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February 20, 2018

IMF issued staff report and selected issues report in the context of the 2017 Article IV consultation with Australia. Directors urged the authorities to maintain prudent policies, continue to address financial vulnerabilities, and raise long-term productivity.

The staff report highlights that APRA used prudential policies to lower housing-related risks to household balance sheets and the banking system. The capital adequacy ratio of the Australian banking system rose by another 0.8% points through 2017, reaching 14.6% by the end of September, with 10.6% in the form of common equity tier 1 (CET 1) capital. The report notes that the capital adequacy framework is appropriately being refined further, raising capital requirements and addressing the concentrated exposure to mortgages. In July, APRA issued a framework that clarified the capital requirements for Australian banks to be unquestionably strong, as suggested by the 2014 Financial Sector Inquiry. For the four major banks, which use internal risk rating models, the framework implies CET 1 capital ratios of at least 10.5% by January 01, 2020, which is 1.5 percentage points above the current requirements and 0.5 percentage points above the ratios in the third quarter of 2017.

The adjustment for stricter requirements in capital and risk-weight calculations in Australia, as per APRA estimates, would translate into substantially higher CET 1 capital ratios on an internationally comparable basis. APRA is also working on regulations to address systemic risks from banks’ concentrated exposure to residential mortgages, by making capital requirements a function of exposure concentration, within the unchanged overall capital adequacy requirements. The liquidity coverage ratio was comfortably above the minimum requirements. By the end of September, many banks had net stable funding ratios above 100%, which was the minimum requirement from January 01, 2018. The report also notes that recent structural policy efforts have focused on addressing infrastructure gaps, strengthening competition, and fostering research and development.

The selected issues report examines infrastructure investment in Australia; housing market imbalances in Australia; insights into recent inflation dynamics in Australia; and linkages of Australia and China in the context of prospects and ramifications of economic transition of China.

 

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Keywords: Asia Pacific, Australia, Banking, Article IV, Capital Adequacy Framework, CET1, Systemic Risk, IMF

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