Concerns about a "toppy" housing market and lower growth in China are reasons for Australia's banks to continue to hold capital buffers higher than the minimum levels set by the Basel Committee on Banking Supervision, a senior executive at the Australian Prudential and Regulation Authority says. 
Ahead of the visit to Sydney this week by Bill Coen, secretary-general of the Basel Committee, for The Australian Financial Review Banking & Wealth Summit, APRA's executive general manager of supervision and support, Charles Littrell, said on Friday that the concentration of lending by the big four banks into property markets is a "perpetual concern" for the prudential regulator.  
"It is a significant issue of concern to us that close to two-thirds of [the big four banks'] balance sheets are exposed to property???mainly housing loans," Mr Littrell said.
"It is fair to say in the past year we have worried about it a bit more because of the point we are at in the cycle." 
  Betting on China  
The economy's reliance on continued strong economic growth from its largest trading partner, China, is another reason APRA wants local banks to hold equity higher than demanded by the international standards setting body based Switzerland.  
"Australia has taken a big national bet on the rise of Asia, in particular on the rise of China, from a developing country to developed status," Mr Littrell said.
He described APRA's stance of forcing the banks to hold higher levels of equity than they might like as an "insurance policy" against that bet.
"Most of Australia does business on the basis that China is going to continue to rise relatively smoothly and that the Communist government can manage macroeconomic policy. At APRA we are not so convinced," he told an Australian Centre for Financial Studies event in Melbourne on Friday. 
"Australia's economy has done absolutely brilliantly well for a really long time, but it is brittle: this could all go away quite rapidly. Our aspiration for the major banks is that they are not accelerants in that situation, but shock absorbers." 
  Too big to get sick  
The financial system inquiry chaired by David Murray said Australia's banks should be "unquestionably strong" compared to global banks because of Australia's reliance on international funding for its growth; APRA has said strength will be determined on a range of measures. 
Mr Littrell said there is plenty of focus internationally on banks that are "too big to fail", but the relative importance to the economy of the Australian banks means they are "almost too big to get sick". 
Mr Coen, who is making a rare visit to Australia, will deliver a keynote speech to the AFR Banking & Wealth Summit on Tuesday morning on the direction of the global banking regulatory agenda.
APRA chairman Wayne Byres will follow Mr Coen's presentation.
The Basel committee is consulting on proposals to limit the use by big banks around the world, including Australia's big four, of thier own risk models, which analysts suggest will further reduce bank leverage. 
"We have already said we are not going to announce our final capital strategy until the end of this calendar year, but it will ultimately be a higher capital requirement than we have now," Mr Littrell said.
"We have indicated quite strongly that it won't be that much higher that the banks couldn't get there either by raising the money or accreting the capital over a few years from dividends." 
  Australian banks ahead of game  
Compared to counterparts in the United States, Britain and Europe, Australian banks are relatively advanced in increasing their capital buffers and improving the quality of their capital, and have been pushing out the tenor of their wholesale funding since the global financial crisis of 2008, although APRA suggested last week there was still work to do to reduce reliance on short-term funding, which is considered less stable. 
Mr Littrell said APRA is concerned the credit-default-swap spreads of the big four banks are so closely aligned, increasing the likelihood of contagion if a major problem were to occur at one of the lenders.
Global wars, terrorism or pandemics are among other potential triggers for another financial system crisis that APRA considers when determining how much capital it should force the banks to hold, he said. 
Australian Bankers' Association chief executive Steve Munchenberg said the industry accepted the inevitability of tougher capital requirements. 
"Since 2002-2003, well before the GFC, APRA has taken a more conservative approach," he said. 
Mr Munchenberg said Australia's strong reliance on foreign capital means it is vital the domestic banking system projects an image of being "unquestionably strong", and he was confident APRA would continue to measure that in more sophisticated ways than just capital ratios.