.

Mr Hartzer highlighted that one of the main challenges of the post-GFC environment has been responding to increased regulatory requirements and oversight across all elements of the bank’s business.

“As referenced in the Australian Government’s recent Financial Systems Inquiry, we support the goal of a strong banking system and the need to be ‘unquestionably strong’,” he said.

“However, we must be clear about what ‘unquestionably strong’ really means, along with the implications and cost of any increases in regulation.”

To date, the debate on strength has largely centred on the level of capital, Mr Hartzer said, adding that the notion held by some is that "if more capital is good, higher capital is better." 

Over the 2015 calendar year Westpac materially strengthened its balance sheet by raising an additional $6 billion in equity.

“That’s a significant increase, which places our capital ratios well into the top quartile of banks globally when compared on a like for like basis,” Mr Hartzer said.

“However, this focus on capital is a narrow interpretation of strength when you study the sources of bank failure over time,” he said.

The Westpac boss noted that the strength of a bank is really a function of a range of factors including its capital levels, funding mix and liquidity reserves; credit quality and new lending standards; risk processes and culture; and profitability, or the ability of the bank to generate new capital over time.

“While more capital does increase strength, it won’t protect a bank with poor credit quality, weak risk standards, a fragile funding position, or low profitability,” he said.

“For Westpac to play its role effectively in supporting economic growth, we need to look at a range of ‘strength’ measures that allow us to support the economy through the economic cycle, not just at a point in time.”

Commenting on the housing market, Mr Hartzer poured cold water on any talk of a ‘bubble’.

“We don’t share that view, and while house and apartment prices have risen sharply in some suburbs, we believe the economics of Australian housing are sound,” he said, noting that in a number of markets demand for housing from investors and owner-occupiers has consistently exceeded supply.

“Of course, we may see some stress in selected geographies, but given the underlying strength of the market we don’t anticipate a widespread deterioration.”

[Related: Big four will continue to raise capital for some time]

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