Pimco Calls for More Australian Bank Capital as Property Booms

Pacific Investment Management Co. says regulators should consider pushing banks to issue equity capital to help guard against the risks of a property boom that’s making it harder for policy makers to lower interest rates.

The biggest risks to the Australian economy are the property market and consumers who may have taken on too much debt, Robert Mead, head of portfolio management in Australia, wrote in a note dated April 27 on the fund managers’ website. If banks sell shares, that would improve the balance sheets of mortgage lenders, helping deleverage the country’s economy, according to Mead.

The RBA unexpectedly held its overnight cash rate target at a record-low 2.25 percent this month. The potential ramifications from a housing bubble may be a reason for the policy makers to resist more rate cuts as they seek to guide the economy’s transition after a mining boom, Mead said.

“The Australian economy needs to rebalance,” he said. “The RBA must not be sidelined due to property market exuberance from playing a central role in helping this occur.”

Traders see a 55 percent chance of a rate cut next month, according to swaps data compiled by Bloomberg.

Common equity tier 1 capital at the four largest lenders -- Australia & New Zealand Banking Group Ltd., Commonwealth Bank of Australia, National Australia Bank Ltd. and Westpac Banking Corp. -- stood at at least 8.4 percent as of Dec. 31, according to regulatory filings.

While capital levels are well above minimum regulatory requirements, leverage ratios haven’t improved since 2008, David Murray, who headed the government’s review of the financial system said at a conference Tuesday.

While regulators may opt for macroprudential tools to control housing risk, a more powerful tool is forcing banks to raise “good old common equity,” Mead said.

“By definition, macroprudential controls can only affect the quality of the flow of mortgages being originated,” he said. “Increasing common equity also effectively protects the stock of mortgages already on banks’ balance sheets from potentially causing systemic stress.”

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