APRA’s international comparison study finds banks capital ratios need to increase
(14 July 2015 – Australia) The Australian Prudential Regulation Authority (APRA) has released the results of a study comparing the capital position of the Australian major banks against a group of international banking peers on 13 July.
The study was conducted by APRA in response to Recommendation 1 of the Financial System Inquiry (FSI).
The FSI recommended that APRA should ‘set capital standards such that Australian authorised deposit-taking institution [ADI] capital ratios are unquestionably strong’.
APRA fully supports this recommendation, as the benefits are clear for the financial system and for the Australian community.
In its final report, the FSI suggested that for banks to be regarded as ‘unquestionably strong’ they should have capital ratios that position them in the top quartile of internationally-active banks.
APRA’s study, which adjusts for differences in measurement methodology across jurisdictions and uses a number of different measures of capital strength, found that the Australian major banks are well-capitalised, but not in the top quartile of international peers.
The results of the study will inform, but will not ultimately determine, APRA’s approach for setting ‘unquestionably strong’ capital adequacy requirements.
APRA regards the top quartile positioning as a useful ‘sense check’ of the strength of the Australian framework, but does not intend to tightly tie Australian requirements to a benchmark based on the capital adequacy ratios of international banks.
A final response to the determination of ‘unquestionably strong’ capital standards will require further consideration by APRA, taking into account the results of this study, changes arising from the Basel Committee on Banking Supervision’s current review of the global capital adequacy framework, and the extent of further strengthening in the capital ratios of peer international banks.
Taking all of these factors into account, APRA’s current 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.
APRA is committed to ensuring that any strengthening of ADI capital adequacy requirements as a result of the FSI recommendations and the Basel Committee’s deliberations occurs in an orderly manner.
Australian ADIs should, provided they take sensible opportunities to accumulate capital, be well placed to accommodate any strengthening to capital adequacy requirements that APRA implements over the next few years.
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