APRA announced temporary changes to its expectations regarding bank capital ratios, to ensure banks are well-positioned to continue to provide credit to the economy in the current challenging environment. APRA is advising all banks that they may need to utilize some of their current large buffers to facilitate ongoing lending to the economy. This is especially the case for banks wishing to take advantage of new facilities announced by the Reserve Bank of Australia, or RBA, to promote the continued flow of credit. Provided banks are able to demonstrate they can continue to meet their various minimum capital requirements, APRA would not be concerned if they were not meeting the additional benchmarks announced in 2017 during the period of disruption caused by COVID-19.
APRA, in 2017, had set benchmark capital targets for banks to enable them to be regarded internationally as unquestionably strong (which was a recommendation of the 2014 Financial System Inquiry). These benchmarks are well above the current minimum regulatory requirements. For the four major banks, for example, this benchmark equated to having a common equity tier 1 (CET1) ratio of at least 10.5% of the risk-weighted assets. A lower benchmark applies for smaller banks. In comparison, the actual CET1 ratio of the banking system by the end of 2019 had reached 11.3%. Over the past decade, the Australian banking system has built up substantial capital buffers. CET1, which is the highest-quality form of capital, reached $235 billion at the end of 2019. As a result, banks are typically maintaining capital levels well above the minimum regulatory requirements.
Related Link: Press Release
Keywords: Asia Pacific, Australia, Banking, COVID 19, CET 1, Basel III, Regulatory Capital, APRA
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