Australian banks may need to increase capital buffers
(8 July 2016 – Australia) Australia’s biggest banks may need to increase their capital buffers further in order to retain their position among the world's best-capitalised lenders, the country’s financial regulator has indicated.
Following increased pressure on the “Big Four” banks to raise approximately A$18 billion in additional equity last year, the Australian Prudential Regulation Authority (APRA) earlier this week released a study showing an improvement in the lenders' capital adequacy compared with banks overseas.
However, the regulator also flagged that lenders will have more work to do in building up their capital buffers – which protect banks against financial shocks, but also make them less profitable.
APRA updated a study that showed the common equity tier 1 (CET1) capital ratio of Australia's major banks were now in the top quartile of banks internationally – a key target set by the 2014 financial system inquiry (FSI).
APRA said the banks' average CET1 ratios were 13.5 percent of assets at December 2015, up from 11.7 percent 18 months earlier.
In it 2014 report, the FSI said that for Australian banks to be "unquestionably strong", their capital position should be among the top 25 percent globally.
"The relative positioning of the Australian major banks' CET1 ratios now seems broadly in line with the benchmark suggested by the FSI," APRA said.
Even so, APRA made it clear that further increases in capital would be needed for the banks to maintain their position in the top quartile, though exactly how much capital the banks may need to raise is unclear.
APRA added that global banking regulators were soon likely to agree on new rules that would increase banks’ capital requirements – including those in Australia.
"The major banks have undertaken significant capital raisings since the 2015 study, which has significantly improved their capital adequacy position relative to international peers. That said, the trend of international peer banks strengthening their capital ratios continues," APRA said.
"Forthcoming international policy developments will also likely mean that Australian banks need to continue to improve their capital ratios in order to at least maintain, if not improve, their relative positioning."
Although the exact nature the new rules would not be known until late this year, it would be "prudent" for financial institutions to plan for "the likelihood of strengthened capital requirements in some areas".
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