The first week of August saw a more than 7% fall in the share price of Australia and New Zealand Banking Group (ASX: ANZ). The key reason was the announcement of $3 billion in capital raising to maintain compliance with the new Australian Prudential Regulation Authority rules (APRA).
The second week of August witnessed a similar fall in Commonwealth Bank of Australia's (ASX: CBA) share price after it announced a $5 billion capital raising.
APRA is clearly concerned about the minimum level of capital banks must maintain to protect them from any possibility of a downturn in the housing market. National Australia Bank Ltd. (ASX: NAB) was among the first of the big four banks to raise $5.5 billion in May 2015 in anticipation of new rules. In July, APRA increased average mortgage risk weights, the capital the banks need to hold against potential home-loan losses.
The global financial crisis (GFC) of 2008-09 saw a massive meltdown in prices of American houses, which resulted in the failure of several major banks in America. Bankers' appetite for profit and bonuses on Wall Street was partly responsible for the GFC, but so was the failure of the regulator to impose stricter regulations on banks and other lending institutions. APRA is clearly aware of the history and is trying to ensure that Australian lending institutions are protected from any future challenges.
The Australian economy's current growth rate is below the long-term average. The unemployment rate increased to 6.3% in July from 6.1% in June. Commodities prices have crashed and interest rates are at an all-time low, with the possibility that Reserve Bank of Australia (RBA) might further cut interest rates. And China's most recent measures to devalue its currency to boost exports will not favour the Australian economy.
Booming Australian house prices, particularly in Sydney, are moving at their own pace, completely unaware of the risks. The banks' exposure to the housing market worries both APRA and the RBA. Imposing stricter regulations is a step in the right direction to contain any risks. However, Australian banks are considered among the best in the world and are highly profitable. Commonwealth Bank recently announced a record full-year cash profit of $9.14 billion.
Foolish takeaway
Australian banks are well run and managed. Due to the current global economic environment, the future is even more uncertain than usual. Raising capital is a sensible step to guard against possible risks. However, market volatility could also provide some good opportunities to buy bank shares at attractive prices.
