APRA has confirmed that Australian banks will be required to hold more capital to be on par with their international counterparts.
A study conducted by the regulator, which compared the capital position of the Australian major banks against a group of international banking peers, found that the major banks are well-capitalised, but not in the top quartile of international peers.
The study was conducted by APRA in response to Recommendation 1 of the Financial System Inquiry. The FSI recommended that APRA should “set capital standards such that Australian authorised deposit-taking institution [ADI] capital ratios are unquestionably strong”.
As a result, APRA’s judgement is that the major banks would need to increase their capital adequacy ratios by at least 200 basis points, relative to their position in June 2014, to be comfortably positioned in the top quartile of their international peers over the medium-to long-term, as recommended by the FSI.
However, the regulator has admitted that the results will inform, but not determine, its approach for setting capital adequacy requirements.
“While APRA is fully supportive of the FSI’s recommendation that Australian ADIs should be unquestionably strong, it does not intend to tightly tie that definition to a benchmark based on the capital ratios of foreign banks,” the study noted.
“APRA sees fourth quartile positioning as a useful ‘sense check’ of the strength of the Australian capital framework against those used elsewhere, but does not intend to directly link Australian requirements to a continually moving benchmark such that frequent recalibration would be necessary.”
The response from the major banks has been positive so far, with Westpac’s chief financial officer, Peter King saying the major bank is pleased APRA has confirmed Australian bank are well capitalised and that the top quartile positioning is a “sense check” rather than a regulatory benchmark.
“The release of the Study is a further step in helping investors understand the relative position of the Australian bank capital ratios compared to international peers,” King said.
has also welcomed the study, maintaining that a strong balance sheet has always been a priority for the bank.
“Since June 2014, than Bank has increased its CET1 ratio from 8.46% to approximately 10% on a proforma basis…” according to a statement from the major bank.
“Total capital ratios have increased by a larger margin over this same time period. This increase represents a CET1 capital buffer of approximately 100 basis points to the midpoint of NAB
’s 8.75-9.25% CET1 target operating range. As a result, NAB
is well placed to respond to changes in regulatory capital requirements.”