APRA raises the bar on bank capital adequacy

As a number of the banks consider the future of their wealth management divisions, the Australian Prudential Regulation Authority (APRA) has moved to ramp up their capital benchmarks to what it describes as “unquestionably strong”.

The regulator has released an information paper containing an assessment of the additional capital it believes is required for the Australian banking sector to have capital ratios that are considered “unquestionably strong” and has indicated it would like to see the banks fall into line by 2020.

It said that for authorised deposit-taking institutions (ADIs) that use the internal ratings-based approach to credit risk, APRA had concluded that it was necessary to raise minimum capital requirements by around 150 basis points from current levels to achieve capital ratios that would be consistent with the goal of “unquestionably strong”.

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The regulator said that in the case of the four major Australian banks, APRA expects that the increased capital requirements will translate into the need for an increase in CET1 capital ratios, on average, of around 100 basis points above their December 2016 levels.

“APRA considers that ADIs should, where necessary, initiate strategies to increase their capital strength to be able to meet these capital benchmarks by 1 January 2020 at the latest,” it said.

Commenting on the proposed changes, APRA chairman, Wayne Byres said the regulator’s objective in establishing unquestionably strong capital requirements was to establish a banking system that could readily withstand periods of adversity without jeopardising its core function of financial intermediation for the Australian community.

“Today’s announcement is the culmination of nearly a decade’s financial reform work aimed at building capital strength in the financial system following the global financial crisis,” he said. “Australia has a robust and profitable banking industry and APRA believes this latest capital strengthening can be achieved in an orderly way.”

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Important article, Mike. APRA would be wise to head the warning in the International Monetary Fund blog post here: https://blogs.imf.org/2017/06/20/fintech-capturing-the-benefits-avoiding.... The danger is of not carefully reviewing the role of Fintech in avoiding the risks associated with weaknesses in the process mapping of interest risk management for the customers and the banks' shareholders. The banks' shareholders, let alone the customers, will not be impressed if this warning is not heeded. The IMF have a good overview globally of the housing markets finance and real estate booms, see here: https://www.imf.org/external/pubs/ft/sdn/2015/sdn1512.pdf. They are right in my opinion.

What do you think, Mike?

Keep up the good work.

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