Stevens is something of a typical central banker. He's pretty conservative, plays his cards close to his chest, and what he says publicly is likely only a fraction of what he thinks.
In short, he's very skilled at the art of 'bureaucratese' — saying what needs to be said without scaring the horses.
But when he comes out with something forthright, you'd better know he wants the message to be read loud and clear — and far and wide. So investors had better be paying attention when Stevens says, as he did this week:
"The 'right' rate of return for bank shareholders is, as others have observed, an open question. It is not a constant of the universe"
And you'd better believe he's not expecting bank returns to increase from here.
Where are my returns going?
The primary reason is that various international and Australian inquiries, including what's known colloquially as the Murray Inquiry, chaired by former CBA boss David Murray, have determined that for the sake of the Australian financial system, the banks should effectively have more ballast in their holds.
And, to switch to a racing metaphor in this Melbourne Cup week, there's not a horse on this planet that runs faster when more lead is placed in its saddlebags — which is exactly what the new rules require for our banks.
Australia's banks have been the darling of the ASX and the global banking sector for a long time now. At one point, the market value of our banks was higher than that of every European bank, combined.
And before we congratulate our bank CEOs too warmly, the reason is a happy consequence of geographic isolation, protective regulation and our lucky avoidance of any meaningful GFC-related damage, thanks largely to the mining boom.
The head honchos of Australia's banks do deserve some credit — they avoided most of the excesses of the pre-GFC easy-money era — but make no mistake… they (and we) got lucky.
Fixing 'Too big to fail'
In the aftermath of the GFC, global and local regulators have determined — totally correctly — that our economic prosperity depends on a well-functioning banking system.
And, again correctly, they've realised that our banks truly are too big (and too important) to fail.
That's different from saying that it's not possible they could fail, though — so the regulators' approach has been to ensure the banks are each adequately able to protect themselves from the worst excesses of another GFC-style crisis.
A little too late from those regulators, but better late than never, should we encounter a similar problem in future.
Warning: Slower growth ahead
But back to our horse racing analogy.
The regulators' decision has been to require banks to carry more of that lead in their saddlebags, in the hope that it ensures their castle walls are thick enough and high enough to withstand the next crisis.
That's all to the good, but it comes at a cost — and it's a cost that'll be borne by bank shareholders.
Specifically, having to retain more capital than in the past means the banks can lend less to their customers. That'll crimp loan growth (short of raising billions more in new capital), and therefore profit growth. And it's not a one off.
Glenn Stevens is effectively telling bank shareholders 'You're in a lower return world now, get used to it'.
The news isn't all bad
Some investors will resent the imposition from regulators (including the RBA and the Australian Prudential Regulatory Agency, or APRA). It's natural to be a little miffed when your investment returns go down.
But in truth, it's the price you pay for having a well-regulated economy that allows you to earn those returns in the first place. But there's another reason you should be smiling.
APRA and the RBA are looking after the interests of bank shareholders. If we were to have a significant bank collapse here, the government might step in to protect depositors, but you can be very sure that they won't be giving shareholders any return on their investment.
In contrast, while there might be lower returns on offer in the good times from now on, the chances of a catastrophic banking collapse will now be far lower — giving you a greater chance of having something left if the worst is to happen.
The truth hurts
Glenn Stevens won't earn himself many friends by speaking the truth to loyal bank shareholders, but he should — he's giving it to you straight, which is all we can and should ask of an RBA Governor.
And we should be heeding his warning — for bank shareholders, the future may not look much like the past.
