Commonwealth Bank has raised concerns that differences in Australia’s regulatory architecture can allow similar financial activities to attract different capital requirements.

At its February results, CBA chief executive Matt Comyn said competition was increasingly being shaped by differences in “business models, regulatory settings and architecture”. CBA-commissioned research subsequently published by Mandala argued for the principle that firms conducting the same activities with the same risks should face the same obligations. More recent CBA-commissioned analysis reported in September specifically examined Macquarie’s structure and reportedly estimated that comparable capital treatment could require Macquarie to hold around $18 billion more capital. That Macquarie-specific analysis has not been publicly released.

To understand the issue, start with bank capital.

Banks fund their assets using deposits, wholesale borrowing and shareholder capital. Capital is not money kept in a vault. It is funding — principally shareholder equity — that can absorb losses before depositors and other creditors suffer them.

APRA therefore requires banks to maintain minimum amounts of capital relative to their risk-weighted assets. Higher-risk assets generally require more capital than lower-risk assets. The purpose is to limit leverage and ensure banks can withstand losses.

CBA and Macquarie have different corporate structures.

CBA itself is the authorised deposit-taking institution. Its regulatory capital is measured across its APRA Level 2 banking group. Macquarie Group Limited, by contrast, is a non-operating holding company, or NOHC. Beneath it sits Macquarie Bank Group and a separate Non-Bank Group.

Macquarie Bank is subject to APRA’s banking capital rules. But capital for the Non-Bank Group is calculated using Macquarie’s APRA-agreed Economic Capital Adequacy Model. Macquarie’s overall minimum capital requirement is broadly the Bank Group requirement plus the separately calculated Non-Bank Group requirement.

That distinction creates the capital issue.

If $100 of economic risk requires $10 of shareholder capital when conducted inside a banking group but only $7 under another capital methodology, $3 less equity is required to support the activity.

That matters because shareholder capital is relatively expensive. Investors expect a return on their equity. Requiring less equity can therefore reduce the amount of profit that must be earned from an activity to achieve a given return.

The potential competitive implication follows directly: a lower capital requirement can create greater capacity to offer lower lending rates or higher deposit rates while maintaining the same target return on equity.

That is the economic mechanism behind CBA’s concern. Macquarie rejects the proposition that its bank receives preferential capital treatment and says its mortgage and deposit pricing reflects business choices rather than a capital advantage.