The headline figures regarding bank capital is that the banks have increased their capital base from about 10% of assets to about 12% of assets. As is generally well known, some bank assets are risk weighted so as not the full 100% of the asset value is counted as a risk. Housing assets are a good example. Depending on the loan to value ratio, only 35% of the value of a home loan is counted as a risk.

As of March 2011 (source: RBA), total bank assets were $2,683 Billion. The risk attributed to those assets was 48% lower, or $1,385 Billion.

Bank capital was $162 billion, so as a percentage of $1,385 Billion, this gives you the capital ratio of 11.7%. (The red line in the graph). But as a percentage of published total assets ($2,683 Billion) it is 6.05%. (The blue line in graph).

This trend is quite stark as it has been in clear decline since the late 1980's when it was 12.66%. Blogsite, Macrobusiness has pointed out that as house prices have increased over the years, the banks internally are able to revalue upwards the value of your home so as to achieve the lower risk weightings. Again, this is what puts further pressure on our banking system that high home values are maintained. If home prices were to fall then conversely banks would be required to increase their risk weightings on asset values. So without any bad debts or losses, the bank will be required to raise capital to maintain the regulatory minimum.

Michael Cornips