IMF calls for big bank buffer
The big four held 80 per cent of bank assets and 88 per cent of residential mortgages, the IMF said, making the banks vulnerable to any slump in house prices. Photo: Karl Hilzinger
THE International Monetary Fund says the big four banks should be forced to hold more capital because their market dominance and the implicit guarantee of taxpayer support could threaten the economy.
As figures showed a $398 million worsening in the budget, the fund also said the government could abandon its plans for an early return to budget surplus if the economy deteriorated sharply.
In a review of the financial system published on Friday, IMF officials judged the sector to be ''sound, resilient, and well managed'' and said the economy was performing well.
But while the IMF was broadly supportive of the government's economic management, it also highlighted the long-term ''systemic risk'' posed by the dominance of Commonwealth Bank, Westpac, ANZ and NAB. ''Significant and protracted difficulties in any one of them would have severe repercussions for the entire financial system and, in turn, the real economy,'' the fund said.
As well, it said the big four benefited from wider margins than their local and international rivals because credit markets assumed they would be supported by the government if needed.
''The four major banks enjoy a funding cost advantage derived from an implicit government guarantee, and should bear some of the cost of mitigating systemic risk,'' it said.
To shelter the economy from any future troubles in the banking sector, the IMF said requiring the banks to hold more capital so they could absorb losses ''would seem a natural next step to take''. It also suggested increased ''stress-testing'' of banks by authorities.
Forcing banks to hold more capital would act as a drain on profits - which are also under pressure from declining credit growth.
With bank profits hitting $25 billion this year, the big four lenders are among the most profitable in the world. But the fund highlighted several longer-term risks facing the sector, such as banks' heavy reliance on overseas funding markets and their large holdings of residential mortgages.
The big four held 80 per cent of bank assets and 88 per cent of residential mortgages, it said, making the banks vulnerable to any slump in house prices.
On the economy, the IMF reaffirmed next year's 3 per cent growth forecast, though this would be ''narrowly driven by a mining investment boom''. It backed the government's goal of reining in spending and public debt.
If the outlook were to worsen dramatically, it said that ''delaying the return to surpluses could be an option'' and the Reserve Bank would have ''scope'' to cut the cash rate further.
The comments came as new figures showed the budget deficit in August was $398 million wider than the government had expected in its May budget, due to weaker than expected tax receipts.
A spokeswoman for Finance Minister Penny Wong said the write down of revenue showed that weakness in the economy had been taken into account in the government's midyear budget review, published last month.
Treasurer Wayne Swan said the IMF's support for government policy objectives represented a ''big tick'' for Australia's economic management.
''The government understands that not everyone is doing it easy, but reports like these demonstrate why all Australians can be proud of what we have achieved working together in the face of acute global challenges,'' Mr Swan said.
While Mr Swan has pledged to deliver a surplus this financial year, the government has recently softened its rhetoric, suggesting it might abandon the goal if conditions worsen significantly.
Since Canberra announced $16 billion in spending cuts in the midyear budget update, it has avoided reaffirming its promise to post a surplus, instead referring to a ''plan''.