CBA's soft diplomacy is on Murray's wishlist

The softly, softly public positioning of CBA and National Australia Bank on the potential for higher capital charges to promote greater stability in the financial system is in stark contrast to the noisy campaigns waged by the prophets of doom at ANZ and Westpac, with their warnings of interest-rate hikes and lower dividends.

The dramatically different approaches haven't gone unnoticed at the David Murray-chaired inquiry, which will hand down its report later this month.

There are all sorts of theories bouncing around in Canberra, Sydney and Melbourne about why there is such a gulf between the major banks.

A popular view is that the CEOs of the noisy banks -- Mike Smith and Gail Kelly -- are closer to the end of their tenures than the beginning, which gives them greater freedom.

In contrast, new NAB boss Andrew Thorburn has his trainer wheels on, while Narev is around midterm but with a challenging regulatory road to navigate.

CBA was instrumental in getting PwC to compare the capital buffers of domestic banks to their international peers, to rebuff Murray's interim finding that the majors were middle of the range. However, any temptation for Narev to bare his fangs at Murray would be tempered by CBA's financial planning debacle.

The other notable development as the Murray inquiry reaches the pointy end of its deliberations has been the sidelining of the Australian Bankers' Association on regulatory capital requirements.

The reason is that the ABA could not breach the divide between larger banks and the smaller institutions.

There was broad agreement that the current capital requirements create an uneven playing field, with the majors able to use their loss experience to calculate risk-weights through an internal model.

The large banks said they'd back any ABA recommendation to help the regionals get quicker accreditation to use their own internal risk models.

But the consensus broke down when the regionals said they wanted more than just assistance from APRA.

As to weekend reports that Joe Hockey has already warned the majors that he's ready to lift capital levels, this column argued back in August that the only way is up for bank capital.

There were suggestions yesterday that Hockey's office had been in contact with the banks to hose down the reports.

It would be surprising if the federal Treasurer had already pre-empted the findings of an independent inquiry.

The other factor that's often overlooked here is the internal machinations of the Abbott government.

At very senior levels, there is still a belief that the financial crisis was made in the northern hemisphere, that our major banks were well-behaved in the pre-crisis period and that they should not be punished for the excesses of others.

The argument has its limits -- it can only go so far without creating the dangerous perception that our banks are riskier than their global peers. Instead of suffering an unwanted regulatory burden, they would then be exposed to an anti-competitive financial penalty.

Regulators have claimed a lot of “watershed moments” since the financial crisis, but Financial Stability Board chairman Mark Carney got it right yesterday in claiming such a moment with the release of proposals to end the too-big-to-fail problem.

While the proposals relate to 30 banks of systemic global importance, ANZ Bank boss Mike Smith said yesterday that local regulators would probably oversee the introduction of a similar, minimum standard for the total loss-absorbing capacity of large domestic banks.

The FSB said the world's biggest lenders might be required to have a TLAC equivalent to as much as a quarter of their risk-weighted assets, including separate capital buffers, with national regulators able to impose even tougher standards. The FSB is seeking commentary on the rule, which will be implemented in 2019 at the earliest.

“Once implemented, these agreements will play important roles in enabling globally systemic banks to be resolved without recourse to public subsidy and without disruption to the wider financial system,” Carney said.

Instruments that can count as TLAC include regulatory capital and some other liabilities such as unsecured debt, where losses can be imposed on creditors.

The G20 is expected to agree to the principles at this week's Brisbane summit.

This article originally appeared in The Australian Business Review