APRA announced its assessment on the additional capital required for the Australian banking sector to have capital ratios that are considered “unquestionably strong.” APRA released an Information Paper that outlines its conclusions on the quantum and timing of capital increases that will be required for Australian authorized deposit-taking institutions to achieve unquestionably strong capital ratios. All authorized deposit-taking institutions are expected to meet the new benchmarks by January 01, 2020.
The analysis draws on international comparisons as well as other information that allows capital strength to be viewed from different perspectives. In its assessment, APRA has focused on the appropriate calibration of common equity tier 1 (CET1) capital requirements, recognizing that CET1 is the highest quality capital and, therefore, most likely to engender confidence in an authorized deposit-taking institution’s financial strength. APRA has distinguished between the authorized deposit-taking institutions using the more conservative standardized approach to capital adequacy and the banks that are accredited to use internal models to determine their capital requirements. The four major Australian banks need to have CET1 capital ratios of at least 10.5% to meet the “unquestionably strong” benchmark. APRA will set prudential standards to achieve this outcome by effectively increasing requirements for all internal ratings-based banks by the equivalent of nearly 150 basis points. For other authorized deposit-taking institutions, the effective increase in capital requirements to meet the “unquestionably strong” benchmark will be about 50 basis points.
The 2014 Financial System Inquiry (FSI) endorsed the benefits of a strong and well-capitalized banking system and recommended that APRA set capital standards such that capital ratios of authorized deposit-taking institutions are unquestionably strong. The Australian government subsequently endorsed this recommendation.
Related Link: Media Release
Keywords: Asia Pacific, Australia, Banking, CET1, Basel III, Internal Ratings Based, Standardized Approach, APRA