Commonwealth Bank of Australia (CBA) is challenging the way Macquarie Group calculates its key capital ratio, according to a report in the Australian Financial Review. The report says a CBA-backed analysis argues that Macquarie's CET1 ratio—a measure of a bank's financial strength—makes its balance sheet look safer than it actually is. At the same time, the Australian Prudential Regulation Authority (APRA) is turning its attention to reviewing legacy holding company approvals, a move that could have broader implications for the sector.
What is the CET1 ratio and why does it matter?
The CET1 (Common Equity Tier 1) ratio is a core measure of a bank's capital adequacy. It compares a bank's highest-quality capital—mainly ordinary shares and retained earnings—against its risk-weighted assets. A higher ratio suggests a bank has a larger buffer to absorb losses, which is why regulators and investors watch it closely. Banks are required to maintain minimum CET1 ratios, and those that exceed the minimum are often seen as more resilient.
The dispute centers on how Macquarie calculates its risk-weighted assets. If those assets are understated, the ratio would appear higher than it should be, potentially masking the true level of risk on its books. CBA's analysis reportedly suggests that Macquarie's approach may not fully capture the risks it holds, making its capital position look stronger than it really is.
Why is CBA pushing back?
CBA's challenge is not just academic. Banks compete for capital and investor confidence, and a perceived inconsistency in how capital rules are applied can create an uneven playing field. If Macquarie is seen as holding less capital than its risk profile warrants, it could enjoy a competitive advantage in funding costs or regulatory treatment. CBA, as one of Australia's largest banks, has a direct interest in ensuring that capital rules are applied consistently across the industry.
The timing is also notable. APRA, the country's banking regulator, is reportedly shifting its focus to reviewing legacy holding company approvals. These approvals, often granted years ago, may no longer reflect current risk profiles or regulatory expectations. A review could lead to changes in how some institutions structure their capital, potentially affecting their ratios and, in turn, their lending capacity.
What does this mean for investors?
For everyday investors, this dispute is a reminder that capital ratios are not always as straightforward as they appear. A bank's reported CET1 ratio is a key indicator of its financial health, but it depends on complex calculations and assumptions. When banks disagree on how those calculations should be done, it can signal that the numbers may not be fully comparable across institutions.
If APRA's review leads to stricter requirements for Macquarie or other banks, it could affect their ability to return capital to shareholders through dividends or buybacks. On the other hand, if the review finds that current practices are sound, it could reassure investors that the system is robust. Either way, the outcome could influence how investors value Australian banks and financial institutions.
Broader context and what to watch
The spat between CBA and Macquarie comes amid a broader focus on bank capital in Australia and globally. Regulators have been tightening capital requirements since the global financial crisis, and banks have generally built up larger buffers. However, the rise of non-bank lenders and the increasing complexity of financial products have made it harder to compare risk across the sector.
Investors should also keep an eye on APRA's review of legacy holding company approvals. These approvals can affect how banks and other financial firms are structured, and any changes could have ripple effects on their capital positions and business strategies. The review is part of a wider effort by APRA to modernize its oversight and ensure that regulations keep pace with evolving risks.
For now, the dispute is playing out in the media and in regulatory circles, but it could escalate. If CBA's analysis gains traction, it might prompt APRA to take a closer look at Macquarie's capital calculations. That could lead to changes in how Macquarie reports its ratios, or even to adjustments in its business practices.
What it means for your money
For most investors, the immediate impact of this dispute is likely to be limited. Bank shares may see some volatility as the story develops, but the fundamentals of the institutions involved are unlikely to change overnight. However, the outcome of APRA's review could have longer-term implications for the banking sector's profitability and stability.
If you hold shares in Australian banks or financial institutions, it's worth monitoring how this story unfolds. A stricter capital regime could reduce the amount of capital banks can return to shareholders, while a more lenient one could boost their ability to lend and grow. As always, it's important to focus on the underlying strength of the companies you invest in, rather than reacting to short-term headlines.
In the meantime, investors can take comfort in the fact that Australia's banking system is generally well-capitalized and tightly regulated. Disputes like this one are part of the normal process of regulatory and competitive tension, and they often lead to clearer rules and better disclosure—which is ultimately good for investors.
