by Robin Christie | 14 Jul 2015
The Australian Prudential Regulation Authority (APRA) has stated that the major banks would need to increase their capital adequacy ratios by at least two per cent to meet Financial System Inquiry (FSI) recommendations.
APRA has been comparing the capital position of the Australian major banks against a group of international counterparts, and the results of this study, released today, have led to the two per cent figure being mooted.
The study was implemented as a direct response to the FSI final report’s first recommendation, that APRA should “set capital standards such that Australian authorised deposit-taking institution [ADI] capital ratios are unquestionably strong”. This would mean making sure that Australian ADIs sit in the top quartile of internationally-active banks in capital adequacy terms.
….the statement adds that APRA is committed to ensuring that any capital adequacy requirement improvements occur “in an orderly manner”. This process would take into account Australian ADIs’ ability to manage the impact of any changes “without undue disruption to their business plans”.
While APRA hasn’t made a decision on whether it will go as far as mandating a two per cent increase in capital adequacy ratios…. it has stated that Australian ADIs should be well placed to accommodate its directives over the next few years – “provided they take sensible opportunities to accumulate capital”.
Bear in mind that capital adequacy ratios are measured against risk-weighted assets, where asset values are adjusted for the perceived risk of default. Australian banks have historically used risk weightings as low as 15% for residential mortgages compared to 50% in the US. That means that a bank with a capital ratio of 10% would only hold 1.5% capital against residential mortgages. And a 2% increase, to a capital ratio of 12%, would only increase capital cover to 1.8%. Revision of risk weightings is more important than an increase in the capital ratio, especially given Australia’s precarious property market.
Read more at APRA considers two per cent capital adequacy increase.