Bank safety depends on more than high capital, says RBA’s Ellis

The Reserve Bank of Australia's head of financial stability, Luci Ellis, said banks with higher levels of capital are not necessarily safer than others. Speaking at a CPA Australia Finance and Accounting Expo on October 24, Ellis also said it would be a mistake to believe higher capital is the answer to the problem of financial instability.

For example, banks with more capital could feel "emboldened to try to grow faster or to take on other risks". Or, Ellis said, a bank might be required to hold extra capital, on account of possessing a business model that is inherently riskier than that of other banks but in ways that Basel Capital Accord risk weights don't capture properly.

Ellis said Pillar 2 of the Basel III accord accounts for this, enabling supervisors to increase banks' capital requirements further. However, such actions would only assure greater safety if the additional capital covers less easily measured risks, she added.

Click here to read the speech.